I was lying in the bath with Rory Sutherland the other day – he’s a columnist for the Spectator, and I like a magazine while soaking – and something that he wrote has been playing on my mind ever since. The piece concerned is here; it’s about how, as we find solutions for more and more problems, any future problems are going to need even weirder solutions. As an example, he talks about how making cockpit doors impenetrable to terrorists has also made them impenetrable to cabin crew, and wonders whether a better solution might be to make half of cockpit doors impenetrable, so that no-one knows which are and which aren’t, “because uncertainty may be a better way to deter wrongdoing than unvarying rules (a lesson bank regulators have just begun to learn)”. You see – fascinating.
Taking this idea into the world of AML, would it make more sense to subject random clients to enhanced due diligence, rather than applying it to all high risk ones? Or would it be better to report for further enquiry (internally only, of course) all transactions for some random clients, rather than just the obviously unusual/suspicious ones? And for those institutions that apply thresholds for various things, it would almost certainly be better to have those thresholds vary unpredictably rather than be fixed at a certain point (which is often well-known if not actually publicised). After all, ever since I was showered head to foot in tonic water after opening one particularly explosive bottle last year, I have opened all subsequent bottles with great care – it’s the dreadful uncertainty that tempers my activity.
As I was writing my previous blog post, a little thought tweaked at the corner of my mind. It’s not terribly well-formed (either the thought, or indeed the mind), but here goes. I was thinking about PEPs and monitoring, and of course one of the elements that you check when monitoring a relationship is the current standing of the jurisdictions concerned. So a client from Syria, let’s say, might have been perfectly ordinary a decade ago but requires much closer scrutiny today, whereas one from Bulgaria, for instance, would have been a much more risky proposition before his country joined the EU in 2007. (Simplistic examples, to be sure, but you get the point.)
But what if you are a regulated firm actually in a high risk jurisdiction? Do you recognise your own high risk status and allow accordingly? If you are shading your domestic PEPs, as we were discussing earlier in the week, does the high risk nature of your whole jurisdiction (as seen by the rest of the world) influence you into labelling them all high risk? Do MLROs in high risk jurisdictions start all their risk assessments from a higher point? Or is there a (perhaps natural) tendency to think that others are exaggerating your high risk status, or that your own understanding of how things work in your own country reduces the risk for you?
I did note that the new Isle of Man legislation (which is how we got onto this domestic PEP jag in the first place) talks not of “high risk” domestic PEPs, but of “higher risk” ones, which allows for a ranking rather than a strict delineation. (You can say that all of your domestic PEPs are high risk, but it would be illogical to say that they are all higher risk – for some to be higher, others must be lower. I bet you’re glad you started reading this. Never mind: it’s nearly elevenses and you can have a reviving Jaffa Cake.)
On 1 April 2015, updated AML legislation came into force in the Isle of Man. (No, I don’t know why anyone would choose that particular day to bring anything into force.) The 2015 version of the Code (as they have it in the IOM – we go for Regulations in the UK, while they like a juicy Order in Jersey) tidies up some earlier legislation, and also anticipates the Fourth Money Laundering Directive in various ways. One of these is in its definition of what we are now calling domestic PEPs.
When the FATF started making noises about widening the definition of PEPs to include your own domestic ones as well as foreigners, several small jurisdictions pointed out that for them, if a “domestic PEP” is anyone in a position of public influence, and their family, and their close associates, you would end up with three seasonal workers and a stray dog who weren’t PEPs. Rumblings started about the idea of risk assessing domestic PEPs – or, as I prefer to think of it, shading them. So how to express this in clear legislative terms?
Well, here’s what they’ve done in the IOM’s new Code. For a start, a domestic PEP is “a natural person who is or has been entrusted with prominent public functions in the Isle of Man and any family members or close associates of that person, regardless of the location of those family members or close associates”. So only the PEP’s position has to be Manx – his family and friends can be scattered across the globe. And then when it comes to how to treat a domestic PEP (which sounds like the start of a joke, but isn’t), it is more implied than stated. In the section that talks about PEPs and their need for enhanced due diligence, the Code says: “A relevant person must maintain appropriate procedures and controls for requiring the approval of its senior management [and] take reasonable measures to establish the source of wealth [and] perform ongoing and effective enhanced monitoring of any business relationship with a domestic PEP who has been identified as posing a higher risk of ML/FT, or any foreign PEP” (my italics). So the expectation is that all PEPs will be identified as such, and then domestic ones will be risk assessed in order to identify the ones that are higher risk and therefore should be subject to EDD. It’s neat enough, but I would have preferred more clarity.
As I see it, the process is this:
- Put in place a system for spotting PEPs of any stripe.
- If they’re foreign, slap them with EDD.
- If they’re domestic, do a risk assessment. If they’re low or standard risk, job done – although surely monitoring will come into it, in case they grow dodgier with time (or in case your own jurisdiction does… heavens, I feel another blog post coming on). If they’re high risk, see step 2.
A couple of weeks ago someone sent me a link to a heart-warming story of corruption, money laundering and revenge. Back in 2005, Sharon Millard of Wolverhampton was sent to prison for six months after being found guilty of laundering £97,537 through her bank accounts for her daughter’s dodgy boyfriend. She was also served with a confiscation order for £51,000, but after paying back just £5,000 she said that she had no more money. And I daresay she thought that that was that. What she didn’t count on was the dogged determination of the West Midlands Police, who reviewed her file last year – and discovered that the poverty-stricken Ms Millard had somehow paid off her mortgage and was now sitting on tens of thousands of pounds in equity. They served her with a court order restricting her financial dealings (in case her assets should mysteriously go walkabout again), and on 12 March 2015 a court ordered her to repay the outstanding £46,000 or go back to prison for another eighteen months. And of course, even if she does serve the extra time, the debt will simply be waiting for her on release – which will make for a touching scene outside the prison gates.
I will admit that I didn’t realise that the police were so tenacious with confiscation orders, and I am very impressed and mightily encouraged. As explained by Detective Constable Yvonne Barwani: “We’re determined offenders can’t profit from crime and we never write off PoCA debts – and as this case shows we can come knocking at any time, even years after an offence, to recover outstanding money. We routinely revisit such cases, examining new intelligence and delving into the person’s finances to see if they’ve come into any money.” Often people will ask me whether I think our AML efforts are bearing fruit and whether we’re actually hurting the criminals at all, and next time they ask I shall smile sweetly and say, “Let me tell you about this nice lady from Wolverhampton…”
A kind reader in Ireland has pointed out to me this recent case (I’m sure you’re all on top of it, but what with the dizzy promise of Easter eggs this weekend, it quite escaped my notice). At the heart of it is a business transfer agent called RTA (Business Consultants) Limited, based in Stockport. The details are given in the transcript, but in short, in February 2010 Peter Bracewell appointed RTA to sell his business property. Partway through, Mr Bracewell changed his mind about the sale and tried to terminate his agreement with RTA. They said that he still owed them their commission, and took him to court. Unfortunately for RTA, someone spotted that RTA – despite acting in this case as an estate agent – had not registered with their supervisory authority (then the Office of Fair Trading for estate agents, now HM Revenue & Customs) on or before 1 January 2010. RTA was alerted to its shortcoming by the OFT on 11 October 2012 and registered the very next day – but this was long after it had entered into its contract with Mr Bracewell. The failure to register was (if we can use this term in the context of a legal tussle) an honest mistake. As HHJ Richard Seymour QC observed: “I accept that, on the material put before me, the failure of RTA to comply with the requirement to register with OFT earlier than it did, did not indicate dishonesty or ‘turpitude’. OFT plainly took the same view, as it did not seek to impose any civil penalty on RTA or to prosecute it.”
But sadly for RTA, the wording of the Money Laundering Regulations is such that a failure to register means that they were in effect prohibited from acting as estate agents: in essence, unless businesses are registered with their correct AML supervisory body, they “may not carry on the business or profession in question”, and indeed are committing a criminal offence if they do so. And – stay with me, we’re nearly there – if they are carrying on their business or profession in contravention of the law, their commercial contacts are rendered illegal and unenforceable. Long story short, for RTA and Mr Bracewell, “both the claims in this action and the claims in the counterclaim fail and are dismissed”.
So it seems that a failure to register for AML supervision is not simply an administrative oversight – its implications can be very wide-reaching indeed.
One of my top reads of the year is, no, not the “Robin Ellis as The One True Poldark Bumper Christmas Annual (with free stick-on dashing facial scar)”, but the “International Narcotics Control Strategy Report” from the US Department of State. I admire the discipline of the operation – it is published every 1 March, come rain or shine – and its honesty. For those of you who are unfamiliar with this tremendous publication, let me explain. It comes in two (enormous) volumes: the first deals with drugs, and we can safely ignore that one, while the second focuses on money laundering and financial crimes – bingo! Within this second volume is an extremely useful table of jurisdictions, which shows whether the US considers them to be of primary [money laundering] concern or of concern, or if they are being monitored. (Incidentally, whenever I slightly mistype ‘monitor’, my spellcheck suggests ‘Minotaur’ – I should imagine being Minotaured would definitely being tears to your eyes and make you long for the halcyon days of being simply monitored.) And featuring in the list of jurisdictions of primary money laundering concern is the US itself – hence my admiration for this report’s honesty.
If you are on the primary list (that means you, dear readers, if you’re in the UK, Guernsey, Jersey, Isle of Man or dozens of other jurisdictions), the report goes into much more detail about why you’re in the hot seat (all very handy info for the MLRO and his list of high-risk jurisdictions). Turning to the exposé of the UK, we can read this: “The United Kingdom plays a leading role in European and world finance and remains attractive to money launderers because of the size, sophistication, and reputation of its financial markets. Observers feel the UK’s current regulatory architecture and the high degree of financial secrecy afforded to directors of British firms also are attractive to global criminal syndicates. Although narcotics are still a major source of illegal proceeds for money laundering, the proceeds of other offenses, such as financial fraud and the smuggling of people and goods, have become increasingly important. The past few years have seen an increase in the movement of cash via the non-bank financial system as banks and mainstream financial institutions have tightened their controls and increased their vigilance. Money exchanges; cash smugglers (into and out of the UK); and traditional gatekeepers, including lawyers and accountants, are used to move and launder criminal proceeds. Also on the rise are credit/debit card fraud, internet fraud, and the purchase of high-value assets to disguise illicit proceeds. Underground alternative remittance systems, such as hawala, are also common.” Ouch. It’s a bit like being Minotaured – but all true.
Some while ago I wrote about a draft of the Fourth Money Laundering Directive that had sneaked in a much-extended definition of “high value dealers”. What this earlier draft said was that HVDs would be “other natural or legal persons trading in goods or services, only to the extent that payments are made or received in cash in an amount of €7,500 or more”, and the point I made was that although we were all familiar with art auction houses and fancy car showrooms, no-one had said much about those who trade in services for cash – which could include universities (selling education services), clinics (selling medical services) and brothels (you get the picture – but do try not to).
But perusing the now-all-but-final version of MLD4 – we’re waiting for the final signature, which I am given to understand is merely a formality, and all the horse-trading is over – I see that HVDs are back to their original (i.e. MLD3) form: “Natural and legal persons trading in goods should be covered by this Directive to the extent that they make or receive cash payments of €10,000 or more.” So out go the universities, clinics and brothels – which is a shame from a theoretical perspective (as I was looking forward to seeing which regulator would be tasked with overseeing our houses of ill repute) and from the crime prevention perspective (as I am sure criminals do launder money through such unregulated and therefore naïve places) but I can understand why the legislators backed away from it. They do allow individual governments to adopt, if you will, an alternative position: “Member States should be able to adopt lower thresholds, additional general limitations to the usage of cash and further stricter provisions.” But I think we must accept that it is a rare parliamentarian who will vote for legislation requiring CDD checks to be done on their clients by the very establishments of which he and his colleagues might be enthusiastic patrons. I mean clinics and universities, of course.
Posted in AML, Legislation, Money laundering
Tagged AML, due diligence, financial crime, government, High Value Dealer, legislation, MLD4, money laundering, proceeds of crime