Double-duty SARs

Ever since some hunter in ancient times pulled back his slingshot and managed to kill two birds with one stone, we humans have loved achieving two (and if possible more) ends with one action.  For instance, it is helpful to remind staff that the CDD they do for AML reasons can also be “re-purposed” to meet CRM (customer relationship management) aims – in short, the more you know about a client, the more you can sell them.  And so it was with great pleasure that that I heard a couple of stories recently that showed how SARs, and indeed money laundering suspicion in general, can work double time.

The first was actually a missed opportunity.  Those who work in money laundering investigation are generally in favour of sharing information, but sadly the structure of the SARs regime – certainly here in the UK – is such that non-financial investigators do not have access to (or perhaps do not think to request access to) SARs information.  In a manhunt earlier this year, thousands of police officers were deployed to find a man suspected of murdering a young woman.  After they found him, it turned out that a SAR had been made on him by a money transfer business; they were uneasy about an online transaction he had made, and their SAR contained a huge amount of information about him, including his passport details and his IP address.  If only those looking for him had realised that all of that was on file…

The second is a more successful outcome – or at least it appears to be so at the moment.  Last week London police announced that they had arrested three Libyans, one of them on suspicion of involvement in the shooting of PC Yvonne Fletcher outside the Libyan embassy in London in 1984.  Eagle-eyed and bat-eared news followers will have picked up that all three are suspected of money laundering…  No doubt more will become clear as the investigation progresses, but surely it is not too much to speculate that a money laundering suspicion has led the police to these three people.  It would be far from the first time that a SAR had played a vital role in bringing a criminal to justice for crimes beyond his financial ones.

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Back to laundering basics

Just to give you a breather after that last post, which taxed your brain cells, this time I am looking at the other end of the spectrum.  I was watching “Look East” a few days ago, which is our local after-the-news news programme, and up popped a story about a drug dealer in Bedfordshire.  Although a dab hand at the dealing, he was obviously not the sharpest knife in the drawer, as he took his cash takings and buried them under the patio in plastic bags.  And then, whiling away his time in prison, he became concerned that the bags might not be waterproof enough…  So he asked his wife, mother and sister to dig it all up and hide it indoors.  They were caught, and all three women are now serving time – for money laundering.  “Surely not,” said my husband.  “That’s not laundering – they didn’t do anything with the money.”  After years – nay, decades – of listening to me describing complicated and dastardly laundering schemes, he had forgotten that the main laundering offence is that of “concealing” the proceeds of crime, which includes hiding it under the patio.

A second example was publicised last week, when the National Crime Agency announced the imprisonment for money laundering of two chaps who had hidden their dirty drug cash in, among other places, a chest of drawers.  (Or, as they are known in my family, Chester drawers – my granny thought that’s where they came from.)

So yes, “concealing” can mean the use of the most highfalutin financial instruments by the most cunning professionals in the most secretive jurisdictions – or it can mean shoving it down the back of the sofa.  PoCA will get you either way.

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Taxing tax evasion

In this post we are getting right down to what a French friend of mine once called “the nitties and the gritties”, so thinking caps on, please.  An MLRO has written to me with a vexing conundrum around consent concerning the suspected proceeds of tax evasion, so you might need a coffee and some biscuits as well, and maybe even a damp flannel for your forehead.  Here we go – here is his query in full, in his own sad and baffled words:

“Where I as an MLRO form a suspicion that a client is engaged in tax evasion I will almost always form a suspicion that they are necessarily involved in money laundering as well, via my bank or elsewhere.  This of course engages not only my ability but my duty to make a disclosure to the authorities.  I then reluctantly turn my mind to the painful process of consent if I wish to pay the funds away to exit the client, or if we receive a payment instruction from the client, [which raises the question] of whether I suspect the funds in the account to be criminal property.

“In tax evasion cases I find this quite difficult.  The funds are legitimate (let’s assume) but the client may not have declared them for tax. That doesn’t make them criminal property in toto but does it make part of the funds (representing the amount that would otherwise have been paid over to the tax authority) criminal property, as it represents a person’s benefit from crime.  But why the funds in that account as opposed to funds in the client’s name with another bank?  He can settle his tax liability from any account, so why would my [bank’s] funds be criminal property rather than someone else’s?  Just because they are undeclared doesn’t make them criminal property…

“I am still pondering the issue in light of R v William.  The legal position seems to be that in tax evasion cases the gross turnover is criminal property, not just the sum avoided.  In personal tax evasion cases that suggests all income during the period of evasion is tainted.  That would make it both easier and harder for an MLRO: easier as it’s all tainted but harder in that one ought perhaps to identify (at least so one forms a suspicion) when the evasion started and whether the funds are from that period.  (Most of mine are, as clients helpfully state they’ve not declared them for tax!)

“The underlying legal argument is the wording of s340(3)(a) of POCA, that property is criminal property if (inter alia) it represents a person’s benefit from crime in whole or in part.  The court’s interpretation seems to be that if any part of a sum is derived from criminality it is all criminal property.”

This last point is what I call the Ribena principle – one drop of dodgy money and the whole glass is contaminated – which is what I have always applied, but perhaps rather simplistically.  So over to you, learned readers: I know we have plenty of MLROs, some police officers, a few regulators, a handful of lawyers and some FIU staff.  Between you, you must have some opinions – please share them.

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Confession is good for the soul

The lovely film “Out of Africa” contains one of my favourite cinematic lines of all time.  No, it’s not a declaration of love from mahogany Rob to multi-accented Meryl, but rather the response from her dastardly soon-to-be-ex-husband, the splendidly-named Baron Bror Blixen, when she says that she will have to accuse him of something if he wants a divorce: “Whatever: I have surely done it.”  It is good to know not only one’s limitations but also one’s failings, and two jurisdictions recently have been through an AML baring of the soul.

At the beginning of October, the head of the AML Unit of the Attorney-General’s Chambers in the Cayman Islands announced that their national AML risk assessment had revealed all sorts of shortcomings.  Francis Arana spoke frankly to compliance professionals at a conference in Grand Cayman: “We have outdated anti-money laundering, terrorism financing laws that are in urgent need of updating.  The way that the laws, regulations and guidance were structured did not anticipate the high level of interagency cooperation and coordination [and as a result] government agencies are operating in silos.”  He lamented the level of AML supervision in his jurisdiction: “We have inadequate supervision at this time, especially for designated non-financial businesses and professions and non-profit organisations – I think this is a big vulnerability.”  In a bid for absolution (and perhaps with an eye on a visit from the AML deities in the form of the Caribbean FATF in early 2017) the Cayman Islands government now has an action plan for updating the legislation and putting place adequate supervision, as well as dealing with beneficial ownership and establishing greater enforcement powers.

And the UK’s own national risk assessment, published only days after the Cayman conference, exhibits similar candour.  Earlier posts (here and here) have discussed specific points raised, but the tone of the whole assessment is one of confession.  And again, action is promised, with priorities including “plugging intelligence gaps”, “reforming the suspicious activity reports (SARs) regime, and upgrading the capabilities of the UK Financial Intelligence Unit (UKFIU)”, “addressing the inconsistencies in the supervisory regime” and “transforming information sharing”.  The UK’s next mutual evaluation visit by the FATF is tentatively scheduled for March 2018, and of course MLD4 changes must be transposed into UK legislation before then, so, confession over, HMT and others will have to scramble up from their knees pretty sharpish and get busy.

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And they lived PEPily ever after

The Fourth Money Laundering Directive is the gift that just keeps on giving, isn’t it?  It’s a meaty document, and one of the delights it has served up – following the recommendation of the FATF’s, well, Recommendations – is an adjustment to the definition of PEPs (Politically Exposed Persons).  It varies slightly from place to place, but in essence a PEP is someone who holds a position of politically authority or influence in a jurisdiction other than your own, and their family and close associates.  The big change is that from 26 June 2017 onwards, we (EU Member States, that is) will have to gaze at our own navels too: “domestic” PEPs will be included, as well as those dastardly foreigners.  But one thing that MLD4 did not tamper with is the length of PEPitude.

In the UK’s Money Laundering Regulations 2007, the definition of a PEP includes the phrase “an individual who is or has, at any time in the preceding year, been entrusted with a prominent public function”.  So this means that once you have been out of that prominent public function for a year, you are de-PEPped, along with your family and close associates.  And this position is supported by MLD4: “Where a politically exposed person is no longer entrusted with a prominent public function by a Member State or a third country, obliged entities shall, for at least 12 months, be required to take into account the continuing risk posed by that person and to apply appropriate and risk-sensitive measures until such time as that person is deemed to pose no further risk specific to politically exposed persons.”

But (ah, you knew there’d be a but) this definition is not universal.  In Guernsey, Jersey and the Isle of Man, for instance, PEPitude is for life, not just for Christmas.  (It may be the same in other jurisdictions, but they’re the ones I know about.)  So if you were an MP in the UK thirty years ago, Guernsey will consider you a PEP until the day you die – and will consider your children and grandchildren PEPs until the days they die.  (But the PEP ripples do not start again with them, unless of course they PEPify in their own right – and of course some professions do tend to run in families, as with the politically active Aitkens, Cavendishes and Churchills.)

Now it’s not our place to change MLD4, but it may be time for renewed debate about PEPs.  They are significant for AML purposes because most jurisdictions state in their legislation that PEPs must be considered high risk, and therefore must be subject to enhanced due diligence.  But with our risk-based approach hats on, what is the most practical and effective way to deal with the money laundering risk posed by these people?  No-one would argue that a current PEP is worthy of a closer look, and few would suggest that taking an interest in them in the year immediately after they leave office is overkill.  But forever?  Personally, I think some sort of compromise would actually be most realistic.  Five years, perhaps, or ten.  I know that their influence can continue – the power behind the throne – and of course money that was dirty forty years ago is still dirty today, but we do have to strike a balance between what is ideal and what is possible.  And to my mind, both approaches (de-PEPping after a year, and never de-PEPping) are unrealistic: in other words, they do not accurately reflect the (average) level of money laundering risk presented by your (average) PEP.

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Running scared

Over lunch yesterday, a friend of mine told me a story so bizarre that I have to share it with you.  But for reasons that will become obvious, I have to keep it all anonymous.  My friend’s sister lives in the north of England, and for her birthday was taken out for dinner to one of a chain of restaurants – we don’t have this chain down south, but apparently it’s well-known up there.  As she walked in through the door, she slipped on a puddle on the floor and basically did the splits, pulling something very painful in her groin, passing out, and hitting her head on a table as she went down, just for good measure.  Once out of hospital, she contacted the restaurant to ask for compensation, as she had to take time off her (self-employed) job and so was out of pocket.  There was no reply, so she went to the police, taking along two friends who had witnessed the splits and could give statements about the wet floor and so on.  But the police officer who interviewed her advised her to let it drop because (I’m getting there) the restaurant is infamous as a front for money laundering (he actually said the words “front for money laundering”), and the people running it are nasty.  In short, don’t rock the boat.

So what to make of this?  My friend’s sister did let it drop – if your police were too scared to get involved, and you lived locally, you’d probably do the same.  But what can be going on?  Best case scenario, it could be a sting operation, and the police don’t want their investigations to be disrupted or their targets spooked by civil actions for negligence and injury.  Or it could be that the police are genuinely scared.  Or it could be that the police are in cahoots with the criminals.  I know we have a few police readers of this blog, so what would be your take on this?

I’m obviously a bit concerned by it, as I do know the name of the town and the restaurant and indeed the police force – but it’s coming to me third-hand, so I’m SAR-uncertain.  (And that’s quite apart from the harrumphing outrage I feel at the laundering, and the slightly mollifying feeling of being right – I know that some people don’t quite believe me when I warn them about criminal money and cash-intensive businesses.)  Readers, over to you for comment and advice.

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The realms of cash

Money laundering has changed almost beyond recognition since the days of “Scarface”, when Al Pacino’s drug kingpin Tony Montana washed his millions of dollars of drug proceeds by delivering mailbags of cash to his banker friend Jerry.  Indeed, those of us involved in AML training are careful always to stress that concentrating only on looking out for dirty cash is dangerous is today’s world of non-cash transactions.  But of course many crimes do still generate cash – street-level drug sales, human trafficking, illegal prostitution – and criminal gangs still end up with sacks of cash that they need to process.

And some recent cases in America, focusing on the Mexican Sinaloa and Los Zetas drug cartels, have shown that these organisations have become prolific in trade-based money laundering, whereby dollars (from drug sales in the US) are used to buy legitimate goods in the US which are then exported to Mexico and sold for pesos – laundered profit for the cartels, that they can spend locally as they wish.  (This manoeuvre is often called the Black Market Peso Exchange – BMPO.)  In recognition of this continuing danger, earlier this year the US Homeland Security and Treasury Department issued “geographic targeting orders” on about 700 businesses in the Miami area, many of them dealing in mobile phones and other electronic goods in Latin America, requiring them to report all cash transactions over $3,000 – instead of the usual $10,000 threshold required by American AML legislation.  And in the autumn of 2014, similar GTOs were served on about fifty businesses in the garment district of Los Angeles.

For the cash-intensive businesses, the temptation is great – even before factoring in any cultural pressure or downright threats that might be brought into play.  In one recent case, the Drug Enforcement Agency recruited as an informant a cash courier operating out of a hotel in downtown Miami; each week he would deliver $290,000 in cash to local businesses, keeping 5% as his cut.  And in another, a business owner called Jonas Belinaso used his company, JB Wireless, to launder $300,000: the company took the cash from the drug cartel in the US, bought a shipment of mobile phones for sale in South America, and wired the proceeds to Copenhagen so that their drug dealers there could buy more drugs.  Belinaso is now serving time for money laundering, although he was given a reduced sentence for his co-operation.  So if cash is no longer king, it is still at least a (Danish) prince.

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Beware the EU shortcut

When MLROs are populating their lists of high- and low-risk jurisdictions, they are advised to consult as wide a range of (reputable) sources as possible.  (For non-MLRO readers, the risk status of a jurisdiction matters because if it is judged to have a good approach to AML – sometimes called “equivalence” – then business coming through that jurisdiction might not need high levels of due diligence.  On the other hand, if a jurisdiction has been pinpointed as having deficiencies in its AML regime, then business connected with it will almost certainly trigger enhanced due diligence requirements.  That’s an over-simplification, but you get the idea.)  And one of the go-to sources is the list of EU Member States.

Looking for example at Part III of the JMLSG guidance issued for the UK financial sector, we read that in section 2.2 that “Member States of the EU/EEA benefit de jure from mutual recognition through the implementation of the money laundering directive” – and are therefore considered to be equivalent jurisdictions when it comes to AML efforts.  But the wise MLRO reads further, where the JMLSG elaborates: “Although firms may initially presume equivalence, significant variations may exist in the precise measures (and in the timing of their introduction) that have been taken to transpose the money laundering directive (and its predecessors) into national laws and regulations.  Moreover, the standards of compliance monitoring in respect of credit and financial institutions will also vary.”

I should coco.  The reason that this topic is on my mind at all is that I recently went on a rail holiday to eastern Europe.  One of the countries I visited was Romania – a member of the EU since January 2007 – and while I was there I got chatting to a local girl in her twenties who (and this was the common ground we found) had worked for several years as a beauty therapist in a spa in Jersey and was keen to keep her English language skills honed.  I asked her what it was like returning to Romania after her Jersey sojourn, and she said it was good to get back to the mountains and the familiar food, but she was in despair at the levels of corruption.  “Some of the older politicians are in jail now, but by no means all of the corrupt ones.  The new regime is trying, and the public does care about it – we realise that it’s important to get this right.  But until we get rid of the old order, we’re stuck.  Here in Romania you can still get wrong things done if you know the right people.”  So although Romania is – technically – an equivalent jurisdiction, it seems that using the EU shortcut would be foolish, as it seems that corruption is still endemic at the highest levels, which will surely have an impact on the implementation, checking and enforcement of the AML regime in the Romanian regulated sector.  And yes, I’ll try to plan future holidays so that I can check up on others for you.

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Crime ain’t what it used to be

Recently the UK government published its first AML National Risk Assessment.  In its introductory look at the UK crime sector, it observes that “the number of armed robberies at banks and buildings societies has declined in the last decade” while “fraud and tax offences are the largest known source of criminal proceeds from offending in the UK”.  This is no surprise at all for those of us who have been in AML for a while, and even telly drama makers have cottoned on to the fact that modern criminals favour “low detection, low penalty, high profit” crimes.  Watching someone hack into bank websites on a computer is not terribly gripping visually, so crime dramas tend to wax nostalgic *wobbly lines to indicate going back in time*.

Over the summer, ITV showed a three-part story called “The Trials of Jimmy Rose” starring Ray Winstone – a man born to play old-school criminals if ever I saw one.  He is released from prison after serving a twelve-year stretch for armed robbery, and comes out – as the promo material has it – into a changed world.  His grandson has to teach him how to use a smartphone, his wife has had an affair with a policeman, and his best friend – “the world’s worst money launderer” – has lost all of their “earnings” in a disastrous property deal in Spain.  Will Jimmy be able to stay away from crime?  What do you think?  Luckily for Jimmy, he stumbles into an area of crime that still requires his particular hard man skills – stealing drug money from other criminals.  But he’d be lost trying to set up a multi-layered securities fraud involving SPVs and any country other than Spain.

We saw a gang of real-life Jimmys at work over Easter this year, plying their trade in the old way as they tunnelled into vaults in Hatton Garden and pinched the contents.  But one by one they have been picked up – and of the nine charged with the robbery, two are in their sixties and two in their seventies.  The baby of the gang is 48.  They did rope in some young ’uns to do the laundering: three in their forties and one of 35.  Perhaps fittingly, some of the loot has just been found in a cemetery…

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A superabundance of supervisors

With all eyes on the Fourth Money Laundering Directive, I will confess that I had lost track of the UK’s AML/CFT National Risk Assessment – and then it appeared last week.  There’s plenty of meat in it and it’s perfectly readable so I’ll leave you to it, but something that caught my eye was this: “The effectiveness of the supervisory regime in the UK is inconsistent… The large number of professional body supervisors in some sectors risks inconsistencies of approach.  Data is not yet shared between supervisors freely or frequently enough, which exposes some supervised sectors where there are overlaps in supervision.”

I could not agree more.  When I talk about America – which I do infrequently – I nearly always find myself saying, “Of course, they have a very fragmented approach to AML supervision” – and then I have to stop myself.  Who am I to talk, when you look at the situation here in the UK?  Appendix A to the NRA lists “bodies currently designated as AML/CFT supervisors under the Money Laundering Regulations 2007 (as amended)” – and there are twenty-seven of them.  Faculty Office of the Archbishop of Canterbury, anyone?  (According to its website, its “functions are now threefold: the issue of Special Marriage Licences, the regulation of the Notarial profession and the legal work for the awarding by the Archbishop of ‘Lambeth’ Degrees”.  Who knew?  I feel a “University Challenge” question coming on.)

I do understand that the UK is a complex financial centre offering the full range of services, and therefore having just one AML supervisory agency, as works in some smaller jurisdictions, is probably unrealistic.  But twenty-seven?  I have worked with a handful of them, and I can agree that there are “inconsistencies of approach”: putting it bluntly, some are pretty hot on AML, while others barely know what it means.  I would certainly campaign for a concentration of supervisory duties in a few capable hands and, at the risk of eternal damnation, perhaps would not recommend Mr Welby – the Primate of all England and Metropolitan should surely have his mind on higher beings than notaries.

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