The detrimental quarter

Three of my very most favourite things in the world are delivering training, MLROs and biscuits – so when I can combine the three (as in tomorrow’s workshop for experienced MLROs in Guernsey, with two biscuit breaks) I am a very happy bunny indeed.  I have been running these MLRO workshops for years, and they are just the most exciting events: I prepare a ton of information and raid M&S for gingerbread men, but then on the day our discussions range far and wide, and I always learn such a lot.  And the fact that some of “my” MLROs are coming to their eighth workshop tomorrow tells me that they find the training useful and correctly pitched.

So when the UK’s Financial Conduct Authority published its thematic review on “How small banks manage money laundering and sanctions risk” earlier this month, I was despondent to read that: “The level of AML and sanctions knowledge among MLROs in a quarter of banks visited was inadequate.  In particular, they did not understand their legal and regulatory responsibilities, money laundering risks, or ‘red flags’ relevant to their bank.  The MLRO is an essential function and a weak MLRO cannot meet their obligation to oversee their bank’s AML compliance.  We found that MLROs in a quarter of banks had a detrimental effect on the overall standard of AML and sanctions systems and controls in their bank.  Following our visits, several banks have decided to replace their MLROs.”  Those poor MLROs.  (And before you suggest it, yes, I have contacted the FCA and offered my training services – but the FCA isn’t really in the training market, and it would be quite a step for them to do it.)  I have tried to run my MLRO workshops in London, but I’m not nearly as well-known there as I am in “the islands and isthmus”, and I just couldn’t fill the room.  But perhaps now, with the FCA breathing down their necks, UK financial institutions will be more receptive to the idea of dedicated training for their MLROs, and not expect these poor souls just to pick it up as they go along – or not, as seems to be the case.  Imagine the horror of being an MLRO while not understanding your legal and regulatory responsibilities!  And as for concept of an MLRO actually being detrimental… well, pass the biscuits, as I urgently need reviving.

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A death-knell for HVDs

Last week I went to a funeral, and as I sat outside the crematorium waiting for it to begin, I observed the rather large number of undertakers in attendance.  The funeral business is manpower heavy, what with the preparation of the body and the paperwork and the actual physical work of carrying the coffin, driving the hearse and mourners’ cars and walking in front of the cortège.  Add to this the cost of chapel rental and flowers, and the price of a funeral soon mounts up.  In fact, research earlier this year suggested that the average cost of funeral in the UK is now nearly £3,500.  So for those who go the whole hog it can be a significant expense – we’ve all seen the photos of the old East End funerals, such as Charlie Richardson’s in October 2012.

So why my morbid turn on mind?  Well, in the draft Fourth Money Laundering Directive, one of the changes that seems to have escaped general notice and concern comes in the latest amendment to draft revised Article 2 (do keep up – it’s a long process, and there’s more to come).  Article 2 deals with the “obliged entities” (i.e. those who will be required to abide by AML legislation) and the latest version of it says this: “Other natural or legal persons trading in goods or services, only to the extent that payments are made or received in cash in an amount of €7,500 or more, whether the transaction is executed in a single operation or in several operations which appear to be linked”.  Now, I’ve mentioned this before, but I think it’s quite significant – because it lowers the threshold for all high value dealers (it used to be €15,000), and because it brings in those dealers in services.  And last week, for the first time, I realised that this might include undertakers as well.  You see: I got there in the end.

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Rebranding

Last week I wrote a post about the best proportion of staff to have working in compliance.  My husband – who for reasons of marital harmony is a dedicated and generally complimentary reader of this blog – is an engineer by training and he made an excellent observation.  “Why do you call it compliance?” he asked.  “Wouldn’t it be better received and understood if you called it – and treated it as – quality control?”

When he worked in an aircraft factory, he tells me, every part of the aircraft was regularly checked by quality control – often (coincidentally) one part in every ten off the production line.  Some would be tested to destruction, and others just to within normal tolerances.  Along the way, this meant that the factory was complying with all sorts of safety and manufacturing legislation, but the primary focus was on ensuring that the company was making parts to the standard to which it had agreed.

Surely this is what we should wish for the financial sector too: that they should supply products and services to the expected standard.  And that standard includes not allowing them to be contaminated by criminal money.  So maybe we should stop calling them compliance departments, and rebrand them as quality control – after all, people might complain about having to comply with laws with which they do not agree, but who could disagree (with any dignity or credibility) with wanting to attain and maintain high levels of quality?

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Now just play nicely

There has been a lot in the press recently about an announcement on 3 November 2014 of what the FT has called a “poacher-turned-gamekeeper” agreement that will see staff from the bank RBS training officers from the City of London Police in detection and handling of financial crime.  In their own press release, the COLP prefer to see it as a “landmark agreement”, under which “RBS staff will assist the force’s Economic Crime Directorate on a voluntary basis, supporting training events and research and development projects”, advising officers on such specialist topics as equities and markets, financial instruments, international jurisdictions and cyber technology.

There are of course those who have said that RBS – with its “outstanding litigation issues” (according to the FT) – is in no position to preach.  But as every parent knows, it’s always been do as I say, not as I do.  And from Matthew the Apostle onwards, we’ve known that it’s much easier to spot the speck of sawdust in someone else’s eye than the plank in your own.  So if RBS staff can, from rueful experience, talk feelingly of the techniques of money launderers and other criminals, then all power to them.  Perhaps it could be viewed as a rehabilitative element of any eventual sentence passed on the bank, much as blue collar criminals are given community service to make reparations to the public.  And those who complain – often with much justification – that regulators and law enforcement do not understand the financial sector or the commercial pressures placed on it, will doubtless welcome this evidence of a willingness to learn.  As I have said countless times in the past, criminals are successful in no small part because they are happy to co-operate with each other and play to their respective strengths.  We on the side of the angels would be mad not to emulate them in this.

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One in ten

As I mentioned recently, HSBC has been having a rough old time with AML “issues”.  (“Issues” is one of those softly-softly words that we now use, alongside “vulnerable” and “downsizing”.)  And I missed it earlier this year, but at the beginning of August beleaguered HSBC chief exec Stuart Gulliver reported that – almost uniquely amongst its departments, where downsizing is a real issue, and may well be vulnerable too – this year his bank is spending US$800 million on its compliance and risk programme, which is $200 million more than it spent last year.  It now has 24,300 staff specialising in risk and compliance – almost 10% of its workforce.

Of course, much of this is direct fall-out from 2012, when HSBC was fined $1.9 billion for AML failings and signed a five-year Deferred Prosecution Agreement with the US authorities.  With about a hundred monitors installed within HSBC to check that it really is getting it right this time, and with regulators around the world sniffing at the bank’s doors, the increase in compliance manpower is entirely understandable.

But it has made me wonder what would be the correct proportion of staff to have working in compliance – in effect, making sure that everyone else is doing their job properly.  I love compliance people, as you know, and I think that their focus on detail and precision married with their indifference to any bonus structure that may be on offer to sales staff makes them an invaluable balance to the profit motive.  But how many of them should there be?  One in twenty?  One in ten, as at HSBC?  One in five?  Or perhaps what matters most of all is not how many of them there are, but how seriously they are taken.  Even the most dedicated MLRO, after years of being called the Business Prevention Officer, is bound to lose heart.

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NED and board

A few weeks ago I wrote a post about the new Senior Managers Regime, being proposed by the UK’s Prudential Regulation Authority and Financial Conduct Authority to “clarify the lines of responsibility at the top of banks, enhance the regulators’ ability to hold senior individuals in banks to account and require banks to regularly vet their senior managers for fitness and propriety”.  All UK supervisors and trade bodies are now preparing their responses to this proposal, and the British Bankers’ Association is one of the first to publicise theirs.

On 3 November 2014, the BBA announced that it “supported the broad thrust of the reforms but raised some particular concerns”, and you can read more about their thoughts – including the full text of their response – here.  Interestingly – and perhaps swimming against the tide – the BBA is of the view that “non-executive directors perform different roles from executive director members of the board [and therefore] a different supervisory approach should be developed for NEDs”.  Checking a handy factsheet, we read that: “There is no legal distinction between executive directors and non-executive directors (the definition under the Companies Act 2006 defines a director as including any person occupying the position of director, by whatever name called); the distinction lies in the role that they perform.  Non-executive directors usually stand back from the day-to-day running of the business, drawing alongside the executive team as required to facilitate the strategic decision-making process.”  I understand that, I really do, but I have to say that if I were a NED looking at the AML guidance in my jurisdiction (bearing in mind that I work in the UK, Guernsey, Jersey, the Isle of Man and Gibraltar,so they’re the only ones I know about), I would be very uneasy about taking such a hands-off approach to AML.

For instance, the JMLSG guidance in the UK says that “senior management must be fully engaged in the decision making processes, and must take ownership of the risk-based approach, since they will be held accountable if the approach is inadequate”, and “senior management” is defined as “the directors and senior managers (or equivalent) of a firm who are responsible, either individually or collectively, for management and supervision of the firm’s business”.  Hopping across to Guernsey, their guidance for financial services businesses states that “the Board has effective responsibility for compliance with the Regulations and the Handbook [and] in particular the Board must take responsibility for the policy on reviewing compliance and must consider the appropriateness and effectiveness of compliance and the review of compliance at appropriate intervals”.  No-one in the AML environment makes any distinction between the responsibilities of executive directors and those of their NED brethren.

So maybe the BBA has highlighted something that we do need to address.  Are NEDS equally responsible for AML oversight, or does their distance from the day-to-day running of the business mean that they are not equipped to make these decisions?  And if they can’t contribute to the decisions on AML, can they contribute to the decisions on other sorts of risk?  And if they can’t take a view on risks at all, well….  What do you think?

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Beware Greeks bearing bribes

I’ve just had a week’s holiday in Crete – lovely, thank you for asking.  The town we visited – Chania, in the west of the island – seemed to be doing well, albeit slowing down for the end of the season, and our taxi driver confided that he had earned more this summer than for many years.  But the number of half-built and abandoned properties that we passed on our way to the airport, and the number of permanently closed shops and restaurants, suggested that even in relatively prosperous Crete, the Greek economy is still struggling.

And one possible explanation for why they just can’t seem to pull themselves out of the mire is given in this article by an economist.  As she points out, in the Transparency International Corruption Perceptions Index 2013 (the 2014 version is due soon), Greece ranks lowest of all EU Member States – on a par with China.  Football match-fixing seems to be a particular issue in this soccer-mad nation.  There is also the common (and seemingly widely accepted) concept of “fakelaki” – small, petty bribes given, for instance, to jump waiting lists in hospitals or to get a construction licence expedited.  And looking at the first “EU Anti-Corruption Report” (published in February 2014 and due to be updated every two years), 99% of Greeks think that corruption is widespread in their country.  In the report chapter specifically on Greece, the problem that the country has when dealing with corrupt politicians is explained: “According to the Greek Constitution, MPs can be prosecuted or arrested only with prior approval of Parliament.  If no decision is taken within three months, the approval is deemed not to have been granted.  The decision does not have to give reasons… The Constitution provides for a complex and time-constrained procedure for submitting legal action in the case of offences committed by ministers, former ministers and state secretaries, which creates considerable obstacles to prosecution… In addition, ministers and former ministers also benefit from an extensive statute of limitations regime which – in combination with lengthy proceedings – poses significant problems for prosecuting corruption in Greece.”

No wonder then that the people of Greece were thrown into mourning in early October 2014 when the death was announced of their “riot dog”.  Loukanikos (Greek for sausage) began hitting the headlines in 2010 when he started to appear, as a stray, in the front line of anti-austerity protests, and he was present at most protests until he retired in 2012 to live with a family in Athens.  Maybe Greece needs to find an anti-corruption mascot to replace Loukanikos and rally the troops – although perhaps not a fat cat…

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Drawing a veil over political correctness

Anyone who has been to my AML introductory training for new staff will have seen my slide showing a Serbian photographic driving licence offered as proof of identity by a lady of Iraqi origin.  The problem with it is that the photograph is of her face completely covered by a rather lovely peacock-blue veil.  It was accepted at a bank that shall remain nameless, because they were chary of causing offence by stating the bleeding obvious, which is that a photograph that shows no features at all is rather worthless as proof of identity.  Now, we’re all nice people, keen to tolerate other cultural preferences and norms, but perhaps we need to make the rather valid and important point that access to financial services is a privilege and not a right.  And if you want to avail yourself of that privilege, you need to comply with the entry requirements.  (In case you’re thinking about financial exclusion, yes, everyone needs to be able to use the most basic of financial services – somewhere safe to save their money – and such accounts can be provided with minimal entry requirements, mainly because there is very little criminal scope to them.  But even these require some due diligence.)

I was thinking about this recently because a blog reader who works in AML in Jersey very kindly sent me this article from a blog about mobile money.  It tells the story of a low-income Indian woman who wants to open a savings account at a bank in Bangalore.  To quote what happened next: “Being Muslim, Mubeena is wearing her burqa, as she always does when outside of her home.  This was unacceptable to the bank branch staff because they could not verify photographs and KYC documentation.  So she began to remove her burqa (being completely clothed and nicely dressed underneath), yet what embarrassment for all the men staff at the branch!”  In the end, she was sent home, account-less.  Can you see me rolling my eyes?  If the men in the branch were so outraged by seeing Mubeena’s uncovered head, could she not have been dealt with by a female member of staff?  If, on the other hand, Mubeena had refused to reveal her face to anyone, then quite rightly she should have been refused the account.

In short, we do what we can – and we use our noggins to work our way around little challenges like veiled ladies.  As my reader in Jersey says in her email: “Sometimes we fall over ourselves to be culturally appropriate, when as far as KYC/CDD/ECDD is concerned, sometimes the actual following of the rules can get in the way of ‘knowing’ your client, and thank goodness for a risk based approach that involves ‘thinking’ – as long as we actually think …”

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Sit! Heel! Sniff!

We Brits are used to exporting our expertise, but did you know that our sniffer dogs and their trainers and handlers are used all over the world?  Back in 2008, Robbie the cocker spaniel was lent to police at Rome’s Malpensa airport – and over two days he sniffed out currency worth more than £130,000, much of it being smuggled out of the country.  The Italians already had sniffer dogs, of course (cani addestrati, I am told), but they were trained to seek out drugs and explosives, not readies.  And the Italians are particularly keen on sniffing out (sorry) cash on the move, because their citizens tend to be the teensiest bit naughty about paying their taxes.  British dog handlers spent some time passing on tricks of the trade, and now there are cash-trained cani addestrati at work all over the country.  The hounds started work officially on 1 January 2012, and are assigned to airports, train stations, ports and border crossings across Italy.  One of the most successful Italian cash sniffer dogs is Stella, a black labrador who patrols Naples airport.  Apparently labs are  better suited for cash sniffing because they’re calmer and more meticulous  than the German shepherd dogs used to detect drugs.  Also, handlers report that travellers are more comfortable being snuffled by a lab than by a German shepherd, which makes sense.

On the other side of the world, cash sniffer dogs were introduced (I’ll refrain from jokes about bottom-sniffing) in November 2012 and have been terrifically successful.  The team of labs at Auckland Airport, for instance, has to date found more than NZ$3.3 million (equivalent to about £1.6 million), including a single seizure of $150,000.

In case you’re now looking at your own pampered pooch and thinking that it’s high time he started earning his keep, here are some tips on training a cash sniffer dog.  Soak a rolled-up towel in a bowl with some currency so that it picks up the smell of the cash.  Then use the towel to play with the dog, so that it associates the smell of cash with fun and play (as do we all).  Then start to hide the cash-scented towel – in long grass, then in a box, then in a suitcase – and encourage the dog to seek out the towel and (important this bit) to sit passively as soon as the towel is found.  (You don’t want a cash sniffer dog that finds money and then mauls or eats it.)  Once that is mastered, you can start using distraction smells – such as coffee, tea, cans of fish, dog food and raw meat – in with the hidden towel.  Barbara Woodhouse would be proud of you.  Now, siT!

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A novel about historical money laundering – mine!

My novel, that is – not my laundering.  I don’t normally do this, as I like to reserve this blog for serious matters ML and AML (apart from next Tuesday, when I think I’ll write about dogs), but I feel that today I can make a small exception and self-promote my new novel – because it contains money laundering!

Some of you may have read my first novel, “Fatal Forgery”, which was published last year and is set in London (and Gibraltar) in the 1820s, and has as its hero the magistrates’ constable Sam Plank, and as its central crime, forgery (I think the title rather hints at this).  Well, I just couldn’t leave poor Sam tramping around London on his own, so he now has a new adventure which is published today – yes, this very day – and called “The Man in the the Canary Waistcoat”.  (Although I’ve given the Amazon link for simplicity, those of you in Cambridge and London might prefer to lay your hands on a copy at Heffers or David’s in Cambridge, or Hammicks on Fleet Street in London.)  This time there are four crimes for him to grapple with and – crucially – money laundering rears its ugly head.  It wasn’t called money laundering, of course, back in 1825, but that’s what it was: a criminal trying to make his proceeds of crime look like legitimate money.  And Sam, equipped only with a natty uniform, fine side-whiskers and a rather resourceful wife, has to work out what to do about it.

I should warn you, however, that this historical financial crime is rather addictive: I have already decided on the themes of the next two Plank mysteries, and you can be sure that money laundering will be needed more and more…

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