Nipping crime in the (Jersey lily) bud

Following on from my post a few days ago about the LIBOR fines being used as a force for good, I have been interested to read about the allocations made over the past decade in Jersey.  In response to a Freedom of Information request, the States of Jersey has detailed the amounts received by their Criminal Offences Confiscation Fund, and what they have done with that money.  The COCF was created in 1999, and statistics are available from 2004.  From 2004 to date, the Jersey authorities confiscated £16,520,435, and received a further £46,350,104 through asset sharing arrangements – making a grand total of £62,870,539.  There seems to be no pattern to the figures; they go up and down randomly.

When it comes to disbursements, however, there is a discernible shift in emphasis.  If you look at the grants paid from the COCF in the early years, nearly everything went back into the legal side of things, in the form of money paid to law officers, courts and the like.  In recent years, however, they have received much less, and instead grants are made to government departments for projects concerned with crime prevention – such as producing a guide for parents about drugs, and investing in bodycams for the police.  I find this fascinating, not least because it supports my position that crime prevention is the way to go – after all, that’s what AML is all about.  Of course we can to catch money launderers when we can, but the real aim is to make it such an unattractive option that they don’t even bother to try.

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House of horrors?

With the acres of newsprint devoted in recent months to the topic of registration of beneficial ownership, it is interesting to consider the role of the registrars.  Companies – and other structures – are required to submit returns, and to update them regularly, and to make changes promptly to their details, but is any of that information being verified, or even checked?  Before the advent of the PSC register here in the UK, Companies House was a simple register of companies – in essence, a giant filing cabinet.  I send in my annual return to them, along with the appropriate fee, and anyone looking up my company on the CH system will find the information that I have submitted.  My suspicion has always been that you can send in whatever details you want, as long as you don’t mind signing a false declaration.

And it seems that I am not alone in thinking that.  In February 2016, an S Prichard made a Freedom of Information request to CH, containing several questions, including “Is it illegal to knowingly provide wrong information for registration to Companies House (i.e. false names, variations of names, false address, false DOB)?” and “What safeguarding measures do Companies House take to ensure the public are safeguarded from criminal activity such as fraud when viewing or obtaining information about a company on the Companies House website?”.  In response to the first question, CH explained that “it is an offence under the Companies Act to submit a false filing” – so that’s clear.  It’s the second question that really interests me, as the CH answer is this: “Companies House acts primarily as a registry of company information.  We must accept all documents sent to us in ‘good faith’, we do not have any powers to verify or validate the information contained on them.  We can only act within the parameters of the Companies Act as we have no investigatory powers.”

Now that CH is the home of the PSC register as well, I wonder whether things have changed?  And some Italian journalists wondered the same thing…  A fortnight ago, Italian newspaper Il Sole 24 Ore reported that some of its staff had gone through the motions to set up a company in the name of Matteo Messina Denaro (a notorious mafia boss currently on the run) and giving 10 Downing Street as the company address.  According to the Italians, their aim was to show that the UK company formation regime is too liberal and that “there is nothing easier than creating ghost companies that can hide illegal activities or recycle money”.  They stopped short of actually paying the £12 to form the company – so as not to break the law – and CH said that “had the application been submitted our systems would have picked up the false information and the incorporation would have been denied”.  To be fair, I can imagine that their systems might have spotted the address…  But perhaps a more subtle attempt might have succeeded, if the CH powers are indeed still the same – i.e. no power to verify or validate.

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Turned out fine again

The UK Chancellor’s budget is rarely a cause for much celebration, while the obligatory leaks in the days beforehand suck every element of surprise out of his announcements, but one little gem might have passed you by on 22 November (as it appears in the documents only and not in the speech).  In the old days, the Financial Services Authority kept all income from penalties levied on banks and used that income to subsidise the cost of its fees to banks.  But in 2012, the then-Chancellor George Osborne announced that “the multi-million pound fines paid by banks and others who break the rules will go to the benefit of the public and not to other banks”.  And so, under the Financial Services Act 2012, the Financial Conduct Authority committed to returning all income from “penalty receipts” (i.e. banking fines) above its enforcement costs to the Exchequer.

In the same year – 2012 – HM Treasury announced that the proceeds from LIBOR fines specifically would be used to support armed forces and emergency services charities, and “other related good causes that represent those that demonstrate the very best of values”.  (You see the point being made, that the LIBOR lot did not demonstrate these…)  And as part of his Autumn Budget 2017, current Chancellor Philip Hammond committed the final £36 million gathered in such fines to be paid over the next three years to eighty-two charities, including the Royal British Legion (to receive £1,500,000), Help for Heroes (£1,441,370) and the Army Benevolent Fund (£1,225,444).  This brings the total LIBOR lolly committed to charities since 2012 to £773 million.  And a further £200 million collected in LIBOR fines has been given to the Department for Education to spend on 50,000 apprenticeships.  Hurrah!

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Salvator emptor

The recent record-breaking sale of “Salvator Mundi” highlighted two things – one a surprise, and the other not.  The surprise was that this is the most expensive painting by Leonardo DiCaprio that has ever been sold.  I kid you not: that’s what the announcer on BBC’s breakfast news sofa said.  The not-surprise is that the sale has demonstrated, once again, how easy it is to move enormous – breath-taking, gargantuan – sums of money through the art sector without giving too many of your details.  You know, tricky stuff like where you got the money.

We don’t know who bought the (to my eye, rather creepy) portrait of Jesus for US$450,312,500, although we assume that Christie’s, the auction house running the sale, has some idea.  We do know that the seller was the family trust of Russian billionaire Dmitry Rybolovlev, who bought “Salvator Mundi” in 2013 for US$127.5 million from Swiss art dealer Yves Bouvier.  Rybolovlev and Bouvier have history: the Russian previously claimed that the Frenchman had overcharged him for various pieces of art, although this latest profit somewhat undermines his case…  And Rybolovlev is a rather unexpected champion of transparency.  In 2015 Yves Bouvier consigned for sale at Sotheby’s in London a painting by Henri Toulouse-Lautrec called “Au Lit: Le Baiser”.  He signed the standard paperwork which requires the consignor to indicate that he owns the piece or is authorised to sell it.  And after the sale – the painting made £10.8 million – the money was handed to Bouvier.  However, the real owner was – you’ve guessed it – Dmitry Rybolovlev, who says that he authorised the sale but that Sotheby’s should have checked who the real owner was before turning over the money.  His lawyer Tetiana Bersheda was flabbergasted: “It is extraordinary that such a rare and high-value work could have been sold at auction without the auction house knowing the identity of the true owner.”

Perhaps the “Salvator Mundi” profit of $322,812,500 will mollify Mr Rybolovlev and soothe his relationship with Mr Bouvier.  But whatever happens between those two gentlemen, repeated calls for more transparency in the art market – when such enormous sums are at stake – must surely begin to bear fruit.

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Paradise polluted

Last week I went to a new gathering of people (oh, go on, you forced it out of me: I’ve joined the Women’s Institute) and when they asked what I do and I gave the potted description, several of them said, “Oh, so you’re part of the Paradise Papers”.  Those exact words – and as with earlier incarnations (the Papers that were Panamanian), I simply nodded and said, ”Something like that”.

I am not going to write about the Paradise Papers themselves because, contrary to popular opinion, I am not part of them and I cannot shed any more light on them than that nice man from “Panorama”.  What I have been disappointed by, however, is the official response to them.  Every government whose jurisdiction has been named in the papers has said two things: “let’s concentrate on the real crime here – the hacking” and “at least we’re not as bad/complicit/corrupt as that jurisdiction over there [insert name as appropriate]”.  Although I appreciate that politicians are concerned primarily with keeping their jobs, I find this short-term and un-cooperative stance depressing.  Wouldn’t it be refreshing if someone said, yes, we’re a bit concerned about the manner in which the information has come to light, but we do encourage whistleblowing for the public good.  And now that we know how widespread are these practices – to the detriment of all our public purses – let’s concentrate on how we can work together to harmonise our tax legislation and close the loopholes.  After all, saying “we’re slightly less dreadful than our neighbours” is not really a glowing endorsement, is it?  We’ve been through a similar process with AML, and thankfully – at least in the jurisdictions where I choose to work – the emphasis is now on improving global AML standards, rather than finding clever ways to get around them.

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Big worries about small accounts

The news has been full in recent days of the financial activities of the “super-rich” and fiscally sophisticated.  (That’s my phrase, that last bit, but I can imagine it catching on.  Who knows: we might even start talking about the “sophiscallated” – you heard it here first.)  But at the November 2017 plenary meeting of the FATF in Buenos Aires, attention was fixed more on the other end of the spectrum: the financially excluded.  Life is full of contradictions, of course (why is anything delicious bad for us, while wholesome home-knitted yoghurt tastes disgusting?), and in the financial sector we wrestle with this one: how can you make rational, profitable, risk-based decisions about which clients to acquire and retain, without shutting out those who – for entirely un-criminal reasons – cannot meet your standards of due diligence?  Yes folks: it’s the familiar de-risking versus financial exclusion dilemma.

One of the documents to come out of the FATF plenary is a supplement to – but one which, bizarrely, is put at the front of – their 2013 guidance on financial exclusion.  This supplement examines the knotty problem of CDD and financial inclusion, given that “18% of all adults without an account cited documentation requirements to establish proof of identity as an important barrier to account ownership”.  All sorts of people find it hard to attain modern standards of due diligence documentation, from those who are paid cash in hand to asylum seekers and refugees.  That said, it has to be recognised that financial service businesses are, well, businesses and therefore need to make a profit, and having their staff spend hours thinking imaginatively about how to facilitate financial inclusion for clients who are never going to bring in much profit does not make commercial sense.  However, it makes both moral sense (these people are as deserving of financial provision as the wealthy, particularly in a world where those who pay cash rather than by bank transfer are penalised for it and end up paying more, e.g. having an electricity meter fed with coins is much more expensive than paying a monthly bill by direct debit) and AML sense (if people are using financial services we can check and monitor them, but if they’re not, we can’t).

So what practical solutions does the FATF offer?  The supplement reveals that many countries have tried all sorts of things, and a popular idea is the tiered bank account, where minimal – if any – due diligence is done on applicants for a most basic account, offering limited services and small transactions only, albeit enough to pay an electricity bill.  I like the plain-speaking Indian approach, which is to call these “small accounts”.  Fiji is happy to accept identification letters from referees (no, not Pierluigi Collina, but including schoolteachers and village headmen).  Many countries are sensitive to the need to relax requirements after a disaster, as when typhoon Haiyan swept through the Philippines in 2013, carrying away many people’s belongings including their identity papers.  And the development of more sophisticated ID systems – often relying on biometric data – is of great help.  I welcome all of this, as I think it puts the financial inclusion responsibility back where it belongs: with governments, and not with individual banks.

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The Beemer and the Batboat

I have written before about the fate of items confiscated from money launderers. Often, of course, the assets have gone: the money has been spent on consumables such as fine wines and fancy holidays.  But criminals do like to surround themselves with the trappings of wealth, and this can be very handy when it comes to confiscation and – if possible – reparation for victims.

In a recent case, however, there was no question of returning criminal proceeds to those who had paid it to the criminal, as he was a seller of illegal drugs.  Martin Fillery was always interested in cannabis production; in fact, he wrote a screenplay about it before he decided to put theory into practice.  He and two associates set up a giant cannabis farm in RGHQ Chilmark – an underground nuclear bunker constructed in rural Wiltshire in the 1980s to house local government in the event of a nuclear attack during the height of the Cold War.  The bunker has been decommissioned but is still intact – and the nuclear blast doors make the site almost completely impenetrable.  But in February 2017 police intercepted Gillery and his two colleagues with keys in their hands, and discovered that the bunker was home to 4,000 cannabis plants, capable of producing £2 million of drugs a year.  The men had bypassed mains electricity into the site, illegally abstracting approximately £650,000 of electricity.  In August 2017, Fillery was jailed for eight years for drug offences, abstracting electricity and money laundering – and so the confiscation proceedings began.

It turned out that Fillery was quite the collector of film memorabilia and boys’ toys – all of which were seized and sent to an auction house in Northern Ireland.  And didn’t they do well?  A BMW that was driven by the character Biff in the film “Back to the Future II” went for £20,000, while a “Batboat” fetched £15,000.  A replica of the Trotters Independent Traders-branded yellow three-wheeler from “Only Fools and Horses” sold for £6,000, and a six-foot tall IronMan statue went for £3,100.  Bids came from all over the world and, as auctioneer Aidan Larkin said: “All of the money we raise goes back into the court and the public purse as part of the wider proceeds of crime case.”  As Del Boy would say, lovely jubbly.

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The UK’s reporting report card

Well, we in the UK are streets ahead of our EU neighbours in one regard at least: the number of SARs we submit to our FIU.  At the start of September, Europol published a report entitled “From Suspicion to Action: Converting financial intelligence into greater operational impact”.  According to the press release, the report “provides insight into the AML framework and the extent of suspicious transaction reporting in the EU, highlights trends and developments, and gives recommendations on how the AML framework can be improved”.  And one of its most notable findings is that of the 960,463 reports made in 2014 (the year under examination) to EU FIUs, 36% were made in the UK to the National Crime Agency.  (31% were made in the Netherlands, but in that jurisdiction they have an obligation to make Unusual Transaction Reports of any transaction of €10,000 euros or more – which accounts for 85% of the reports made, so only 15% of the Dutch 31% are reports of suspicion.  100% of the UK’s 36% of the total are reports of suspicion.)

So why are we such snitches?  The Europol report hazards a couple of guesses: “It is of course understandable that the UK would generate one of the highest reporting volumes in the EU: not only is it home to one of the largest financial markets in Europe, but in addition, it operates a Suspicious Activity Regime (SAR), which broadens the types of reports it can receive.”  I’m not sure I understand this comment – surely a “suspicious” reporting regime would narrow the reports, while an “unusual” reporting regime would broaden…?  The report continues: “Nonetheless, the figures are extremely high in comparison to other countries, which may also be a result of defensive or over reporting.”  Now steady on there, that’s quite an accusation – although the report does quickly jam in a mollifying footnote admitting that “reporting guidance from the FCA, JSMLG and NCA is quite comprehensive on obligations and the UK FIU analysis of reports suggests that the majority of the financial institutions that submit SARs conduct at least a basic level of research and analysis prior to submission, and in some cases undertake quite substantial pre-submission examination”.  And just what is “over reporting”?  Putting in duplicate reports?

Whatever the reason, the statistics are startling, and I feel certain that the FATF evaluators will be asking questions when they visit us at the end of this year.  If we’re so out of step with the jurisdictions with which we (currently) share the same base AML obligations, there must be a reason – and I am sure that some of you will hazard a guess!

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Laying the (shaky) foundations

No-one who has heard me speak or read my blog will be surprised to hear that I am a devout Remainer.  As someone whose parents had vivid memories of (and occasional nightmares about) the Second World War and its aftermath, I was daily grateful for the stability provided by belonging to the EU.  As we prepare to cast ourselves adrift from that, I have to – alongside my personal decisions – prepare for a professional life outside the EU, when the UK is no longer obliged to comply with the Money Laundering Directives.

And the UK government seems to have taken its first step in this direction.  On 19 October 2017 the draft Sanctions and Anti-Money Laundering Bill was launched on its legislative voyage.  The purpose of this is to give the UK government – whoever they might be at the point of Brexit – authority to put in place sanctions and AML legislation.  The Bill does not give details of what that AML legislation might look like, although Schedule 2 lists – in sixteen paragraphs – all the things that could happen (e.g. “Require prescribed persons to identify and assess risks relating to money laundering, terrorist financing and other threats to the integrity of the international financial system” and “Require prescribed persons to take prescribed measures in relation to their customers in prescribed circumstances” – prescription will obviously be a Big Thing in our post-Brexit world).

I’m not a lawyer, so what I can’t quite tell is what the wording “make provision for” actually means, as in “Make provision for and in connection with the creation, production and retention of registers and records, including registers of people with significant control and registers and records relating to the beneficial ownership of prescribed entities, trusts or other arrangements”.  Could “make provision for” mean “decide not to do at all”?  Or does it suggest that at least something must be done?  I’m also rather taken with the idea of a supervisory authority being authorised to publish “statements of censure” – they sound so much more Dickensian than our current Final Notices.

(And I am slightly mollified – as in “I told you so” – to read in the Interpretation to Schedule 2 that “‘Money Laundering Regulations 2017’ means the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017”.  So why not just call them that and be done with it?  Pah!)

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What’s in a name?

Name changes are a tricky thing.  Remember when Royal Mail decided to call itself Consignia?  That lasted for about a year until it was quietly shelved.  (Mind you, Brad’s Drink was renamed Pepsi-Cola in 1898, and that seems to have stuck.)  And so it is with some concern that I note that the UK FIU – the National Crime Agency – would rather we stopped talking about “consent”, and referred instead to “DAML”, or “defence against money laundering”.

To be fair, it’s not just a cosmetic change for the sake of fashion, or a cynical attempt to fool buyers into thinking they’re getting something new.  As explained in the NCA’s “SARs Annual Report 2017” (published on 11 October 2017): “The UKFIU introduced the term ‘DAML’ as it had found that the term ‘consent’ was being frequently misinterpreted by reporters [by which they mean MLROs making reports – not newspaper johnnies].  The term ‘DAML’ is aimed at educating reporters and improving submissions by clarifying what the UKFIU can/cannot grant.”  Alongside the DAML there is also the DATF – but you’re ahead of me here.

So how is the rebranding going?  Again from the annual report: “The UKFIU has received positive examples of how the new DAML process has been influencing reporter behaviour, in particular instances where, after the UKFIU has requested clarification as to the prohibited act, the reporter has acknowledged that they have misinterpreted the meaning of ‘consent’ and has withdrawn their DAML request.”  And so let’s compare year on year, and look at the number of consent SARs made in the period October 2015 to September 2016 with the number of DAML SARs made in the period October 2016 to September 2017.  There were 17,909 consent SARs and 14,465 DAML SARs, so that’s a decrease of 19%.  Perhaps MLROs are getting a clearer picture of what the NCA will and will not grant.  But it’s not that simple: in the first period 6.94% of consent SARs were refused, and in the second, 9.37% of DAML SARs were refused.  If MLROs really knew what was expected and permitted, surely nearly all DAML SARs would be granted – not a (significantly) decreasing proportion of them.

But of course it is early days yet – personally I have yet to hear an MLRO use the phrase “DAML” rather than “consent”.  It may be some time before we know whether the NCA has a Royal Mail or a Brad’s Drink on its hands.

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