Another disappointing report card

You know only too well my views (here and here, for instance) on the ridiculously over-crowded AML supervisory “space” in the UK: we have three statutory supervisors (the Financial Conduct Authority, HMRC and the Gambling Commission) and then 22 “professional body supervisors” for the accountancy and legal professions, which are themselves supervised by OPBAS.  It’s not that I’m opposed to admin – indeed, on a good day, with an episode of “Desert Island Discs” playing in the background, I quite like it – but that I think such a complicated and bureaucratic structure needs to be shown to be working better (much better) than something simpler, to justify its existence.  And so each year I wait, willing to give the benefit of the doubt, for the publication of HM Treasury’s review of the effectiveness of the UK’s AML/CFT supervision arrangements.  This year, 19 November was the big day.

The report is, of course, written in government-ese, so allow me to fillet it for you.  You may recall that the FATF published their mutual evaluation report of the UK in December 2018.  Great was the excitement throughout Whitehall as it was declared the BEST MER EVER!  But those of us who are picky about these things read the whole 252 pages, and it turns out that “the quality of supervision varies among the 25 AML/CFT supervisors which range from large public organisations to small professional bodies” and that “there are significant weaknesses in the risk-based approach to supervision among all supervisors, with the exception of the Gambling Commission”.  We’ve had three years to put these faults right, so I’m expecting a glowing review, with all 25 supervisors at the top of their game, and all supervised entities quaking in their boots, knowing that any infringement will be, well, stamped on by even bigger boots.

Sadly, it seems that the supervisors are still not scary enough:

  • “The FCA reported that 33% of the firms subject to a desk-based review (DBR) and 47% of firms visited were classified as ‘generally compliant’. 6% of firms subject to a DBR were classed as non-compliant and 50% of firms visited were non-compliant with the regulations.”
  • “Of the 1,829 firms subject to supervisory activity by HMRC in 19-20, 24% were assessed as not compliant. However, 585 cases (32% of the total firms subject to either a DBR or onsite visit) did not result in a compliance rating being recorded in the figures returned to the Treasury.” [Eh? The supervisor forgot to keep records of 585 visits?]
  • “The Gambling Commission found that 53% of firms subject to DBRs and 56% of firms visited were assessed as non-compliant.”
  • “In the accountancy sector, PBSs reported that approximately 5% of the obliged entities were subject to a DBR and approximately 9% of these were classed as non-compliant with the MLRs [while] 5% of their population were subject to onsite visit, with 19% of those visited classified as non-compliant.”
  • “Legal sector supervisors reported that 6% of the obliged entities were subject to a DBR and 10% of these were non-compliant with the regulations [while] approximately 5% of the obliged entities were subject to an onsite visit, with 24% of those visited found to be non-compliant.”

Now, I fully appreciate that with a risk-based approach, supervisors should be skewing both DBRs and onsite visits to the riskier end of their supervised community, but don’t those figures still sound high to you?  Perhaps we need to go back to basics: instead of adding layer upon layer of supervision – the supervisor, then the supervisor of supervisors, then the government review of the supervisors and of the supervisor of supervisors, all bound about with Economic Crime Plans and Statements of Progress (again, doesn’t “20 of the 52 original actions have been delivered” – from a plan announced in July 2019 – sound a bit feeble to you?), perhaps we should ask one simple question.  How can we make the whole regulated sector take the Regulations seriously?  The current 25 options seem to be making a poor job of it so far.

And please do take part in my auctions for MLRO mugs and MLRO cufflinks – the mugs are being particularly keenly fought over, and I’d love to be able to send a hefty donation to Book Aid International.  Here are the links to the mugs auction and the cufflinks auction.  To take part, follow the auction link and then click on the photo on the right of the auction description (the one showing the current auction value and number of days left to run).  Both auctions end on 12 December 2021 – with a fair wind, your bounty will be with you by Christmas!

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Selling off the family silver (and ceramic)

As some of you may be aware, I am retiring from the world of AML at the end of this year.  In preparation for that I have been having a grand sort-out and have uncovered a couple of things that I commissioned as prizes for my MLRO workshops.  And I thought that it would be a good opportunity to raise some money for charity – specifically, Book Aid International (which “provides brand new, carefully selected books to thousands of libraries, schools, universities, hospitals, prisons and refugee camps around the world”).

Accordingly, I have set up two auctions – one for MLRO mugs, and the other for MLRO cufflinks.  Both auctions are running from today until the end of Sunday 12 December 2021.  There are four mugs up for grabs and two pairs of cufflinks – the four highest bidders in the mug auction will each get a mug, and the two highest in the cufflink auction will each get a pair of cufflinks.  The highest bidder in each auction will be invited automatically to pay via PayPal; I will then contact the other three mug winners and the other one cufflinks winner myself, to arrange PayPal payment.  You can bid wherever you are in the world – I’ll post anywhere.

The mugs are a hoot and highly coveted in MLRO circles – on one side they say “Money Laundering Reporting Officer”, and on the other “Manager of Laws, Rules and Obstacles”.  It’s then up to you which side of your nature you display.

The silver cufflinks are perhaps a more subtle display of your MLRO-ish allegiance – neat and stylish, they quietly proclaim your AML priorities to the world.  Ideal for wearing to those meetings with the regulator, I think.

So please do bid if you can – it would be lovely to see these going to good MLRO homes, and to be able to send a nice donation to Book Aid.  Here are the links to the mugs auction and the cufflinks auction.  To take part, follow the auction link and then click on the photo on the right of the auction description – the one showing the current auction value and number of days left to run.  This will open another window, where you can place your bid (you can put your maximum and the system will bid up to that for you if needed).  Happy bidding to you all!

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Please release me

The principle of mitigation is an important one in the justice system.  Once someone has pleaded guilty to an offence – or been found guilty of it after a trial – the attention of the court turns to sentencing, and this is when mitigation comes in (and will certainly be more generous in the former situation than in the latter).  The defence uses all of its skill to urge the judge (or magistrates) to move downwards from the “starting point” sentence, which is – at least in the UK – specified in the publicly-available sentencing guidelines.  And the prosecution usually rebuts these blandishments, seeking a more robust sentence.  What amuses me is how criminals who have been shown to be utterly professional and ruthless throughout the court process are keen to emphasise their vulnerability when it comes to sentencing.  I’m not saying that mercy should not be shown – I’m simply observing that it’s fun to watch the screeching U-turns.  Two recent money laundering cases comes to mind.

In the first, Bruce Bagley – a former University of Miami professor whose area of research was (*irony alert*) Latin American drug trafficking and organised crime – pleaded guilty in June 2020 to receiving US$2.5 million in deposits from bank accounts in Switzerland and the UAE that was embezzled from Venezuela, and then retaining a commission.  He has been held on remand since his arrest in November 2019, and as his sentencing hearing approaches his attorneys have filed a request that he be sentenced to time already served and released immediately, citing his age (75) and ill health, and saying that “it is altogether reasonable to predict that he will never be a repeat offender”.  (Personally, I would have gone for the more convincing “he has assured us that…”, but then I am a picky-pants.)  Prosecutors have said that Bagley has shown no remorse, and are asking for a sentence in the range 46-57 months (that’s 3.8 to 4.75 years – you’re welcome).  And this very morning he has been jailed for… six months.

And in the second, we have the case of Graham “The Wig” Whelan, in Ireland.  (No, I don’t whether he wears a wig, or is good at disguise, or listens in on private conversations – another mystery.)  Now, Mr Whelan is not a nice man: in March 2000, when he was only 17, he was caught with €1.5 million worth of cocaine and ecstasy in the Holiday Inn in Dublin, and jailed for six years.  This drugs bust was the start of a notorious feud between crime families (Whelan was part of the Kinehan family) in which sixteen people died.  And Whelan matured as a criminal: he racked up 33 convictions, including violent disorder, criminal damage, assault and grievous bodily harm.  In January 2019, Whelan was arrested at the Intercontinental Hotel in Dublin, in possession of €1,275 cash (when he was asked where it was from, he told officers he had got from “up his Swiss roll” and that they could keep it – ewww) and wearing an Audemars Piguet Royal Oak watch worth €28,000.  He pleaded guilty to money laundering – including paying his hotel bill of €2,140 with the proceeds of crime.  On 15 November 2021 he was sentenced to eighteen months in prison – and then asked the judge to delay sending him to prison until January, so that he could spend Christmas with his kids.  The judge declined this interesting offer – I am assuming on the basis of that other sound legal principle “you should have thought of that earlier”.

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Dull as dishwater

One of the most common requests I have from people commissioning my training is for case studies – stories about money launderers.  And I am more than happy to oblige, as researching these creatures is one of the guilty pleasures of my life.  Take yesterday, for instance, when this headline flashed across my screen: “Mexico’s anti-money laundering chief resigns amid scandal”.  Well, who could resist?  Turns out it might not be anything to do with money laundering – the head of Mexico’s FIU got married and on the private plane he hired to take “influential guests” to his wedding in Guatemala there was also a bag containing US$35,000 in cash, which was apparently correctly declared and intended to be spent on medical treatment in the US.  (But I have questions: how can the head of an FIU afford private planes, why does he have “influential guests”, and do doctors in the US really accept bags of cash?)

However, I think it is important to get the message across to staff – who are, after all, your front-line defence – that money laundering is not always, indeed not usually, as fun and glamorous as this.  Most money laundering is dull, pedestrian and unambitious.  As an example, I often tell the story of Ian Woodall, who worked for Westminster Council as an interim chief investment officer.  Between January 2009 and December 2012 he stole £924,841 from the council by tricking colleagues – who trusted his advice – into signing off on payments from their billion-pound pension fund by telling them that he was making investments.  And in a way he was: he was investing in his own house and car and – morally interesting, this – he paid off his tax bill at HMRC.  The laundering came about because Woodall transferred the money from his UK bank account to accounts he had opened for this purpose in Switzerland.  The theft was uncovered in September 2013 when an audit into the council discovered almost £1 million had been “unlawfully removed”, and in January 2019 Woodall was jailed for seven years.  No private jets, no glamorous birthday parties stuffed with influencers, no fleet of diamond-encrusted sports cars – but all the more missable for it.

If we feed staff a constant diet of high-level, high-octane, high-glam stories about top level criminals and corrupt PEPs, we risk them getting the idea that all money laundering is like that.  In reality, it’s mostly quiet, modest and sneaky – it happens every day, in most financial institutions, and we need to remind them of that.  So for every Obiang in your training, make sure you include a Woodall as well.

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Underfunded, under-supervised and over here

I know, I know: who thought I would spend my last few months as an AML-er shaking my fist impotently at the madness that is freeports?  But here we are.  I’ve written before (here and here) about why they’re such a bad idea from the point of view of money laundering, and how they will further damage our international reputation (such as it is…) for financial uprightness.  But recently I’ve spotted a few stories that address something more basic, more concrete, more old-fashioned if you will: the physical security of freeports (and customs warehouses and bonded warehouses).  (Quick and shameless plug, if I may: my fourth Sam Plank novel, “Portraits of Pretence”, includes a murder in a Thames-side bonded warehouse in 1827 – exciting stuff!)

You will remember, I am sure, HMG’s reassuring confirmation that “the government does not want the introduction of UK Freeports to lead to an increase in illicit activity”, and that “as part of the authorisation process, checks will be conducted on Freeport operators and businesses operating to ensure they do not present and undue risk and that Freeport operators have adequate policies in place to ensure control over the movement of goods”.  All very well in theory, but – as this article from the Guardian way back in November 2002 shows – we were already hampered by “the slow-motion disaster inside an underfunded and under-supervised customs”.  The culture was already “more business friendly [as] red tape was cut and the emphasis shifted to facilitating trade”, while “customs officers were pulled back from the ports and warehouses and staff cut”.  I appreciate that this is a report from nearly twenty years ago, but can we believe that HMRC has bucked the trend of every other government agency and in the past two decades has received more funding and better supervision?  And with our standard ports already under-supervised, how will we cope with the new freeports as well?

With an underfunded and under-supervised (and presumably demoralised) workforce, can we really be sure that people working in the freeports, or with access to them, will be screened and monitored robustly enough?  In August 2020 a man pleaded guilty to stealing nearly 300 iPhones from a customs warehouse in New Jersey in the US; he worked for a maintenance contractor to the Treasury Executive Office for Asset Forfeiture, which gave him access to the warehouse for a three-week period, and each day at work he stuffed a few phones down his trousers and boots.  (Actually, if he worked there for fifteen days, that’s twenty phones a day down his britches.  I assume they were Oxford bags.)  And just to pull us back to money laundering again, on 8 October 2021 three men were jailed in London for laundering £25 million from the sale of alcohol where duty was not paid, through their cash-and-carry warehouses.  I know it’s a different sort of warehouse, but the men – presumably identified by banks and solicitors as running a cash-and-carry operation and subjected to relevant CDD checks – moved millions through a network of shell companies.  The money laundering was exposed when investigators discovered that the shell companies – claiming to be legitimate alcohol sales businesses – had no storage facilities for the bottles and were fronted by people with no experience of the trade.  With such basic schemes still working so well, I fear for the future – and take little to no comfort from HMG’s desire that the new freeports should not lead to an increase in crime and requirement for them to have (sadly unambitious) “adequate” procedures.

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Boxed into a corner

What else could I write about this week except the Pandora Papers?  The initial focus will be on the individuals named in the leak, but away from the gory headlines will be the real work: looking at the enablers.  The primary targets will be the fourteen “secrecy brokers” identified in the Papers (and all their offices – after all, a client taken on in one jurisdiction is often and easily passed to another).  But after that will come the real sifting of data: with 600 journalists on the team, looking at 11.9 million documents relating to the financial affairs across five decades of more than 29,000 beneficial owners, you can be sure that many more enablers will be exposed.  Indeed, some experts are already hinting that that is where the hatred (and perhaps the weight of the law) will fall.  Alex Cobham of the Tax Justice Network observed that “few of the individuals had any role in turning the global tax system into an ATM for the super-rich.  That honour goes to the professional enablers – banks, law firms and accountants – and the countries that facilitate them”, while you can hear Maíra Martini of Transparency International sighing as she says “here we are again, looking at clear evidence of how the offshore industry promotes corruption and financial crime while obstructing justice”.  (I’m not a fan of the word “offshore”, as it is so often used inaccurately to pinpoint specific jurisdictions.  But no “offshore” jurisdiction is offshore to its own people.  What it actually means is “outside of your own country”, which is a moveable feast – at some point, we’re all offshore.)  But she’s right: there are plenty who pay lip service to AML/CFT while happily signing up the dodgiest of clients.

The name of the leak interests me.  According to the ICIJ website, they chose the name because “this collaboration builds upon the legacy of the Panama and Paradise Papers, and the ancient myth of Pandora’s Box still evokes an outpouring of trouble and woe”.  To be precise, Zeus gave Pandora a box (in ancient Greece, it was referred to as a jar) as a wedding present but warned her never to open it.  Pandora’s curiosity overcame her and she opened the box – and out flew greed, envy, hatred, pain, disease, hunger, poverty, war and death.  She quickly slammed the lid shut – but the only thing left in the box by then was hope.  We’re going to need plenty of that as the implications and ramifications of this latest leak become clear – whether that’s realising that a client is not as you had imagined, or getting the stomach-liquifying feeling that your CDD processes might not stand up to close scrutiny.

I’m taking a few days off next week to celebrate my gazillionth wedding anniversary, so no blog post next Wednesday (imagine the marital disharmony if I sloped off to write about AML) – business as usual on Wednesday 20 October.

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Less than super-vision

I assume most of you know how I feel about the theory of OPBAS – i.e. that the solution to the fragmented and conflicting AML/CFT supervision arrangements in the UK is not to rationalise the number of supervisors but rather to insert another layer above them, creating a supervisor of supervisors.  (And in case you don’t know, I think it’s nutty.  OPBAS now oversees the 25 – yes, 25 – legal and accountancy professional body supervisors in the UK, while alongside them are the statutory supervisors like the FCA, HMRC and the Gambling Commission.  Told you.)  I work regularly in two other jurisdictions (Guernsey and Jersey) which, despite having sophisticated and varied financial sectors (albeit smaller than those in the UK), both manage perfectly well with one or two AML/CFT supervisory bodies.  But hey ho, OPBAS is what we have, and it’s been in place since January 2018 – so after 3½ years it should have licked the 25 PBSs into coherent shape.  Their latest report on “progress and themes” has just been published, so let’s have a look…

Modelling themselves on the FATF, OPBAS have adjusted their supervisory assessment of the 25 “and moved from looking at each PBS’s level of technical compliance with the MLRs to a greater focus on how effectively they were conducting their AML supervision”.  And – as did the FATF – OPBAS has found that theory is one thing and practice quite another: “when focusing on effectiveness… we found differing levels of achievement and some significant weaknesses”.  But even the theory is still lacking, right down to how the PSBs are structured: “A third of PBSs did not have an effective separation of their advocacy and regulatory functions, presenting a clear risk of conflict of interest.”  (In other words, they try both to protect/promote their members and keep them in line – with the almost-certain result that, given a choice, a professional will join the supervisory body that is least demanding, which means that the body that wants members and their fees must drop its standards.)  But more shocking is the revelation that “the vast majority (just over 80%) of PBSs had not implemented an effective risk-based approach” – despite the fact that the OPBAS Sourcebook, issued right back at the beginning, states clearly that “the Money Laundering Regulations 2017 require anti-money laundering supervisors to adopt a risk-based approach [which] applies to the way professional body supervisors allocate their resources [and] act in a manner that supports the application of a risk-based approach by their membership”.  For those of us steeped in the world of AML, the risk-based approach is second nature, but steeping is rare in the PBSs: “Only a third of PBSs assessed were effective in recruiting and retaining staff with relevant experience and providing support through ongoing professional development [and] on occasion, staff in key AML roles lacked sufficient expertise and knowledge.”

But perhaps the most disappointing revelation is that the 25 are, for the most part, toothless tigers: “half of PBSs, particularly those in the accountancy sector, failed to ensure members took timely action to correct identified gaps [in AML controls]”, while “around two thirds of PBSs didn’t have effective enforcement frameworks [and] some PBSs could not explain their criteria for taking enforcement action and which tools would be used”.

The main aim of OPBAS is to “ensure a robust and consistently high standard of supervision by the professional body AML supervisors overseeing the legal and accountancy sectors”.  It has not achieved this, although – deludedly, as it contradicts even its own findings – it is still declaring that “if a PBS significantly fails to deliver its obligations under the MLRs, we will not hesitate to take robust enforcement action”.  This is patently not happening, even nearly four years down the line.

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A mammoth task for the MLRO

A little while ago I was giving a training session and used an analogy that the people attending found useful and amusing.  And, being both vain and generous, I thought I would share it in case it helps with your training.  I was trying to explain why people in compliance often have difficulty persuading their colleagues in client-facing roles (in short, the sales people) to complete the required AML checks to the specified standard within the necessary timeframe.  And then I mentioned the woolly mammoth.  Wavy lines, if you will, as we drift back to the Palaeolithic era.  Humans have gathered into small communities for safety and companionship, and they are what we would recognise from the movies as cavemen (although I’m not convinced any of them wore a bikini and bootees like Raquel Welch).

Each day a small group leaves the safety of the cave and goes in hunt of the woolly mammoth.  This is a valuable beast, as it will provide the whole community with food from its flesh, clothing from its skin and fuel from the leftovers.  Waiting back at the cave are the other cavepeople, discussing what should be done with any mammoth they get: how to check it for eating suitability (you don’t want to eat anything maggoty), how much to scoff straight away and how much to store for later, which are the most urgent items of clothing to be made, and so on.  And hurrah!  There is a kill, and the hunters drag the mammoth back to the cave.  “Join us,” say the waiting people to the hunters, “while we process this beast – you can help us decide how many chops to make and which bit of skin will make the best maxi dress for Raquel.”  The hunters yawn and frown and shake their heads.  “That’s way too boring,” they reply.  “That’s your department, doing the checks.  We’re going for a shower and then we’re off on the hunt again.  We think we saw an even bigger mammoth in the next valley.”

Now I know that any analogy can be stretched too far, but nothing I have seen in more than two decades of working with compliance teams and sales people has changed my mind on this one.  I don’t know what makes you one or the other – whether it’s nature or nurture – but I do know that they find it hard to understand each other, and they rarely switch sides.  And – this is crucial – the overwhelming majority of firms are run by mammoth hunters rather than mammoth processors.  In other words, CEOs almost invariably come from the sales side rather than the compliance team.  And an ongoing challenge for any MLRO is to find the right language with which to communicate with a sales-driven CEO and Board: sales is all about numbers, and risk-based compliance is very much not.

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A bid for freedom

Woohoo, I do love a good helping of Schadenfreude, and to this end one of my favourite things is hearing about what happens to the fancy assets of criminals when they are taken away (both the assets and the criminals).  I’ve gloated about this before, and when I’m looking for a way to avoid work while sort of remaining true to my AML roots, I do like to sniff around the various auction sites that offer “police seized items” and the like.  (Anyone fancy a pair of designer trainers, doubtless impregnated with criminal sweat?)

And now my auction sniffing can go international, as I have discovered Police Auctions Canada – the name gives it away, I think.  This site features much more mundane items – at the moment, I could bid on a cordless drill (safecracking…?), a pre-paid Visa card (counterfeiting…?) and some rose-scented candles (I’m not even going to hazard a guess).  More predictably, there is quite a lot of precious metal for sale – silver coins and gold ingots.  And if you’re given to speculation, that’s where it will end: coyly, the website confirms that “we are not privy to specifics of where the items originated”.  But with all auctions starting at C$1 (about 80p) and running 24 hours a day for seven days, it can be tempting – like eBay with jeopardy.  And in case you’re worrying about supporting crime, they also confirm that “a large portion of the sales goes back to help sponsor non-profit organizations and community projects in each of the areas represented” – the website sells on behalf of police forces throughout Canada.  I’ve heard of old lags, but I’m still puzzled about the Pride Mobility Go Go Elite Traveler Plus HD Electric Mobility Scooter, currently at a bargain C$22.70 – if that was their getaway vehicle, it’s no wonder they were caught.

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