They’re not going on a summer holiday

As you pack your bucket and spade, I thought you might like to spare a thought for those poor people not having a summer holiday this year.  I mean, of course, those put-upon convicted UK drug traffickers who have been made subject to Travel Restriction Orders.  These were introduced as part of the Criminal Justice and Police Act 2001, and empower the courts to restrict the movements of those who commit “trigger” offences (nothing to do with guns – it’s drug offences with an overseas link) and are sentenced to four or more years in prison, by taking away their passports for a specified period after they are released from prison.  It applies only to those with British passports – i.e. passports issued by the Government of the United Kingdom, the Channel Islands, the Isle of Man or a British Overseas Territory – and the actual physical passport must be surrendered to the court.  (We can’t snaffle other passports because the passports of foreign nationals remain the property of the issuing government – so we’d deport them instead.)  A TRO must last for at least two years and – deliciously – there is no maximum length.  The expectation is that the period of the travel ban should escalate based on the level of sentence, and a TRO of any length can be reviewed (and perhaps revoked or suspended) after the minimum two year period.  Penalties for breaches of TROs include fines and up to five years in prison.

So as you slip a third pair of flip-flops into your suitcase and imagine your first sip of that poolside cocktail, do shed a few salty tears for Merseyside drug dealer Jason Fitzgibbon, who won’t be seeing the Mediterranean sun for quite some time: when he gets out of prison in about a decade, he’ll be subject to a five-year TRO.  And his near-neighbour Mark “Mr Big” Brown will serve a similar term, and then have to wait seven more years before he can paddle in any warm Caribbean waters.  Shame, isn’t it?

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Begone, bad MLRO

In what the headline writers are calling a “landmark case”, an MLRO and the firm she worked for in Jersey have been acquitted of failing to make suspicious activity reports when they should have done.  (“Landmark” because it was the first prosecution – rather than civil action – and not because of the acquittal.)  You can read something of the case here, although I have yet to find the court transcript – please do share if you have the link.

However, I was more interested to read that, a week after her acquittal, MLRO Michelle Jardine had been banned from working in the regulated sector by the Jersey Financial Services Commission.  In that cold-blooded way I have, I leapt on this information because it all helps to define the expectations (or at least the JFSC’s expectations) of the role of the MLRO.  For those of you unfamiliar with this particular Channel Island, let me explain that under Jersey legislation there are two separate roles: Money Laundering Compliance Officer (responsible for monitoring compliance with AML legislation) and Money Laundering Reporting Officer (responsible for receiving and considering SARs – suspicious activity reports).  Both roles can be held by the same person, as indeed they were by Mrs Jardine when she worked for wealth management firm STM Fiduciare Limited.  So what went wrong?

Looking at the JFSC’s Public Statement, we find that in her role as MLRO, Mrs Jardine failed to process fifteen SARs – some of them nearly two years old.  And in her role as MLCO, she failed to pass on to the Board full information about the status of internal and external reporting of suspicions (perhaps unsurprising in the circumstances).  So she failed at the very core of the job: listening to what your staff tell you of their concerns about money laundering, and passing on information to the authorities for investigation.  Quite what she thought she was signing up to when she agreed to be MLRO and MLCO, I cannot imagine, but this case (both the criminal acquittal and the regulatory withdrawal of approval) underlines the importance of making sure that MLROs are fully aware of the duties for which they are legally responsible.

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A regime of responsibilities

On 7 July, the Financial Conduct Authority issued its final rules on the Senior Managers Regime (I long to put an apostrophe in there, but the regulator has decreed it apostrophe-free, and I’m nothing if not obedient to regulatory decree) for the banking sector.  This all started back in July 2014, when the FCA and the Prudential Regulation Authority jointly published their proposals for how to implement a new governance regime to strengthen accountability within banking, following recommendations of the Parliamentary Commission on Banking Standards (which in turn followed public outcry – you know the drill).  We’ve been through a consultation process, and now it’s done and dusted: final rules are just that.  So what do they require?  Main points (but do read the whole paper yourself – what I consider to be main may not match your interpretation):

  • 17 Senior Management Functions are specified – you do not need to have all of them, but staff holding these SMFs must be pre-approved by the regulators
  • 30 Prescribed Responsibilities are specified – these are responsibilities that must be assigned to the individuals who hold SMFs (and again, some may not be relevant to your firm)
  • Individuals who have overall responsibility for activities, functions or areas of the business need to be pre-approved for SMFs – the person having overall responsibility means “the person who has ultimate responsibility, under the governing body, for managing or supervising a function; with direct responsibility for reporting to the governing body, and putting matters for decision to it”
  • There is guidance on: applying the new regime to smaller firms; sharing Prescribed Responsibilities; roles and responsibilities of non-exec directors.

Helpfully, a six-step road-map is given:

  1. Identify all entities in the group that are caught by the regime.
  2. Consider what activities, business areas or functions are performed by each entity, and which Prescribed Responsibilities will be relevant to them.
  3. For each entity, identify those individuals that hold SMFs 1 to 17.
  4. From this list, allocate the relevant Prescribed Responsibilities.
  5. For each entity, identify any individuals that have overall responsibility for any other activities, functions or business areas.
  6. Record the allocation of responsibilities.

Oh, and these final rules come into force on 7 March 2016.  Flip-charts at the ready.

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Agents of doom and disrepute

I’ve just watched a Channel 4 documentary called “From Russia with Cash”.  The premise is that two investigators go undercover as Russian PEP Boris and his ditsy girlfriend Nastya, and trip around the swankier parts of London looking at five high-end properties, each shown to them by a different estate agent.  Boris is completely up-front with each agent: he tells them that he is in charge of procurement at the Ministry of Health, on a small salary, but that from every contract that he awards, a little bit finds it way into his pocket.  He wants to buy a property, but with complete discretion: neither his employer nor his wife must be able to link it to him.  And not one of the estate agents bats an eyelid.  Of course, I can understand the awkwardness of the situation; you can’t back off with a look of revulsion, not least because Boris probably has friends in low places.  And no-one wants to look like a prude, when Boris confesses that he’s buying a London pad in order to get laid.  But the really worrying aspect of it all is the complete misunderstanding by these estate agents of their legal obligations.

Quick revision.  The Money Laundering Regulations 2007 require certain businesses – including estate agents – to do AML checks and due diligence on their clients.  These agents were all acting on behalf of other people (the vendors of the properties), so no need for them to worry (legally, I mean – morality is another issue) about AML checks on Boris.  But then we also have the Proceeds of Crime Act 2002, and its five money laundering offences that apply to everyone.  Everyone.  Yes, even estate agents meeting Boris.  So these agents who happily tell Boris that, yes, of course they would sell a property to him, and yes, they can recommend a lawyer who can help him set up a Cypriot company with nominee directors so that Mrs Boris cannot find his London shag-nest – how is this not the PoCA s328 offence of entering into or becoming concerned in an arrangement that helps someone else to launder their money?  In the case of this documentary, none of the sales went ahead – I don’t think the investigator had quite that money to spare.  But all the estate agents were willing to proceed on that basis, thinking (hoping?) that as Boris was not their client, they were absolved from all responsibilities under the primary legislation.  And not one of them made a SAR to his MLRO about Boris’s confessions of corruption, so how is this not the s330 offence of failure to disclose by someone working in the regulated sector?  What on earth are their MLROs telling them?  Take the money and run?

Posted in AML, Bribery and corruption, Money laundering | Tagged , , , , , , , , , , , | 6 Comments

DD dire warnings

A while ago, I mulled on the meaning on the phrase “due diligence”.  My mullings came back to bite me this week as I leafed through the Spectator magazine and spotted Dot Wordsworth’s column.  Dot writes about the sources, meanings and etymology of words, and she has finally tackled “due diligence”.  As I did, she quickly spotted that the phrase has devotional roots, but notes that it is now used to mean checks done ahead of a course of action – often the purchase of a business, as in her example, but in our AML arena, more commonly the taking on of new clients (or of new activity by existing clients).

What caught my eye about Dot’s musings was her observation that “if you don’t do your due diligence, you deserve to be stung”.  I certainly think that this attitude is common with AML: if you don’t do the sensible checks, you have only yourself to blame if (when) you end up laundering money and/or being fined by the regulator for your lackadaisical attitude.

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Guernsey goes through the reputational wringer

I must declare an interest.  As part of my regular timetable of training visits, I go to Guernsey about five times a year, for a week at a time.  And I like it very much: I like the scenery, I like the size and structure of Town (as the capital, St Peter Port, is termed), and I like the local attitude to AML and their distaste for financial crime in general, including tax evasion.  (Although you should bear in mind that the MLROs that I meet are the self-selecting dedicated ones; if an MLRO is not bovvered about AML, he’s not going to bring me in to train his staff or edit his AML manual.)  So I was nearly as surprised and upset as the Guerns when, in the middle of June, Guernsey was placed on the EU’s list of thirty jurisdictions that are considered non-cooperative in tax matters – tax havens, for short.  To get on the list, you had to be “nominated” (i.e. fingered) by at least ten EU Member States, and it turns out that Guernsey’s tenth nomination – by Poland – was actually a nomination for Sark.  It’s an easy mistake for those who have never experienced first-hand the fierce loyalty of Channel Islanders to their own particular island.  Although Sark is located geographically within the Bailiwick of Guernsey, it is fiscally entirely separate: it has its own laws, its own parliament, and even its own UN country code (680).  So if Poland is unhappy with the tax regime of Sark, that’s no reflection on Guernsey.

But the damage was done to Guernsey.  Danders were up in Town, and representations were made to the EU, whose spokeswoman Vanessa Mick admitted at the beginning of July that “it appears there were different criteria for different countries so we are trying to co-ordinate that [by inviting] the countries on the list of thirty to engage in talks with the objective of updating the list by the end of the year.”  That’s quite a while to wait for a de-listing, so Guernsey has contacted friends in other high places, and in a press release yesterday Guernsey Finance (“a joint industry and Government initiative to defend and promote the long term reputation, stability and development of Guernsey as an international centre of excellence for financial services”) announced that the OECD had come out in its defence, saying lovely things like “we are very pleased with the cooperation Guernsey has shown as a very active member of the Global Forum on Transparency and Exchange of Information for Tax Purposes” and “Guernsey is in the leading group of jurisdictions who are active in the practical implementation of tax transparency and co-operation”.

It all seems very harsh on Guernsey, and I certainly don’t want to make capital out of someone else’s misfortune, but it is a timely reminder for us that one of the main risks of not doing AML properly is reputational damage – whether personal, institutional or jurisdictional.  This example – albeit tax-related and ultimately wrong – shows how quickly a hard-earned reputation can be tarnished (we hope temporarily in this case).  And if accusations are levied, it is the documented evidence of your good standing and best efforts (here Guernsey can point to its legislation, its codes of practice and its many Tax Information Exchange Agreements and Double Taxation Agreements) that will come to your rescue.  Fulsome file notes, ladies and gentlemen – good records, certified copies, and fulsome file notes.

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High risk movers and shakers

The regular updating by the Financial Action Task Force of their list of dodgy places (or, more tactfully, high-risk and non-cooperative jurisdictions) is now part of every MLRO’s diary.  Although I am the first to admit that inclusion on – or absence from – these lists may well have a political dimension to it, it is now widely accepted that reference to the FATF’s concerns is an essential component of the assembling of an in-house list of high risk jurisdictions.  And checking the latest list is the work of a moment, now that that FATF is so organised about publishing it the moment it is agreed at the plenary meeting.

The most recent plenary (in Brisbane, if you please – I quite fancy it myself) finished on 26 June, and the updated list was on the FATF website seemingly within minutes.  As you know, the FATF list has three tiers: jurisdictions subject to an FATF call on its members to apply counter-measures [the baddies, currently Iran and North Korea]; jurisdictions with strategic AML/CFT deficiencies that have not made sufficient progress; and other monitored jurisdictions that have agreed an action plan with the FATF.  To my mind, the thing that matters is to track the movers and shakers.  You need a clear desk and an even clearer head to work out what has changed, so – generous soul that I am – I have done it for you this time.  (Don’t get used to it; I’m just in a good mood because of the sunshine.)  For most MLROs, appearance in any of the three tiers is enough to warrant high risk status for a jurisdiction (and indeed, when jurisdictions themselves issue instructions or other warnings that Must Be Obeyed, the FATF’s list is almost always the starting point), so we’re looking for countries that, this time round, have appeared for the first time in those three tiers or disappeared from them.

After working hard to put in place updated AML requirements, Indonesia has worked its way out of the three tiers – so if you’re considering them high risk purely on the basis of their FATF ranking, you can stop that right now.  (The local press was rightly jubilant about the change; we might occasionally scoff about the independence of the FATF’s list, but there’s no denying that being on it can be very uncomfortable.)  Appearing in the bottom of the three tiers – and thereby almost certainly hauling themselves into your high risk category – are Bosnia & Herzegovina, and Uganda.  Ecuador is also on the move, but as it’s only going from tier two (strategic deficiencies) to tier three (monitored), it’s not done enough to remove itself from your high risk category just yet.  So there you are – you’re welcome.  The next changes will be issued at the end of the next FATF plenary meeting, so that’s 23 October 2015.

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Cash concerns

Earlier this week, I talked about the National Crime Agency’s “National Strategic Assessment of Serious and Organised Crime 2015” – and in particular about its take on high-end money laundering and professional enablers.  But in case you’re feeling all complacent about the cash end of things (unless you’re Greek, of course), I should point out that the same assessment also dedicates quite a bit of space to cash-based money laundering.  I will admit that I had thought that cash was becoming less of a problem; as fewer day-to-day transactions are conducted in cash, with so many of us using contactless payment cards and other cash-eliminating techniques such as season tickets, I had thought that cash would become terribly old-fashioned (and therefore notable when used).  But it seems that, for the UK criminal at least, this day is still some way off.

Among the areas of concern highlighted by the NCA assessment are cash smuggling (especially of the euro, “due to its availability in low-bulk, high-denomination notes, and because it can be concealed within the European monetary system with ease”) and the use of casinos: “Gambling proceeds can provide money launderers with a credible explanation for a source of wealth.  Casinos can operate 24 hours per day, with high volumes of large transactions taking place in short timescales.”  (In case you’re now wondering how it works, the NCA explains that “a number of cases show large sums of criminal proceeds being split into smaller amounts, exchanged into casino chips, gambled at up to a 10% loss and then cashed out”.)  Also of interest are money service businesses – bureaux de change and wire transfer businesses: “The NCA assesses that at least £1.5 billion of UK criminal proceeds go through MSB remittances each year, with the actual figure likely to be significantly higher.”  And we have a new phrase to bandy about: international controllers.  Whether they are round and jolly like the gentleman overseeing Thomas and his friends remains to be seen, but what we do know is that these controllers “are relied upon by many organised crime groups to arrange the collection and delivery of criminal street cash in return for a commission… [They] orchestrate the movement of many millions of pounds across the world, and their loose networks give them the resilience to absorb losses from law enforcement intervention”.  So that mild-mannered chap who likes a flutter at the tables and sends cash to his friends around the world may in fact be an international controller – and all to service the cash end of money laundering.

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Taking the criminal temperature

Every year, the UK’s National Crime Agency puts out a “National Strategic Assessment of Serious and Organised Crime”, which I use as a very handy criminal barometer to measure what professional criminals are spending their time on.  The 2015 edition came out on 23 June, and of course I opened it immediately and started scanning for the words “money laundering”.  And to all those people who, years ago, counselled me to expand my interests “because money laundering will go out of favour”, I think we can say a big yah boo sucks.  Turns out that the NCA is of the view that “money laundering is now a high-priority risk in its own right [and] high-end money laundering, in particular, is a major risk”.  It’s a Pyrrhic victory for my career, of course, as I’d much prefer to see money laundering eliminated and then retire to write novels, but as long as I’m (we’re) needed, I shall fly the AML flag.

The NCA assessment this time round has more nifty graphics than I’ve seen before.  One shows the major sources of the criminal money being laundered in the UK, which include cybercrime, the trade in firearms, drug trafficking (with the UK market in cocaine being the biggest in Europe – and no, it’s not like one of those picturesque flower markets you see in Continental towns on Sunday mornings), people trafficking (with 10,000 victims in the UK) and economic crime (such as tax evasion of various stripes).

Delving into the details, the assessment shies away from putting a definite figure on any estimate of the scale of money laundering in the UK, preferring to say “hundreds of billions of US dollars”.  Particular concern is expressed about “high-end money laundering”, which is “specialist, usually involves transactions of substantial value, and involves abuse of the financial sector and professional enablers”.  We’ve worried about professional enablers before, and the NCA is clear about who it means: “The laundering of criminal proceeds is reliant on access to the professional skills of, among others, lawyers, accountants, investment bankers and company formation agents… We believe the professions posing the greatest risk are within the financial and legal sectors, for example accountants and solicitors.”  Particularly tasty for the money launderer is the solicitor’s client account: “Criminally complicit solicitors can effectively act as private banks to individual clients.  Client accounts offer criminals relative anonymity, the ability to obscure the origins and beneficiaries of criminal proceeds, and the perceived protection of legal privilege.”  Being the pernickety wordsmith that I am, my eye is drawn to that word “perceived”…  Are changes afoot, or prosecutions planned?  At the very least, cards have been marked.

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Cramped corporate quarters

Like many of you, I am sure, my interest was piqued last week by the story that broke on the Beeb (or at least that’s where I first heard it) about shell companies in Scotland allegedly being used to launder the proceeds of a gigantic fraud on three Moldovan banks.  There are many aspects of this investigation that will fascinate those of us with an AML turn of mind, but one that caught my eye was the assertion that one of the limited partnerships suspected of involvement “is registered along with 420 other companies in a flat in a run-down part of Edinburgh”.  This reminded me of both the (defunct) Sark Lark and the assertion on Wikipedia that Ugland House in George Town, Grand Cayman “is the registered office address for 18,857 entities”.

Now, not for one second am I saying that all the companies registered at Ugland House are dodgy, nor that the 259 limited partnerships that give their address as “a flat in Pilton, the district of north Edinburgh famous as the setting for ‘Trainspotting’, the novel about heroin addicts” are up to no good.  But from a due diligence perspective, it would be useful to know that the company I was looking at was living in such cramped conditions.

So I had a peek at my own local register of companies, via the WebCHeck service offered free by Companies House here in the UK.  You can search on company name or number, but not on address.  Now that discussions are starting in earnest about how to design a register of beneficial ownership that meets the standards of the Fourth Money Laundering Directive, it might be a good opportunity to consider whether allowing a search on address would be handy.  After all, if I were an MLRO and doing a check on a new corporate client, I’d quite like to know if they share their address with hundreds or thousands of others.  That alone does not mean that there is anything wrong with them, but perhaps it is another facet of identity that should be available for interpretation and risk assessment.

Posted in AML, Money laundering | Tagged , , , , , , , | 10 Comments