Curiosity might save the cat

One of the management buzz-phrases that seems to be staying the course is “tone from the top”.  In the world of AML, the tone from the top has in fact originated at the bottom: first we had MLROs beating the AML drum, then boards became involved when legislation was upgraded to require business risk assessments, and now supervisors are taking their own medicine (as evidenced by the spread of risk-based supervision) and even governments are getting in on the act (with Recommendation 1 of the FATF’s Forty stating that “countries should identify, assess, and understand the money laundering and terrorist financing risks for the country [and then use that assessment to] apply a risk-based approach”).  The tone from the top for one part of the UK’s regulated sector in particular – the gambling industry – has recently become decidedly frostier.

Businesses licensed by the UK’s Gambling Commission are required to abide by its licence conditions and codes of practice (LCCP).  Enhancements to the LCCP came into force in October 2016, including a requirement that licensees report to the GC “any criminal investigation by a law enforcement agency in any jurisdiction in relation to which the licensee is involved… and the circumstances are such that the Commission might reasonably be expected to question whether the licensee’s measures to keep crime out of gambling had failed”.  In other words, if a customer is hauled off to court, the GC wants to hear about it from their licensee and not (or at least not first) from the police.  In the past, there have been several instances of criminals of all stripes – but mainly thieves and fraudsters – laundering their loot through casinos.  And in a speech to an industry conference in November 2016, GC Chief Exec Sarah Harrison made it clear that this sort of infringement would no longer be dealt with in a gentle manner, with negotiated settlements and the like: “It is important that you are and remain alive to managing the risks of money laundering and terrorist financing, consistent with the licence objective to keep crime out of gambling.  Here, I want to encourage you specifically to raise your game and be far more curious about the source of customer funds.  Our recent casework showed a lack of curiosity, and at worst, a leadership culture which puts commercial gain over compliance.  I still hear now that some businesses are adopting a strategy of ‘wait and see’ – wait until the source of funds is proven to be illegal before acting.  This is far from a risk-based strategy, nor is it credible.”  She had a stern warning about the future of the GC’s enforcement strategy: “[We have so far shown] a preference for pursuing compliance through means that stop short of a licence review, in favour of a regulatory settlement.  We propose to remove this bias in favour of settlement… In addition, we will propose changes to our statement on financial penalties with the likelihood of higher penalties going forward, in particular where we see systemic and repeated failings.”

If I were a gambling woman, I’d bet that the next UK gambling business to play fast and loose with criminal proceeds will feel that tone from the top in the form of a tone of bricks.

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Nobody loves me, everybody hates me

In common with many global banks, Deutsche Bank has come under the AML regulatory spotlight of late.  And then, on 4 January 2017, it was announced that Deutsche’s Global Head of Anti-Financial Crime, an Englishman called Peter Hazlewood, was quitting after only six months in the job, although staying with Deutsche.  According to Der Spiegel (warning: it’s in German), Mr Hazlewood was well qualified for the role, having been a senior detective inspector in the Hong Kong police force and then working in an AML capacity at HSBC, JP Morgan, Standard Chartered and Development Bank of Singapore.  But he had a strained relationship (what my Google translation charmingly renders as “atmospheric disturbances”) with Sylvie Matherat, the Board member responsible for compliance, to whom Mr Hazlewood reported.  Other sources suggest that Mr Hazlewood was unhappy with the staffing levels of his AML team, and that he thought the compliance team should be more assertive.  Whatever the details of this particular situation, it will sound familiar to many working in the AML community: once again, despite all the fine Board-level words about fighting financial crime, AML is under-resourced, under-appreciated and, whenever possible, undercut.

Posted in Uncategorized, Money laundering, AML | Tagged , , , | 4 Comments

When legislation lets you down

For a couple of years I have been tracking the fortunes of “Les W”.  The Wildensteins are one of the highest-profile families in France; Wildenstein & Co was one of the most successful and influential art dealerships of the last century.  It was founded in the 1870s by Nathan Wildenstein, and then passed to his son Georges, and then to Georges’s son Daniel.  Daniel Wildenstein died in 2001, passing the “head of the family” baton to his son Guy.  And then it started to go wrong.

Several women who had at one time or another been married to Wildenstein men contacted the French tax authorities, saying that their ex- or late husbands had diddled them out of money by hiding it “offshore”, usually in the form of valuable artworks.  The French taxman had a look, and claimed that Guy owes him €550 million – and put Guy on trial to get the money back.  Appearing alongside Guy in the dock on 4 January 2016 were his nephew Alec, his brother’s widow Liouba Stoupakova, a notary, two lawyers, and two trust managers.  Two days later, the trial was halted when judges accepted arguments by the defence that an appeals court should first consider a constitutional issue relating to whether two cases – a fiscal one and a criminal one – can take place at the same time, but a few months later the criminal trial went ahead and was concluded on 20 October 2016, with the judge saying that the verdict would be announced on 12 January 2017.  And so it was.

I was not there, of course, but according to various sources, this is the outcome:

  • “The heirs to of one of the world’s biggest art dynasties were acquitted of hiding masterpieces from Caravaggio to Picasso in offshore havens to avoid the French taxman despite what the judge called their ‘clear intention’ to do so.” – Telegraph newspaper
  • “The presiding judge of a Paris court said there had been a ‘clear attempt’ at concealment. But he acquitted them because of shortcomings in both the investigation and French tax fraud legislation.” – BBC website
  • “The French court ruled that even though Mr Wildenstein and other members of his family dissimulated family assets through trust funds set up in tax havens, they hadn’t broken French law. No French law detailed how the transmission of trust funds had to be taxed until 2011, the court said.  ‘It is not the role of the court to take the place of the legislator,’ Judge Olivier Geron, the court president, said in his ruling.  Mr Geron said he understood the French people would probably struggle to accept the ruling given the wealth of the defendant, but justice has to treat everybody equally, ‘be they rich or destitute’, he said.” – Wall Street Journal website

So although it seems that they did do what we think they did, a shoddy investigation and grey areas in French tax law have saved Guy from a criminal conviction.  However, the prosecutor can appeal this decision, and Guy still has to face the taxman in a fiscal court.

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Forget the carrot – where’s that stick?

Years, nay, decades ago, when I started out in AML training, I vowed to myself that my training would be different.  It would not concentrate on money laundering penalties, or feature the phrases “clapped in irons”, “bread and water” or “say goodbye to your pension”.  No: my plan (to which I have stuck) was to concentrate on the why of money laundering and the why of anti-money laundering.  Make people care about money laundering, make them angry about it, and they’ll want to prevent it, I reasoned.  But it turns out that I might have been wrong.

Just before Christmas an article appeared on the Forbes website entitled “10 Ideas to Curb White Collar Crime” – catnip to me, as you can imagine, as I’m always on the lookout for nuggets of wisdom to pass on to MLROs.  And top of the list is this: “Ditch Ethics Training For Teaching Federal Sentencing Guidelines – Every white collar felon I [the article author Walter Pavlo, himself a white collar felon] talked to over the years, and I have talked to many, had never heard of the guidelines used to sentence people to federal prison for white collar crime.  People would make better decisions of choosing right over wrong when they clearly understand the consequences.”  So perhaps I shouldn’t skate so quickly over the penalties, with my usual, glib “…and fourteen years on offer for this one”.

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Going off the rails

Welcome back, and may I wish you all a happy and peaceful 2017.

India has certainly been in the money laundering news lately, what with its “demonetisation” of the most common banknotes on 8 November 2016 and the subsequent arguments about whether this move has helped, hindered or simply bored the criminals.  And now it seems that money launderers (and many citizens trying to get rid of their no-longer-worth-anything banknotes) are targeting that most Indian of institutions – the railway.

It appears that from 9 November 2016 – when the 500 and 1,000 rupee notes were declared no longer to be legal tender – the number of 2,000 rupee notes supposedly received and recorded by railway booking counters did not tally with the number of these notes deposited at the end of each day.  Instead, the shortfall was made up of the (supposedly no longer valid) 500 and 1,000 rupee notes.  For instance, on 16 November one booking counter at Chennai supposedly received thirty-five 2,000 rupee notes from customers – but at the end of the day, it deposited not a single one, instead paying in fifty 1,000 rupee notes and forty 500 rupee notes.  Indeed, from this single counter alone, demonetised notes worth a total of 800,000 rupees (about £9,535) were deposited over a fortnight.  Across all forty counters at Chennai station, demonetised notes worth 10,000,000 rupees (£120,000) were paid in.

It seems that the railway booking counters had been left out of the demonetisation plans and were not told to stop accepting the 500 and 1,000 rupee notes, and consequently found themselves as one of the few places where people could still spend them.  The suspicion is that it was being done in an organised way, with staff colluding with criminals to allow them to buy tickets with useless money and get refunds later, or sell the tickets on.  One railway booking counter employee at Chennai said that for the middle two weeks of November is was a “free-for-all” with every railway staff member, including senior officials, exchanging their own demonetised banknotes and bringing in wads of them on behalf of friends and family.  Railway compliance staff – known in India as the “vigilance department” – are now examining huge amounts of data to look for evidence of criminal involvement and organisation rather than simple opportunism.

It occurs to me that with my local season ticket from Cambridge going up to a wince-inducing £4,780 this year, it might be a useful laundering technique here in England.  I doubt that the ticket counter staff are trained in AML and the dangers of accepting large cash payments, so I could turn up with £5,000 in cash, buy a ticket, and then ask for a refund a couple of weeks later, taking a small loss (as launderers always do) and walking off with a cheque.  You heard it here first…

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Moving the goalposts

I’m as fond of AML measures as the next person.  Actually, that’s a fib: I’m probably a thousand times fonder of AML measures than the next person.  But more than two decades of AML endeavours have taught me one important lesson: softly, softly, catchee monkey.  As with most things, if you bombard people with too many tasks all at once, they tend to throw up their hands in despair and resist doing any of them.  (Anyone currently trying to get recalcitrant spouses or children to sign cards, wrap presents and decorate trees will know whereof I speak.)  And so, much as I love and support the underlying purpose, I am rather cross at the Fourth Money Laundering Directive.

European AML directives are the hippo of the legislative world: slow and ponderous for most of the time, they periodically accelerate to a dizzying speed and hurtle towards you, crushing all resistance, before returning to the shallows to munch peacefully for another decade or so.  They are, if you know this pattern, predictable beasts – not least because they contain within themselves their own implementation period.  And so the Fourth Money Laundering Directive (MLD4 to its friends) and its two-year implementation period came into legislative force on 26 June 2015, meaning that EU Member States (and other jurisdictions who like to observe these niceties) have until 26 June 2017 to transpose its requirements into their domestic AML legislation.  Two years is, as they say, do-able.  There’s time for draft legislation to be, well, drafted, and circulated to interested parties, and then tweaked according to local taste.  While this happens – as tweaks only are permitted, not wholesale changes – those affected (i.e. AML-regulated institutions) can get on with adjusting their in-house policies and procedures to meet the new standard, holding fire on the final wording until the tweaks are done, the legislation is passed to meet the deadline, and guidance is produced.  We all know where we stand.  Until we don’t.

In February, following the appalling attacks in Paris, the European Commission decided that MLD4 was not tough enough on terrorist financing, and so they kick-started a process for amending it – in areas such as virtual currencies, pre-paid cards and (a big one, this) another look at beneficial ownership.  As I say, I am – in general – a big fan of more AML.  And all of these are topics that bear revisiting.  But not in the middle of MLD4 implementation.  And certainly not by 26 June 2017.  It’s simply not fair.  It’s not fair on governments, whose transposition of (original) MLD4 is well underway.  It’s not fair on AML-regulated institutions, whose adjustment of their in-house response to (original) MLD4 is likewise well underway.  And it’s not fair on consumers, who will find it even more confusing to meet a constantly-shifting set of due diligence checks.

I’m not simply stamping my little trotters at unfairness.  My main concern is that it make us – the AML community – look foolish and fickle.  We have spent decades trying to convince people that the AML measures we impose are considered and proportionate.  And if we start changing them on the hoof, that seems like a lie.  It looks like a knee-jerk reaction rather than a carefully thought-through and measured response – like a faddy diet rather than a sensible adjustment of eating patterns.  In short, we lose credibility.  I know this is the season for suspending disbelief, but we in the AML world show uncertainty at our peril: if we cannot, hand on heart, say that our requirements are the very best, deliberated response to current risk, then why should people comply with them?  And if we keep changing what we ask of them, they will baulk: they will (quite rightly) wonder why what we want this week is different to what we wanted last week, and conclude that perhaps we don’t know what we’re about after all, so why should they give us anything at all.  And that attitude rarely ends well – just ask Richard II of England.

This blog will be taking a Christmas break – back as normal on Wednesday 4 January 2017.  A happy festive season to you all.

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Money laundering is on the cards

A couple of months ago, traffic police in Alabama stopped a car and noticed the smell of marijuana.  They searched the car and found forty gift cards with a total balance of US$19,600, along with “numerous receipts showing repetitive reloading of the gift cards from various stolen credit card numbers”.  Further investigation into the gift cards has found them to be connected to a Haitian-based criminal group that is stealing and selling credit card numbers, and is responsible for about $10 million in losses.  The police chief concerned (who may be something like this Bond one, although he was in neighbouring Louisiana) explained that “one of the things they were doing was stealing people’s identities, then putting money on the gift cards, and either cashing the cards or using them for goods like electronics”.

In the latest tranche of changes proposed to the Fourth Money Laundering Directive, much attention is focused on prepaid cards because (as the Council of Europe puts it) “anonymous prepaid cards are easy to use in financing terrorist attacks and logistics.  It is therefore essential to deny terrorists this means of financing their operations, by further reducing the limits and maximum amounts under which obliged entities are allowed not to apply certain customer due diligence measures.”  Their position as of 14 November 2016 – and this text must still be voted on in the European Parliament early in 2017 (that 26 June 2017 deadline is looking scarier by the minute) – is that “it is essential to lower the existing thresholds for general purpose anonymous prepaid cards and to identify the customer in the case of remote payment transactions where the amount paid exceeds EUR 50”.

Of course, we are now in the bumper season for prepaid cards, and specifically for gift cards.  The main attraction of gift cards for money launderers is their anonymity: if you pay cash to load up a gift card, there are (currently) no CDD or reporting requirements.  Moreover, gift cards are not considered monetary instruments, which means that they do not have to be declared and cannot be seized at the border.  And cash sniffer dogs can’t find them – unless you’ve smeared them in liver sausage, which would be reckless.  Criminals can buy a stack of gift cards and then give or post them to an associate who can then redeem them for products (such as high-end electronics) that can be sold.  In what is to me a new development, there is also now an active secondary market in gift cards, including on websites such as Zeek – you’ve probably seen their telly ad campaign.  So a criminal can put dirty cash onto a gift card entirely anonymously, and then sell it on – at a discount, certainly, but this will still be less than he usually has to spend to launder his money.  It all takes time and plenty of people, but it seems that criminal organisations never lack these two resources when it comes to money laundering.

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Goldilocks and guidance

As regular readers will know, I am most active in five jurisdictions: UK, Guernsey, Jersey, the Isle of Man and Gibraltar.  I can – and do – work in other places, but I feel most comfortable when I know the local (AML) legislation almost by heart, and can talk with some confidence about the priorities and concerns of the local regulator and the local FIU.  You might think that my set of five jurisdictions is, in AML terms, all but indistinguishable one from the other.  Certainly they all have UK (and therefore EU) derived AML legislation and (for the most part) appetites, but there are significant differences despite that.  And one of the most individual things about each of them is their AML guidance.

One of the services I offer is the writing of AML policies and procedures.  I love doing it, because I enjoy crafting clear and helpful prose, and because I relish the puzzle of fitting a firm’s distinctive AML approach with the local legislative and regulatory demands.  And in my dizzier moments I dream of being asked to help with the drafting of a jurisdiction’s AML guidance.  I know it will never happen – as an independent, commercial provider, I do not represent any of the professional bodies that are traditionally asked to contribute.  But how I would love to get my red pen onto those A4 folders…

Surprisingly – to me, at least – there has been no model set of AML guidance produced.  No one jurisdiction has done it so well that all the others have closed their laptops, capped their pens and said, “We might as well just copy theirs and localise it” (with permission, of course).  And even across “my” little set of five quite closely connected jurisdictions, I see huge differences in their guidance.  Some are wordy beyond belief, while others are sparing to the point of uncertainty.  Some come in many flavours across the regulated sector, while others offer one set for all.  Some are regularly and carefully updated, while others simply tack new bits on the end and hope that people can navigate to them.  It’s like those three bears and their porridge.  I read them all, of course (sets of guidance, not bears), and always offer my opinion when they go out to consultation (some do, some don’t).  And in my training, I am not above saying, “Look, this isn’t your guidance at all, but I think they say it best here.”

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Cash tales from the Raj

I am often asked whether what we are doing in the world of AML – namely due diligence, record-keeping, staff training and reporting of suspicions – is actually having a positive impact.  I’ve mulled on this before, and no doubt will again, but occasionally someone tries something completely out of left field (as they say in some sport or another – please don’t write in) to tackle the problem.  And on the evening of 8 November 2016, that someone was Narendra Modi, the PM of India.  Seemingly to the surprise of everyone else in the world, he announced that the largest denomination banknotes circulating in his country – worth 500 and 1,000 rupees [now about £5.80 and £11.60 respectively, as the rupee has plummeted in value] – would cease to be legal tender within four hours, and after that could be paid into banks and post offices only up until 30 December 2016.  The plan is to foil corruption and other crimes, by rendering worthless stashes of undeclared income and other criminal cash, before issuing newly-designed 500 and 2,000 rupee notes sometime soon (this is taking longer than anticipated, even with mints working at full stretch).

But the impact has been huge; according to India’s central bank in March 2016, over 86% of the value of all rupee notes in circulation in India was held in those 500 and 1,000 rupee notes.  The recall – if everyone comes forward with their notes – will bring in twenty billion banknotes, which will be quite a security destruction challenge.  In order not to tip off anyone who might take advantage by moving their cash around, even the banks weren’t warned in advance, and they have struggled to supply enough cash in other, smaller denominations, producing enormous queues at branches around the country.  There is a public education requirement: at the moment, 90% of India’s transactions are in cash, and many – most – Indians do not have a bank account.  Mr Modi has called on his people to embrace digital payments, but many doubt that the systems could cope – or that you can force people to trust something of which they know so little.

So the next time that someone suggests that insisting on asking questions about, for instance, source of funds is too intrusive and a step too far, I shall simply raise an eyebrow and ask whether the UK government should simply declare £10 and £20 notes no longer to be legal tender after lunch.

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It pays to check

Last week I watched a programme called “What Britain Earns with Mary Portas”.  Although the title suggests that this was a limited look at the earnings of people who are in business with Mary Portas, it was in fact a game attempt to get people to ‘fess up to their salaries.  Some were more forthcoming than others – Ms Portas herself was rather coy about her own remuneration – but from a CDD perspective, it did raise an interesting issue.

When a regulated business takes on a client – an individual client – one of the due diligence questions that will almost certainly arise is the client’s occupation and salary.  And the regulated business is expected to be able to assess whether the two match – and indeed whether they continue to match over, perhaps, years of a developing financial relationship.  But do we all know what is the average salary for, say, a primary school teacher, or a midwife, or a trainee accountant?  What should the manager of a large branch of Boots be earning, or a small branch of The Body Shop?  How about a senior pilot, or a mid-ranking policeman?  Added to that, it seems that the location where the job is done has a significant influence on the salary – and indeed, at the other end of things, on the cost of living.  The average London salary, for instance, is almost twice the national average.  And then there’s the gender gap.  And that’s before you start to think internationally.

In short, keeping up with all of this is probably an (averagely-remunerated) job for several people.  But for the regulated sector, it might be wise to do occasional checks on the avowed salaries declared by clients – just in case.

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