Ho ho high risk!

While casting around for an idea for this final blog post before Christmas (as you know, money laundering is something of a passion of mine, but even I have to admit that it’s not what you would call festive…), I came across an advert for a Santa in Indianapolis.  This gentlemen makes his living appearing as Santa at parties, shows, conferences and ceremonies.  He does not claim to be the real Santa – he is a Professional Santa.  And I just love how professional he is.  He went to Santa School.  He constantly upgrades his “Santa suit and accessories”.  And (true dedication, this) as he is now retired he has let his beard and hair grow to “a full long Santa length”.  The words that caught my eye in his ad were “due diligence”: “It is unfortunate, but in today’s society, it is important that you do your due diligence in making sure that your Santa is safe to be around your children and/or guests.  I provide you with a copy of my background check from IntelliCorp Records that I must obtain to purchase my entertainer’s insurance.”

As for doing your own due diligence on the man in red, you might like to consider some rather worrying facts.  For a start, he uses several aliases, which he changes according to local preference: Saint Nicholas, Father Christmas, Santa Claus, Kris Kringle and Papa Noel are among those most frequently employed.  His place and date of birth are fiendishly difficult to establish, let alone verify – modern representations suggest that he is from northern Europe, but earlier images show him to be of Middle Eastern origin, and he is centuries old, if not millennia, so the reliability of his own memory might be in question (although his record-keeping of the behaviour of the world’s children seems to be exemplary).  His PEP status is uncertain: can his influence be considered political, or merely social?  He certainly mingles at the highest levels, as this article proves.  His usual garb features a very obvious and elaborate white collar.  He is an employer of note, providing seasonal employment to individuals from a specific ethnic minority – which rings some alarm bells about discriminatory practices.  Rumours are that the working hours for his staff in December in particular are very long, and almost certainly in contradiction of modern legislation.

Which of course brings us to the greatest concern of all: source of funds and source of wealth.  At a modest estimate, there are 1.9 billion children in the world, and Santa claims to deliver a present to each of them.  Even allowing for a small proportion of those children being too naughty to deserve a present, and even if many of the presents are home-made, there is still a great deal being spent on toys.  And yet Santa’s usual form of recompense is a glass of sherry and a mince pie.  I just hope the world’s FIUs are ready for the inflow of SARs on Boxing Day.

I am taking a little festive break, and will post next on 5 January 2015.  Merry Christmas, one and all!

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I look down on him…

Earlier this month, the UK’s FIU, the National Crime Agency, published its “SARs Annual Report 2014”.  It has some SAR statistics and a few brief case studies, which are all useful for training, but I was keen to see how the different parts of the regulated sector are doing when it comes to reporting – the philosophy rather than the arithmetic, if you will.  And the comments are measured and tactful, but still revealing.

Banks made 15.8% more SARs this year than last, contributing a full 82.18% of all SARs.  And why is this?  Well, “the robust stance of banking industry regulators towards financial crime both in the UK and globally may have been a major influence on the volumes of SARs reported by banks”, apparently.  For “robust stance” read “stonking great fines”.  Congratulations all round in the casino sector, whose members have made 12.1% more SARs this year: “Continued work by the Gambling Commission with British casinos to drive up AML standards, and partnership with the NCA in a bid to drive up reporting standards within the industry, may account for the growth in SARs.”

On the other hand, the number of SARs submitted by money service businesses has decreased, “with the market constricting following the ‘de-risking’ in this sector by financial institutions [such that] the number of principal MSBs (those who would report) is down by 21%”.  Accountants are also reporting less, and earns a lightly veiled threat: “The UKFIU is currently working with the regulators/supervisors of this sector which will examine these reductions.”  Lawyers likewise: “The Solicitors Regulation Authority (SRA) has embarked upon a schedule of activity with solicitors and firms focusing on AML compliance.  As part of this work the SRA intends to try and understand why the number of SARs has reduced and will be working with key partners to do this.”

Bald reporting figures are not the whole story, of course, and far be it from me to suggest in any way that SARs should be made simply to keep the numbers up.  But given the amount of money that moves through their relationships with their clients, it does seem unlikely that only 8,540 incidents would happen – across all of the UK’s lawyers and accountants in a whole year – that would be worthy of a SAR.  Just the quickest Google search suggests that there are over 300,000 accountants and about 120,000 lawyers practising in the UK, so that’s (hold on: reaching for calculator) 420,000 professionals making 8,540 SARs… which means only two-hundreths of a SAR per professional across the whole year.  So they would need to work for fifty years to make a single SAR each.  Can’t be right.  Probably my maths gone wrong.  Let’s hope so, anyway.

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Fare’s fair

Any UK reader who has gasped in horror while handing over (metaphorical) fistfuls of cash to their railway company will remember the outrage we all felt when, in April 2014, it was revealed that a “City financier” had been cheating on his fares for years.  (In short, he boarded the train at a rural station with no ticket barriers, then disembarked in the City and “touched out” with his Oyster card, thus being docked the maximum fare of £7.20 – for a journey for which he should have paid £24.50.  For five years.  While earning about a million a year.)  The full puffed-chest, hands-on-hips indignation can be sampled in this article from the Daily Bile.  You will spot that throughout the article the fare-dodger is unnamed, as part of his deal with the railway company was his anonymity, and indeed at the end of the piece the journalist encourages anyone who knows the identity of the miscreant to contact the paper.  But in August 2014, the fare-dodger was warned by the Financial Conduct Authority that they were taking an interest in him, and the cat was out of the bag: he was suspended from his job and eventually resigned.

Yesterday the FCA announced the outcome of its own investigations: Jonathan Burrows has been banned from working in the City again.  As explained in the Final Notice from the FCA, at the time of his offences Burrows was an approved person, but now “the Authority considers that Mr Burrows is not fit and proper to conduct any function in relation to any regulated activity… because he lacks honesty and integrity [and so] he has failed to meet the FCA’s Fit and Proper Test for Approved Persons”.  The FCA press release reveals that “Burrows also admitted in interview that he did not disclose his behaviour to his employer.  Although the FCA is not penalising Burrows for not informing his employer the FCA has taken this into account, amongst other things, in deciding what action to take.”

In the words of my primary school teacher (and doubtless yours too), I find Burrows’s behaviour more disappointing than anything.  We are all tempted, from time to time, to make a quick gain over “the system”.  (When I was a skint student, I once cut an unfranked stamp from a letter I had received and stuck it on one I was sending – I was plagued with guilt for months over that one.)  But those of us who work in finance are in such a position of trust – looking after other people’s money, for heaven’s sake – that we must be held to the highest standards.  Poor old BlackRock had no idea that their MD was the fare-dodger in the press; he fessed up only when he realised that the FCA would be contacting his employer anyway.  And in the intervening months, and indeed his five preceding fare-dodging years, just how fit and proper were his actions with client money?  What a difficult situation for BlackRock.  So should Burrows have been able to strike that anonymity deal in the first place?  Or should his approved status have made it a criminal offence for him not to disclose crimes of dishonesty?  (I think he settled out of court with the railway company, so in fact has no conviction – even trickier.)

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The piggy popularity poll

As we approach the end of the year, I always take the time to review my year – specifically, which of my projects and initiatives have worked, and which have not.  This year, for instance, my workshops for experienced MLROs are going great guns, but the ones for new MLROs are right off the boil and so I will put them to one side for a while.  (One of the benefits of working alone, of course, is that I can make such decisions and turn on a sixpence.  And I get all the Jaffa Cakes.)  And with this being very much the year of the pig for me (from March to November, I oversaw the birth of sixteen of them), I have peered through my magnifying class to scrutinise my porcine sales figures.

There are in fact twenty-one piggies in the AML sty now – it’s very snug in there.  There are five piggies for non-exec directors (UK, Guernsey, Jersey, Isle of Man and international editions), and then four jurisdictional families of sector-specific piggies for staff – four editions each for UK, Guernsey, Jersey and Gibraltar.  So who do you think is Top Hog this year?  Which piggy is more popular than all of his sty-mates?  Well, my bestselling NED piggy this year is the Guernsey one.  But my bestselling piggy of all is the UK banking piggy, who has sold nearly five times as many copies as his closest rival, the Guernsey fiduciary piggy.  I suspect he is out there at all the banking gatherings, truffling down on the canapés and guzzling champers while schmoozing those MLROs.  The runt of the litter, I am afraid, is the Jersey accountancy piggy, who has sold only two copies all year – maybe island-based accountants are particularly careful with their money.  But never fear: I love all of my piggies equally, and I promise that Jersey accountancy piggy will not be made into chipolatas.

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The casino duck

I am doing some work with a casino, and they have introduced me to a term I had not heard before – much-beloved of the UK’s Gambling Commission, it turns out – which is “criminal spend”.  It means “the use of criminal proceeds to fund gambling as a leisure activity”, which I think distinguishes it from using casinos as a laundering mechanism – i.e. with the aim of getting clean-looking funds back again at the end of the process.

I can see that from the perspective of the casino, there is a difference: is the criminal coming in just to enjoy himself, or is he using you as part of a money laundering scheme?  But from the legal perspective, I think the distinction would be harder to draw.  What matters with money laundering is the process, not the intent: if a criminal moves his money through a casino, whether he does it for fun or for laundering, and whether he wins or loses, he has in effect transferred the proceeds of crime, and so has the casino.  But even as I write this, my mind is whirring: given that there is no objective test on the concealing offence, does the gambler’s intent come into it after all?  If your criminal comes into the casino and does not look or act like a criminal, and places entirely normal wagers within standard limits, such that the casino staff have no reason at all to think that there is anything unusual about him, and it later turns out that he was having a high old time buying chips and playing with the proceeds of a bank heist – would the casino be liable to a charge of concealing, or transferring, or converting?  If it looks like a duck, moves like a duck and quacks like a duck (the duck here being your standard casino client), surely no-one can be blamed for assuming that it is a duck?  On the other hand, I think we would all agree that a criminal coming in and placing wagers in a way that is somehow unusual, and perhaps indicative of a laundering attempt, should be spotted and reported.

So what do we think?  Is a criminal just spending his money liable to a charge of laundering?  I would have said yes, as he is converting/transferring criminal property, if not actually concealing it.  But what of the institution or firm that enables him?  Is this perhaps where our old friend “adequate consideration” might come into things?

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Just how close is close?

PEPs are a perennial and perplexing problem.  Who they are, how long they stay like that for, and what to do about them anyway – headaches all along the line.  But one aspect of PEPitude that has been exercising (perhaps even exorcising) me recently is the concept of the “close associate”.  The FATF is uncharacteristically coy on the matter; their 2012 Recommendations define a PEP fairly carefully but then in Rec 12 add simply that “the requirements for all types of PEP should also apply to family members or close associates of such PEPs”.  Turning instead to the draft Fourth Money Laundering Directive *cue weary chorus of “Why are we waiting?”* we read in Article 3, home of definitions and as such Rather Helpful, that, when it comes to PEPs, “’persons known to be close associates’ shall include (i) any natural person who is known to have joint beneficial ownership of legal entities or legal arrangements, or any other close business relations, with a [PEP], [and] (ii) any natural person who has sole beneficial ownership of a legal entity or legal arrangement which is known to have been set up for the benefit de facto of the [PEP]”.

At first glance that actually seems quite prescriptive (which can often be helpful, unless you’re applying a risk-based approach – oh, I see the problem).  But actually there is a lot of wriggle room too, in the phrase “other close business relations”.  The difficulty lies not in appreciating the dangers of close associates – after all, what self-respecting baddie goes anywhere without his henchmen – but in defining and discerning them.  (In one of those extra-value moments for which you really read this blog, I can report that “henchman” comes from the Old English hengest, meaning horse – so the henchman was originally the groom.  Of course now it means someone wider than he is tall, who wears sunglasses at all times and talks into his cuff.  Threateningly.)

Actually, I’m being a bit unfair to the FATF, as in June 2013 they did publish a whole guidance document on PEPs.  And in this they say that close associates are “closely connected to a PEP, either socially or professionally”, which adds that extra social dimension to it.  After issuing the caveats that close association “depends to some extent on the social-economic and cultural structure of the country of the PEP” and “the number of persons who qualify as… close associates is fluid, and may change significantly over time”, the guidance goes into some detailed examples of who might qualify in this category: “(known) (sexual) partners outside the family unit (e.g. girlfriends, boyfriends, mistresses); prominent members of the same political party, civil organisation, labour or employee union as the PEP; business partners or associates, especially those that share (beneficial) ownership of legal entities with the PEP, or who are otherwise connected (e.g., through joint membership of a company board)”.

And just how is the diligent MLRO meant to find out about these connections?  The FATF guidance points out that “unlike law enforcement and supervisors, financial institutions and DNFBPs have access to a valuable source of information: the customer.  They should utilise this rather than relying on third party providers.”  Perhaps MLROs should allow for subscriptions to Hello!, Vanity Fair and Tatler in their budgets – these glossies are packed with pics of the PEPs at play.  And as for uncovering, so to speak, your PEP customer’s known sexual partners outside the family unit, well, I’d like to be a fly on the wall during those DD interviews.

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Because you’re worth it

Are you sitting comfortably?  I ask only because I’m doing that scene-setting stuff again, and it’s going to take a while.  When I was a little girl, my grandma took delivery of a new three-piece suite.  It was an event of some significance, as she had been buying it at the rate of something like 50p a week for seventeen years (you read that right: seventeen) – and refused to have it in the house until it was paid for in full, otherwise it would be like sitting on stolen goods.  A woman of stern moral fibre, my grandma.  Compare and contrast to the furniture ads on the telly at the moment: “Get the sofa of your dreams, in time for Christmas – four years’ interest-free credit, pay nothing for a year”.

What does this tell us about the current appetite for saving up for things, for making do until you can afford it?  Precisely.  And criminals just love our change of attitude.  In the modern desire (desperation?) for everything now, and the chorus of “Why shouldn’t I have it, because she has it and so does he, and after all, I’m worth it”, they find a ready audience for their (false) promises of easy money and no consequences.  It wasn’t so much of a problem when the CEO (or MD, as he was in those days) was paid about a hundred times what his most lowly employee took home; the responsibility/risk/reward balance seemed fair, and Mr Lowly could dream realistically of one day becoming Mr MD.  But now, when junior staff hear about their directors being paid squillions, they see something that is both manifestly unfair and impossibly out of reach – and so their minds turn to alternatives.  And the lure of a 20% cut for shepherding through a dodgy transaction or turning a blind eye to a reportable situation or not asking awkward questions could be irresistible.  But teaching patience (grasshopper) in these Twitter-times is an uphill battle.

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The wretched refuse of your teeming shore

When I was a little girl, I had one of those 3D plastic viewers; you put a circular cardboard plate of tiny transparencies in it, looked to the light, and pressed the trigger to change the picture.  Whenever he went on a business trip my father would buy me a new set of pictures, and after a visit to America he came back with “Great Monuments of the USA” or similar.  There they were in 3D spendo(u)r: the Grand Canyon, Mount Rushmore, the White House, Old Faithful – and the Statue of Limitations.  Yes: at some point in my early years – no doubt while earwigging on conversations that had nothing to do with me – I had concatenated two related ideas, and became convinced that the tall New York lady holding an ice-cream (well, those pictures were very small and lost some of the detail) was indeed the Statue of Limitations.

Now older and wiser, I dwell instead on the significance of the statute.  Of course, it is much more complicated than it first appears: there is not just one statute, and it can be varied depending on the circumstances.  And in the UK we call them “limitation periods” rather than statutes.  But the key point for those of us of an AML turn of mind is that, when it comes to money laundering offences, there is no time limit on either element: the crime which generated the money that is being laundered can be as old as the hills, and the money laundering can be prosecuted at any point in the future.  This sometimes gives MLROs a piercing headache, as at several points in a career they will be confronted with a variant of this question: “How far back do we have to go with this due diligence stuff?  After all, most of England’s stately homes were built on the proceeds of slavery.”

Such a tricky question.  We can discount some concerns pretty easily: what matters is whether the crime was a crime when it happened, so that’s eighteenth century slave-trading done and dusted (along with Leo Sayers’s hairdo and John Travolta’s disco trousers).  But other concerns are less easily assuaged.  I always opine that dirty money is never laundered – that it retains the stain of criminality no matter how clever and determined the laundering.  And as a principle I stand by that.  But we have to be realistic.  Financial services firms are not detective agencies, and are not expected to act as such.  You should conduct professional and diligent due diligence to a standard that enables you to say with confidence that – when viewed with the professional, diligent and dispassionate eye of someone doing your sort of job at your sort of level in your sort of firm – your client appears not to be a crook.  Moreover, we must also recognise that law enforcement agencies work under (sometimes quite severe) constraints of time and money.  As a consequence, much as hospitals perform triage in order to deal with the greatest dangers first, they prioritise their energies on cases where they have the best chance of a successful outcome (i.e. conviction and confiscation).  So although I would dearly love them to be able to winkle every last penny of criminal proceeds from the grasping hands of criminals, I know it’s not going to happen – and so should MLROs and their staff.  We must all accept our limitations – even Roman goddesses of freedom.

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Due diligence dark glasses

I love words, as you know.  But – like Jaffa Cakes on the shelves and “Today” on Radio 4 in the morning – we sometimes take them for granted.  (Although with the recent sale of United Biscuits to a Turkish firm, I am stockpiling just in case…)  And so we often forget what they really mean.  A conman is a conman not because he has confidence – although he usually does – but because he inspires confidence in others.  He is charming and attentive, and we learn to like and eventually trust him.  And once our defensives are down, he reverts to his true snake-like nature and his original vile intentions, and we are left wondering what happened.  No, I’m not dwelling on an ex-boyfriend – although he will recognise himself from my description.  I am talking about clients, and what we could call “client capture”.  This is where you become so fond of a client, so captured by their charm and so ensnared by their story, that you stop seeing things clearly.  It’s like putting on the beer goggles, only it’s donning due diligence dark glasses.

The dangers of client capture were highlighted in a case earlier this year in the Royal Court of Jersey, involving a local trust company and some of their clients.  In the case, victims of a substantial fraud succeeded in a claim of “dishonest assistance” against the trust company, because it had provided directors to a number of Jersey companies which were beneficially owned by a fraudster.  The trust company’s officers had, on the instructions of the fraudster, dishonestly made payments out of the companies when they were on notice that those payments could be fraudulent.  Why were they deemed to be on notice?  Well, the court found that the officers were not fully aware of or complicit in the fraud, but rather that they did not act an honest person would have done in similar circumstances.  In particular, they did as their client (the fraudster) requested without asking any questions – even when he asked them to lie for him and to edit accounting documents for him.  The court held that “an exaggerated notion of dutiful service to clients, which produced a warped moral approach that it was not improper to treat carrying out clients’ instructions as being all important” is dishonest, regardless of whether the person involved genuinely believed it was honest.  In other words, no matter how much you like and trust the client, you must always ask questions of him and of yourself – and always be prepared not to like the answers.

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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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