Low risk is not no risk

When an institution is devising its risk-based approach to AML, and specifically to customer due diligence procedures, it needs to decide how many categories of risk it will recognise.  The discussions can sometimes take a turn for the philosophical – is it better to talk of “higher risk” than “high risk”, and is it unwise to have an odd number of categories in case that encourages the indecisive/lazy client relationship manager to select the middle one – but eventually most places end up with high, standard and low risk categories.

Most attention – regulatory and media – tends to focus on the high risk end of things.  For instance, the majority of AML-related Final Notices coming out of the UK’s Financial Conduct Authority have highlighted their subjects’ inability to (a) recognise, and (b) deal appropriately with high risk customers (often PEPs).  But danger also lurks at the other end of the spectrum: the danger of complacency.  Sometimes people make the mistake of thinking that “low risk” means “no risk” and – worse – acting accordingly.  However, I can think of no jurisdiction that recognises a category of business that is so low risk that it is exempt from due diligence – after all, how can you tell the risk category of anything until you have done at least some due diligence on it?  And how can you be sure that the initial low risk categorisation remains appropriate if you do not monitor that relationship?

I read a case study recently that highlighted the dangers of underestimating the vigilance that is needed around even the lowest-of-low risk business.  M worked as a maid in Singapore, and every week she would go to her local bank and pay in her wages.  Once a month, she would ask her bank to transfer some of her money to an account in Sri Lanka – her home country.  After four years, the bank’s auditors noticed during a random sampling exercise that many more international bank transfers were being made from M’s account.  But the bank manager hesitated: the very idea of M being a money launderer seemed ludicrous, and he didn’t want to scare off the other domestic servants with accounts at his branch by suddenly closing this one.  So he looked more closely at M’s account.  And he saw that over the past six months, a woman who had previously made small weekly deposits was how making much larger deposits on a random, but frequent, basis, and that she was also making wire transfers to other countries besides Sri Lanka.  When he asked his tellers why no-one had reported these changes, he was told that the account was categorised as low risk, and therefore had been taken off the routine monitoring list.  The matter was reported to the authorities, and they later confirmed that M was not the source of the money, but was allowing her account to be used for laundering in exchange for a small fee each month.  A few hundred more account-holders like M, and that criminal organisation was making the low risk category work very well indeed for them.

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Standard-bearer no longer

I once had a very scary Latin teacher – scary because she could tell you off for doing something when she had her back turned while writing on the blackboard.  (She later confessed that she kept an eye on us by checking the reflections in the glass cover of the classroom clock – impressively sneaky.)  And one of her principles was this: if you make a mistake in your translation, I can forgive it – but if I tell you it’s wrong and then you make the same mistake again, woe betide you.  I have often passed on the same message in my training: if a regulator tells you to improve something, you’d better make sure you do it, and quick smart.  (The same applies to jurisdictions, when the FATF or IMF or MONEYVAL has come a-calling.)

And yet it is a lesson that Standard Chartered seems unable to learn.  For anyone who has been sunbathing on a rock for the past month and missed all the hoo-hah, back in August 2012, the bank paid a fine of US$340 million for hiding $250 billion of transactions with Iran.  It also agreed to play host for two years to a monitor from the New York State Department of Financial Services (DFS), who would evaluate AML controls at the bank’s New York branch and report back to the regulator about progress.  You would think, therefore, that Standard Chartered would move heaven and earth to get this right – after all, it’s not inventing anything new here, but simply ensuring that its AML controls meet current, published, accepted standards of good practice.  But as the two-year period of monitoring drew to a close, the news was not good: according to the regulator, the bank had failed to detect numerous suspicious transactions, and “a significant number” of them had originated at Standard Chartered branches in the United Arab Emirates and a subsidiary in Hong Kong.

On 20 August 2014 the bank agreed to pay a further penalty of $300 million for failing to improve its money laundering controls, and was also ordered to: suspend US$ clearing operations for high-risk retail business clients of Standard Chartered Bank Hong Kong; continue a previously launched process of exiting high-risk small and medium business clients at the bank’s branches in the UAE; open no new US$ demand deposit accounts for any new customers without approval from the DFS; extend the monitoring of the bank for an additional two years; and establish a comprehensive remediation plan to tighten money laundering detection and reporting.  Again.  Standard Chartered has said that it “accepted” the findings of the DFS.  Again.  Or, as my Latin teacher, would have said: rursus, you silly girl.

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An ugly new word: de-risking

Over the past few years, we in AML have grown used to new terms.  We’ve learnt to leave behind KYC, and concentrate instead on CDD, to replace STRs with SARs.  While taking on board the risk-based approach (another new term), we have categorised our clients in order to apply the right level of due diligence, including perhaps simplified or enhanced (most especially for PEPs – another new-ish term).  All of these now trip off the AML tongue quite easily.  But I am not sure I will ever become used to a new term that I have just learnt: de-risking.

I read it for the first time in a speech on 12 August 2014 by Jennifer Shasky Calvery, the head of FinCEN, in which she discussed the challenges of implementing a risk-based approach: “Recently, we have been hearing about instances of ‘de-risking’, where money services businesses (MSBs) are losing access to banking services because of perceived risks with this category of customer and concerns about regulatory scrutiny.  Some financial institutions also state that the costs associated with maintaining these accounts outweigh the benefits.”  Indeed, we have had our own home-grown example of this, when Barclays in the UK started closing accounts belonging to Somali MSBs over fears that they were being used for money laundering.

The big question, of course, is whether these particular Somali MSB accounts were suspected of money laundering, or whether this type of account had been pinpointed as potentially popular with money launderers.  MLROs often – quite rightly – complain that they are caught in a very tricky position.  They cannot “profile” accounts and decide, for example (and as used to happen back in the dark ages when I was first AML-ing), never to take on clients whose surnames both begin and end with a vowel as that would suggest either Italian or Nigerian origin and therefore trouble.  And yet they are required to use the results of profiling exercises carried out by governments and bodies such as the FATF – i.e. the lists of dodgy jurisdictions.

The difficulty of matching these two requirements is explained clearly – but sadly not resolved – further on in Ms Shasky Calvery’s speech: “Just because a particular customer may be considered high risk does not mean that it is ‘unbankable’ and it certainly does not make an entire category of customer unbankable.  Banks and other financial institutions have the ability to manage high risk customer relationships.  It is not the intention of the AML regulations to shut legitimate business out of the financial system.  I think we can all agree that it is not possible for financial institutions to eliminate all risk.  Rather, the goal is to provide banking services to legitimate businesses by understanding the applicable risks and managing them appropriately.”  So we must aim for de-risking without creating unbankables.  The first casualty seems to be the English language.

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Quis custodiet ipsos custodes?

Who will guard the guards, asked the Roman poet Juvenal back in the first century, and it is a question that has troubled us ever since.  Last week, Shambhu Prasad Chalise, a section officer at the Department of Money Laundering Investigation (Nepal’s FIU), was caught taking a bribe of one million rupees (about £6,100) from a Japanese migrant worker called Gurung.  Apparently Chalise had earlier filed a report about Gurung at the DMLI, mentioning that he had accumulated millions of “disproportionate properties” (suspicious funds), and the allegation is that Chalise solicited a bribe from Gurung in order to make that report disappear.  Gurung instead reported the matter to Nepal’s Commission for the Investigation of Abuse of Authority (terrific name – we all need one) and gave them audio and video evidence of Chalise’s actions.  The CIAA set up a sting operation, giving Gurung cash to hand to Chalise, and police arrested the officer as he was taking hold of the money at Gurung’s home – rather damningly, he had with him the official documents promising to put Gurung’s case on hold.  Chalise has been taken into custody, but the CIAA suspects that he was not acting alone and that DMLI Director General Choodamani Sharma could also be involved: “We believe that Chalise alone could not have arranged such a big deal without the consent from his senior officers.  Things will become clear after we are done interrogating him.”

When I talk in AML training about criminals infiltrating organisations in order to ensure the trouble-free laundering of their funds, and about the importance of making SARs directly to the MLRO because there is no way of knowing who else among your colleagues might be involved in the suspected laundering, I am often asked, “But what about the MLRO?  Isn’t he a prime target for criminal collusion and coercion?”  And absolutely right: he is.  If I were a criminal, seeking to ensure the safe passage of my dodgy money through an institution, I would love to own the person who can adjust the AML procedures in my favour, and sign off on my due diligence, and approve my continued business, and – if all else fails – make sure that any SARs mentioning me end up in the shredder rather than on the desk of the FIU.  And so, unfair as it may sometimes seem, those who work in AML – MLROs, other compliance staff, officers in FIUs – must be whiter than white, cleaner than clean.  There must be not the faintest sniff or lightest stain of impropriety about them – and that is quite a standard to attain and a heavy burden to carry.  I am reminded of it myself every year as I diligently complete my tax return, and religiously declare the 47p interest I have earned on my savings.

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All the fun of the fair

My mother – herself one of two siblings – once told me that her greatest fear in bringing up an only child was how to teach me about fairness and sharing.  As it turns out, her fear was unfounded.  My father believed strongly in meritocracy, which basically meant that he came first in everything, and so I didn’t win a game of Monopoly or get first choice in a box of chocolates until I was in my twenties.  “But that’s not fair!” I would wail.  “Precisely,” he would counter, building yet another hotel on Mayfair while scoffing the chartreuse cream from the Black Magics.  I’ve often thought that repeatedly losing all of my hard-earned Monopoly money to the paternal fat-cat was the genesis of my absolute belief that those who have acquired their money through dodgy means (e.g. waiting until I had gone to the loo and then reshuffling the Community Chest cards in his own favour) should not be allowed to keep it.

Fairness is on my mind at the moment, in part because of the Bernie Ecclestone bribery trial fiasco that I discussed last week.  One of the many troubling aspects of that story is that such measures – buying oneself out of a trial – are available only to the select few who can afford it.  And I had thought that we were all equal in the eyes of the law – everyone should have access to the same justice.  Granted, some can afford better lawyers, but surely it is wrong to have a system whereby those who have more money can be offered a better outcome (e.g. a financial rather than a custodial penalty).

And – forgive me for the rambling nature of this post, but it’s my blog and I’ll whinge if I want to – this has brought me to a realisation about my personal take on tax evasion.  Regular readers will know that I am Not In Favour.  But it is always tricky when someone asks in training – and someone always asks in training – “But what about tax avoidance – that’s not illegal, after all.”  And of course they are right.  But something about tax avoidance always gets my back up, and the parallels with the Bernie situation have finally bought it to light: it’s the unfairness of it.  Only wealthy people can afford to avoid tax.  Only they can buy the advice and the research and the ongoing vigilance that is needed to be a successful avoider of tax.  The rest of us are too busy earning a living to be able to spare either the time to do our own avoidance, or the money to pay someone else to do it for us.  So, just as Bernie’s millions bought him access to an outcome denied poorer defendants, those with pots of money can buy their way into a special VIP tax zone denied the rest of us.  My tax hero of the week is the actor Stellan Skarsgård (the one with the bare bottom in “Mamma Mia!”), who was asked in an interview about his views on taxation:

Mr. Skarsgård, where do you live?

I live in Sweden because the taxes are higher, nobody is starving, good health care, free schools and universities.  It’s a civilized country and I like that.

You prefer paying higher taxes?

Of course.  If you make a lot of money like I do you should pay higher taxes.  Everybody should have the possibility to go to school, and university, and have good healthcare.

And his bottom’s not bad either.

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A right royal laundering mess

Some months ago, in a post on laundering by female PEPs, I mentioned the ongoing saga of Infanta Cristina of Spain – and as this is the silly season for news, I thought you might welcome a regal update with your morning Jaffa Cake.  Sister of King Felipe, the Infanta is married to Iñaki Urdangarin, the Duke of Palma and a former Olympian – Mills & Boon would describe him as darkly handsome, I suspect.  And the Duke is suspected of misusing millions of euros in public funds that were given to a charitable foundation he ran.  Now, we’ve all had troublesome in-laws whom we might wish our rellies had not married, but unfortunately for the Spanish royal family, it seems that his wife may not be entirely blameless.  And in June 2014, Judge José Castro announced that the Infanta would stand trial alongside her husband on charges of tax fraud and money laundering.  We’re talking the sister of a reigning monarch, going on trial for a crime.

In the document setting out why he is committing the princess to trial, Judge Castro comments that the “love and devotion” that she professes for her husband can in no way justify her behaviour.  Under investigation are the very large amounts of money that the Duke earned (but did not declare) and then paid into a company that he owned jointly with his wife.  The judge is currently of the opinion that the Infanta was fully aware of the source of this money, and therefore demonstrated “active collaboration” in the tax evasion and the laundering of its proceeds.  If she is found guilty, she could be sentenced to fourteen years in prison.  The Infanta’s lawyer has appealed the committal on the basis that his client is being targeted because of who she is, rather than because of what she might have done, and the final decision – trial or no trial – rests with the provincial high court in Palma de Mallorca.  As for the princess, she now lives in Switzerland (I’m saying nothing, but any Swiss bankers reading might want to have a quick squiz at the PEP definition) and is in the peculiar position of no longer being an official member of the Spanish royal family – she’s not even mentioned on their website.  Things must be bad: after all, even the corgis get a mention on ours.

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What’s the German for “irony”?

Frankly, I’m a bit disappointed that I didn’t think of this myself, as an April fools’ joke to play on you all.  On 5 August 2014 a German court agreed to end the bribery trial of everyone’s favourite octogenarian, Warhol-alike, Formula One mogul Bernie Ecclestone in exchange for a payment from him of US$100 million [about £60 million].  Ecclestone went on trial in Munich in April 2014, charged with bribing a German banker with $44 million eight years ago to ensure that a stake in F1 that had been put up for sale by his bank, BayernLB, would be bought by a company that Bernie favoured, so that he would remain in charge of the sport.  The banker concerned, Gerhard Gribkowsky, was sentenced to eight and a half years in prison in 2012 for accepting bribes – and call me simplistic, but if a bribe is proved to have been accepted, isn’t it also proved to have been paid?

But much to everyone’s surprise, it turns out that German law (specifically paragraph 153a of the German legal code) provides for some criminal cases to be settled with smaller punishments, such as fines, if conditions are “appropriate for resolving the public interest in a prosecution”.  And to no-one’s surprise, wealthy defendants have used this clause to buy their way out of trials.  Ecclestone’s settlement, however, is perhaps the highest ever; $99 million goes to the German treasury and a further million to a German children’s hospice charity.  The case is then “abandoned”, and Ecclestone is found neither guilty nor innocent.  Apparently, in considering whether such a settlement was appropriate, the court took into account Ecclestone’s age (he’s 83) and his financial situation.  His lawyer, Sven Thomas, defended the settlement negotiations, saying his client had been suffering from an “extremely burdensome procedure”.  Heaven forbid that someone accused of a serious crime should be inconvenienced by the irritation of a trial.  It seems that anyone who finds themselves facing the German courts needs to have two things: lawyers who can make your case so complicated that it becomes unpalatable, and deep pockets.

On something of a roll, and obviously under the – understandable – impression that money buys you anything, Ecclestone has since offered BayernLB 25 million euros to settle their claim against him that he collected commissions, and undervalued their stake in F1, which they sold in 2005.  The bank has maintained what one might call a dignified (or perhaps horrified) silence, and the offer has expired.

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With friends like this…

On 6 August 2014, it was announced that Standard Chartered could face further fines for AML failings after US regulators identified new problems with the bank’s surveillance system.  Back in August 2012, the bank agreed to pay a US$340 million fine for hiding $250 billion of transactions with Iran, and it could now be hit with another monetary penalty, more remedial action and an extension of a two-year monitoring period.

Now, you’d think that Standard Chartered’s senior staff would show a degree of contrition, perhaps even mortification or – old-fashioned concept – shame, at this discovery of their continuing general AML rubbishness.  But not Standard Chartered Asia CEO Jaspal Bindra.  In an interview with Reuters on 7 August, he came out fighting: “Banks have been asked to play the role of policing anti-money laundering.  That’s the real purpose of all these sanctions and surveillance systems and all that.  We are supposed to police that our counterparties and clients are not money laundering, and if when we are policing we have a lapse, we don’t get treated like a policeman who’s had a lapse, we are treated like a criminal.”

Now, perhaps I take too simplistic a view of the world.  There are laws – such as AML laws.  If you break a law, you commit a crime.  And if you commit a crime, you are a criminal.  But it seems that Mr Bindra is about two decades behind the times: he is still arguing that there should not be AML at all.  Now, that was tried for quite a long while – about a millennium – and it didn’t go well, so it was eventually decided that those who handle other people’s money should take some responsibility for checking that it is not dodgy money.  If you don’t agree with that, might I suggest that banking is not the career for you – much as someone who doesn’t support the concept of kitchen hygiene might be best advised not to run a restaurant.  To be fair, Standard Chartered spokesman Jon Tracey did email Reuters with a clarification: “We want to be clear that Jaspal Bindra’s quote does not represent the bank’s view on anti-money laundering or conduct regulation.  As Group Chief Executive Peter Sands said yesterday, Standard Chartered is fully committed to playing our role in supporting the regulatory conduct agenda and the fight against financial crime.”  While you’re in the mood for that remedial work, SC, you might want to have a quick look at tone from the top, leading by example, etc.

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More risky than we thought

I am still catching up on my reading from last month, so please forgive me.  But a more eagle-eyed reader in Jersey spotted that the UK’s financial regulator, the Financial Conduct Authority, chose the summertime – 18th July to be precise – to publish its own list of high risk countries.  According to the FCA’s own press release on the matter, “We categorise the following countries in accordance with the current level of risk they pose to the FCA’s financial crime objectives linked to tackling money laundering, sanctions systems and controls, terrorist financing, and bribery and corruption.  Our assessment also considers the size of a country’s economy (GDP) or financial markets.”  There are two surprising things about this list, and one unsurprising thing.

The first surprising thing is that it is the FCA publishing the list, and not HM Treasury.  After all, it is HMT that transposes the FATF’s naughty list into UK obligation (as they did most recently here).  So what does this list mean for those covered by the UK’s AML regime but not regulated by the FCA – is it irrelevant, or will its very existence count against them if they have not thought to check FCA as well as HMT and their own trade body?  And what about other regulators in both the UK and overseas?  Will they start their own lists too?  And will they match?

The second surprising thing is the enormous length of the list.  There are 95 countries on it, out of a possible 200-ish in the world – so according to the FCA, half the world is high risk.  I know it’s not an exact science, but the basic bell-curve of distribution suggests that this is a bit much.

The unsurprising thing is that the US is not on the list, even with half the world making it on there.  Well, it’s surprising, when the US is the largest money laundering jurisdiction in the world, but it’s not surprising.  Oh, you know what I mean.   And I nearly forgot to give you the link to the list: here it is.

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The Jersey Financial Services Commission recently published a paper entitled “Revisions to Commission AML/CFT Handbooks”, setting out their plans for (big surprise) forthcoming revisions to their handbooks.  As I was working my way through it, putting key dates in my diary (you can see why the compliance sector and I are natural bedfellows), it occurred to me that each jurisdiction in which I work has taken a different approach to what could – perhaps should – be a standard activity: the preparation and presentation of guidance to their regulated sector.

In the UK, we have “Guidance for the UK Financial Sector” prepared by the Joint Money Laundering Steering Group – a body made up of representatives of the trade associations in the financial sector.  I’ll make no friends by saying this, but the JMLSG guidance is now hopelessly bloated: Part I is general, Part II contains sectoral guidance (with wildly differing levels of detail, depending on who wrote it), and Part III specialist guidance (e.g. on wire transfers, and equivalent jurisdictions).  So the poor UK financial sector MLRO has to check all three volumes and cross-refer between them.  MLROs in law firms, accountancy firms and so on have their own guidance produced by their trade bodies, which again is of varying levels of detail and (frankly) quality.

In smaller jurisdictions, attempts have been made to rationalise things a bit more.  Jersey, for instance, offers a handbook for regulated financial services businesses, one for the legal sector, one for the accountancy sector and one for estate agents and high value dealers.  Guernsey divides its audience into two: financial services businesses, and prescribed businesses (legal professionals, accountants and estate agents).  The Isle of Man likewise has a two-way split, but along different lines: those regulated by the Financial Supervision Commission have their handbook, while those supervised by the Insurance and Pensions Authority have their guidance notes.  Gibraltar has one set of guidance notes for everyone.

(A side point: what the difference between a “handbook” and “guidance notes”?  Is the word “guidance” more legally charged and significant?  Does a handbook sound more optional?)

I probably consult all of these publications more frequently than many people – for a start, as I have presumed to publish books for directors and staff in these jurisdictions on meeting their AML responsibilities, whenever a change is made in anyone’s guidance (or of course legislation) I have to update my publications.  (Jersey last week – all done now.)  And although I am normally very careful not to express preferences of any sort, I have to say that I find the Guernsey pair easiest to use.  There is very little dispute about which category you fall into (FSB or PB – although of course some businesses offer both types of service), and both handbooks are written to the same level of detail.  However, a little Guernsey bird tells me that they are rewriting things as we speak, so fingers crossed that the new versions keep what is good and improve on what is not.

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