He’s not off to sunny Spain

I have always felt that one of the benefits – nay, the joys – of working in AML is that there is never time to become bored or complacent.  Just as you get to grips with how it all works, something changes or is questioned, and there’s a new angle to learn.  In June 2013, three people living in East Anglia and an Englishman living in Málaga, Bradley Rogers, were found guilty of involvement in an advance fee fraud.  In short (and here I am quoting from the official report of the case) “call centres based in Spain or Turkey, employed British nationals who dealt with calls in respect of debt elimination or escort services.  Consumers in the UK who called the centres, having seen advertisements, were persuaded by staff to pay advance fees on false promises made to them of dates or debt elimination.  The money was paid into UK accounts of bogus UK companies and used to pay expenses.  The profit was transferred to Spain.”  Specifically, some of that profit was transferred to the account of Rogers in Málaga, and so he was sent to prison for two years and ten months for money laundering.

So far, so ordinary.  But (and I quote here from the ever-fabulous Money Laundering Bulletin) “at the end of the prosecution’s case [against Rogers], the judge had accepted inclusion of a new count alleging that he had converted fraudulently obtained sums by permitting receipt of the money into his Spanish bank accounts and its subsequent withdrawal.”  Rogers appealed against this, saying that the UK AML legislation could not be made to apply to money laundered overseas – although the money had been fraudulently obtained in England, he and his grubby accounts were in Spain.  (He may not have referred to himself as grubby.)  I daresay he preferred the thought of having a go in the Spanish courts.  But the appeal failed.

To see why, let’s go back to PoCA – come on, there’s nothing like a bit of legislation to get your Friday morning going with a swing.  If you look at section 327(1) of PoCA, the offence of concealing etc., it defines it thus: “A person commits an offence if he – (a) conceals criminal property; (b) disguises criminal property; (c) converts criminal property; (d) transfers criminal property; (e) removes criminal property from England and Wales or from Scotland or from Northern Ireland.”  As the appeal court pointed out, only (e) has any geographical limitation to it – the rest can apply anywhere.  Moreover, if you now take a shufti at section 340(9), you will see that “[criminal] property is all [criminal] property wherever situated…”.  In other words (again, from the official case report): “Whilst the moneys obtained by the fraud in the UK became criminal property once they reached a bank account in the UK controlled by conspirators, those proceeds did not cease to be criminal property when they arrived in the defendant’s bank account in Spain.  By permitting the use of the bank account for receipt and then withdrawal of those moneys, the defendant was converting them and the actions of the defendant continued the harmful consequences of the fraud to be experienced by those victims in the UK by providing a haven further beyond the reach of UK consumers for the criminally obtained moneys.”  So that’s it for Mr Rogers – and I advance my AML understanding by another small step.

Posted in Legislation, Money laundering | Tagged , , , | 4 Comments

By his purchases shall ye know him

Someone suggested the other day that I should write a book about AML, and I said that I already had.  It made me think about it, so I went back and counted how many I have written, and it’s actually thirty-four in total (soon to be thirty-nine, but I’ll tell you all about that when the time is ripe).  Of course, I still have some way to go to catch up with Dame Barbara Cartland; Her Supreme Pinkness published 723 novels.

One of the great pleasures of writing books is when people tell you that they have bought them, and the other day a friend in Alderney sent me a screenshot of the Amazon page that had appeared as he was poised to order my Guernsey NEDs piggy.  (Too cryptic: I mean my book on AML for Guernsey non-executive directors, which features a pink pig on the cover.)  Amazon, being a frighteningly clever collection of algorithms, will always try to make you buy more, for instance by drawing your attention to what those who have bought the book you are looking at have also bought.  And in this instance it seems that purchasers of the Guernsey NEDs piggy are also slapping down good money for bumper packs of baby wipes.  And I mean bumper: 672 of the things.  Now, I have always found AML terrifically exciting, as you know, but not to the point of needing to wipe myself down.

Posted in AML, Publications | Tagged , , , , , | 2 Comments

Coming back to haunt her

If I say the words “HSBC” and “Mexico” in the same sentence, we all know whereof I speak.  (For any newcomers to AML, this is good summary.)  Busy as I am obsessing about all things money laundering, I do not usually worry about whether Scotland is going to flounce off up to its bedroom or who’s going to run the BBC, but when it was announced that the “preferred candidate” to head up the BBC Trust had served on the board of HSBC during what the Mexicans might call il grande fiasco, my little ears pricked up.  Rona Fairhead’s main job between 2006 and 2013 was to be in charge of the Financial Times Group, but she also served as a non-exec director at HSBC and PepsiCo.  Far be it from me to wonder whether she had time to keep her eye on all those balls – after all, with all the financial skulduggery that requires my outrage at the moment, I’m finding it hard to finish that jumper I’ve been knitting since May, so running a newspaper group and serving on two boards would be quite beyond me.

But it seems that I was not the only one to be concerned, and Ms Fairhead was asked to appear before the Culture, Media and Sports Select Committee to answer questions from MPs on 9 September.  I would like to call her answers illuminating, but that would be a fib.  At the time of il grande fiasco (IGF), she was chair of HSBC’s risk committee, which I had always thought would require more than a nodding acquaintance with the concept of, well, risk.  When asked by MP Paul Farrelly whether she felt she had done enough to prevent IGF, Ms Fairhead replied: “One has to be realistic and sometimes bad things do happen.  Sometimes the controls you think are effective turn out not to be so…  In Mexico when an issue was raised we would ask different view points and the data [suggested] everything was fine, the feedback was that we had addressed this.  It turned out not to be so…  There is no silver bullet but a huge amount of work has been done to make sure the culture is that you do the right thing, even if no-one is looking.”  Ms Fairhead has remained at HSBC, where she is now a member of its financial system vulnerabilities committee.

On 10 September Ms Fairhead was confirmed as the new head of the BBC Trust – but her celebrations were presumably quite short-lived, as within hours details were emerging of a class action lawsuit being brought in New York against HSBC by its shareholders, on the grounds that the bank allowed terrorists and Mexican drug cartels to launder their money through its services and accounts.  The shareholders involved want the US courts to force eighty-nine directors, including Ms Fairhead, to repay the fines incurred by HSBC over IGF – fines totalling £1.2 billion.  That’s £13,483,146 per director.  Some of us have been calling for individual responsibility like this – and now that she’s in charge, “Panorama” could make a special programme all about it.

Posted in AML, Due diligence, Money laundering | Tagged , , , , | 2 Comments

NCA gets tough on consent

Because I am such a structured sort of person myself (big excitement last week, for instance, when the 2015 wall planner went up), I very much like the UK’s consent timetable.  That’s not what anyone else calls it, I daresay, but I mean the thing that says that once you make a SAR to the NCA, they have seven workings days in which to respond, and if they say no they then have a further 31 calendar days in which to make a final decision.  (If you’re as thrilled by that as I am, you can read all about it here.)  But it seems that some rascally people have been misusing the system, and so the NCA has had to take a Stern Line (excellent name for a German ferry company, don’t you think) on it.

Last month, they put out a short but very significant document entitled “Closure of cases requiring consent”.  In this, they commented that – to their horror – the turnaround time for SAR responses has been rising steadily.  When it comes to consent SARs, this is obviously quite serious: there’s the poor MLRO on pins, trying to keep his impatient and increasingly curious client on hold while the NCA makes its decision.  But it turns out that consent SARs are often hoist by their own petard: the reason that the NCA cannot make a timely decision is that the crucial bits of information are missing.  In fact, the NCA says that “the cause behind delays in the turnaround of consent requests is the non-inclusion
of the five essential elements of a submission property”.  So from 15 September 2014 – that’s Monday – the NCA will be automatically rejecting “those consents which are missing reasons for suspicion or a statement regarding criminal property” and simply closing the case.  Of course the MLRO can re-submit the consent request, with the required crucial bits of information, but this causes even further stressful and embarrassing delay.  Best to get it right first time.  From Monday, everyone.

Posted in Legislation, Money laundering | Tagged , , , , , , , , , | Leave a comment

Now you see it…

My husband (who subscribes to this blog – well, we need something to talk about over dinner) commented the other day that my posts are much longer than they used to be.  He’s right: my early posts were about 200 words long, and recent ones are averaging 500 words – that’s inflation for you.  It could also be that I’m growing more wittery with age…  So today, here’s a nice concise post for you.

On 18 July this year, the Financial Conduct Authority published its own list of high risk jurisdictions.  This caused something of a hoo-hah, not least on this very blog.  The FCA promised to update its list regularly.  Which it has done.  By removing it.  Now that’s what I call ferocious editing – I could learn a lesson.

That’s your lot: 136 words.

Posted in AML | Tagged , , , , , | 4 Comments

Do they have a means form?

As my voluntary service, I work as a magistrate in Cambridge.  And when magistrates are imposing a financial penalty on someone, we always ask for their “means form”, on which they detail their income and outgoings – in short, we want to see how much money they have.  And then we base the fine on that – so, 50% of weekly income, or 100%, and so on, depending on the severity of the transgression.  This means that richer people pay more than poorer ones for the same offence, with the thinking being that the penalty should hurt everyone to the same extent – and levying a fine of £100 on someone who earns £2,000 a month will be far less painful for them than the same fine for someone earning £600 a month.  It’s a good principle, and one I have long championed for money laundering penalties on institutions.

And then I read this little piece on the BBC website, about how Neil Woodford, “one of the UK’s most high-profile fund managers”, has decided to sell his shares in HSBC because of his concerns about “fine inflation”: “Fines are increasingly being sized on a bank’s ability to pay, rather than on the extent of the transgression”, he said – as though that were a bad thing.  Well hurrah I say!  The only penalties that seem to have any effect are the ones that hurt – and this is true in any situation.  For instance, sending your kids to their rooms these days is pointless as a punishment, as most bedrooms now are fully-equipped entertainment centres.  So I’m all for large and painful penalties on institutions that fail to meet their AML obligations.  If, as Mr Woodford predicts, “a substantial fine could hamper HSBC’s ability to grow its dividend”, then so much the better.  Maybe a posse of outraged shareholders (or a a retreat of shareholders, like Mr Woodford) will force recalcitrant institutions to be more vigilant about AML – I don’t care what makes them do it, as long as they do it.

Posted in AML, Due diligence | Tagged , , , | Leave a comment

Going against nature

I try to keep up with it all, I really do, but there is just too much serious financial naughtiness for me to track everything.  So thank goodness for the Economist, and its recent story on corruption in Catalonia.  The former leader of the independence-seeking Convergence and Union group, Jordi Pujol, has recently admitted that he and his family have been salting away money in Switzerland for 35 years.  There is no suggestion – yet – that this money is the proceeds of political corruption, but rather it seems to be from tax evasion.  Señor Pujol’s explanation was that “we never found the right moment to declare it”.  How about annually, on your tax return, like everyone else?  The Economist is not slow to spot the particular irony of the situation: “The battle cry of the independence campaign is that the rest of Spain steals Catalan taxes and wastes them on lazy southerners.  Now Mr Pujol himself has been found hiding his own stash of cash.”  And it’s not just the man himself: his son Jordi is to appear in court next month to answer questions about tax fraud and money laundering (a girlfriend says that he would tote bags of €500 notes to Andorra), and another son Oriol is suspected of taking bribes while in political office.

[A small side issue comes to mind: are Catalonian politicians considered PEPs in Spain, or are they domestic – given that Catalonia desires but has not achieved independence?]

I have written many times before about financial misdoings by those in power, and about how such activity tends to run in families – nothing earth-shattering about this observation, which is so accepted that we enshrine it in our PEP definition (“and their families and close associates…”).  But, playing devil’s advocate for moment, are we on a hiding to nothing by trying to legislate against human nature?  It is one of the most basic human – indeed animal – instincts to provide for one’s own genetic package (i.e. children) before others, and if necessary at the expense of others.  As explained in this BBC article, male lions who take over a pride will often kill the existing cubs, in order to ensure that their own potential offspring will have the best chance of survival and dominance.  (And in case you’re feeling smug, ladies, the females do it too: female rats will eat the babies of others for sustenance, and then take over the vacated nest as well.)  And in the human arena, there is the (admittedly controversial) Cinderella effect – a theory of evolutionary psychology that states that adults are much more likely to abuse or other wise harm their stepchildren than their genetic offspring.  The thinking is that we have so many calls on our time – survival, reproduction, raising children – that we have to decide where to spend our energy, and investment in non-genetic children reduces our ability to invest in ourselves or our genetic children without directly bringing reproductive benefits.

So if we’re evolutionarily programmed to protect our own family situation, how realistic it is to expect someone who is put into a position where they have access to public money, or access to a situation that enables them to evade tax and so conserve their family resources for their own use, not to take advantage of that in order to favour their own children?  After all, if the desire to protect and promote one’s own offspring can lead to the neglect, abuse and even murder of others, then why should we be surprised if it leads to a more distant harm, e.g. siphoning money intended for a public hospital into a private pocket?  Perhaps the route to success is to prevent PEPs having the opportunity to be corrupt, rather than being outraged when they are.  Now, how to do that?

Posted in AML, Money laundering | Tagged , , , , , , , , | 2 Comments

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.

Posted in AML, Due diligence | Tagged , , , , | 3 Comments

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.

Posted in AML, Due diligence, Money laundering | Tagged , , , , , | 2 Comments

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.

Posted in AML, Due diligence | Tagged , , , , , , , , , | 2 Comments