Keeping up with the Joneses, les Dubois and die Schmidts

I mentioned in my previous post that Guernsey is on the cusp, nay, the very brink of getting new AML legislation.  This represents the conclusion of their exercise to fall into line with the Fourth Money Laundering Directive (or as in line with it as Guernsey wants to be), as we did in the UK when we created the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.  History shows us that after the grand effort of transposing a money laundering directive into national legislation, the domestic AML supervisors should be able to relax for about a decade.  But this is no longer the case.

The first Money Laundering Directive was adopted in June 1991, MLD2 in December 2001, MLD3 in October 2005 (this was rather quick, in order to bring terrorist financing into the mix) and then MLD4 in June 2015.  But then someone found the accelerator pedal: MLD5 was published in draft form in July 2016 and adopted in July 2018, with a transposition deadline for EU Member States of 10 January 2020.  This is only 2½ years after the MLD4 transposition deadline of 26 June 2017.  And now we have MLD6 – which, admittedly, is more of a companion piece to MLD5 as it deals specifically with the criminalisation of money laundering rather than with the practice of anti-money laundering, but nonetheless it too has a transposition deadline that is worryingly close, at 3 December 2020.

I’m not saying for one moment that MLDs 5 and 6 don’t contain interesting developments and initiatives – there are some crackers in there (centralised register of bank accounts, anyone?) – but I am concerned about the speed at which things are changing.  With the best will in the world, is any Member State going to be able to write new AML legislation for the second time in three years and put it out to industry for comment and get any meaningful response, given that industry has only just dealt with the last lot?  Are sectoral AML supervisors going to be able to put out guidance in time, given that they’ve only just dealt with the last lot?  Are MLROs going to be able to convince their Boards and staff to implement yet another updated set of AML procedures, given that they’ve only just dealt with the last lot?  And is anyone going to believe that those tasked with writing these AML directives actually know what they’re doing, given that the shine seems to wear off a new directive with alarming haste?  If we keep changing our minds about the best way to tackle money laundering, we create nothing but confusion, disillusionment and exhaustion – and criminals can take full advantage.

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Chaos theory?

Regular readers will know that I do a lot of work in Guernsey, and that in general I am a supporter of that jurisdiction’s approach to AML.  However, one issue on which we – Guernsey and I – have long differed is dePEPping.  (For the confused, this is the point at which you can consider a Politically Exposed Person no longer to be a PEP because he has left the office which PEPped him in the first place.)  Under the last two EU Directives – MLD3 and MLD4 – dePEPping occurs twelve months after the PEP has stopped doing his PEPpish activity.  (It’s in Article 22 of MLD4.)  Now, I’m not saying that I agree with that; personally, I think it’s a bit too soon.  However, Guernsey has always gone to the other end of the spectrum and has declared (I’m paraphrasing here) “once a PEP, always a PEP”.

But now Guernsey is in the throes of updating its AML legislation.  This round of updates has been, for various reasons, a tortuous and often torturous process but – like a worn-out mare at the Grand National – I feel that I have cleared the Chair and now have only the Water Jump between me and the finish line.  Draft legislation – the Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) (Amendment) Ordinance, 2018 – has been all but agreed and is queued for rubber-stamping at the next meeting of the appropriate bit of the government, on 12 December.  And in this shiny new legislation, dePEPping looms large – and complicated.

What Guernsey has done is to create a definition of dePEPping which is – to my mind – a masterful encapsulation of the risk presented by PEPs.  There are now three categories of PEP – domestic PEPs, foreign PEPs and IOPEPs (who work for international organisations) – and they are dePEPped at different points:

  • domestic PEPs can be dePEPped five years after they leave their PEPpish role
  • foreign and IOPEPs can be dePEPped seven years after their leave their PEPpish role, unless they are a tip-top PEP (e.g. head of state or head of their international organisation) or “have the power to direct the spending of significant sums” – either of which means you can never dePEP them.

As I say, I think this is an excellent reflection of the level of risk presented by various flavours of PEP.  But pity the poor MLRO (or, as Guernsey will soon have it, ML Compliance Officer) who has to design the policies and procedures to reflect this new set-up.  The theory is excellent but I fear that the practice will prove a nightmare.  When creating an AML regime, a vision of the perfect must always be tempered by consideration of the possible.

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The tarnish on golden visas

I have mentioned before the concept of “golden visas” and passports-for-sale.  In today’s politically uncertain world they are becoming ever more popular, and last month Transparency International published a report called “European Getaway: Inside the Murky World of Golden Visas”.  Put aside, if you will, the dislike tinged with envy that is often engendered by those who flit into the country on a leather-lined private jet and select (or instruct their lackey to select) the most appropriate travel document from the sheaf at their disposal.  We’re bigger than that, AML-ers.  From a money laundering perspective the main danger is – as noted by TI in that report – the lack of due diligence: “Though most countries that trade in visas and passports assert that they uphold the highest standards, audits performed in a number of countries in recent years have identified serious deficiencies.”  In 2014 several Portuguese government officials were detained after allegations that their golden visa programme had fallen prey to “corruption, money laundering and influence peddling”, while in March 2017, “the Hungarian golden visa scheme was suspended following revelations that the right to sell residency bonds on behalf of the government was awarded to eight companies without any public procurement process – seven of the chosen companies were registered outside of Hungary, and there was little to no information about their real owners in the public domain”.

However, the country I find really interesting in all of this is Canada.  Canada’s federal Immigrant Investor Programme (launched in 1986) was once rather popular – after all, the Canadian passport is widely accepted, and it’s rather a nice country in which to live, politically stable, with good scenery, and the maple syrup is (almost literally) nectar.  It was not a cheap or easy option: applicants had to have a minimum net worth of C$1.6 million [about £750,000 in 1986] and invest $800,000 in an interest-free loan to the Canadian government (to be repaid after five years), as well as offering at least two years of managerial experience.  Despite this, it was a great success, with an estimated 100,000 Chinese millionaires settling in Vancouver alone (a city of only 600,000 at that time).  The local population had mixed views: luxury developments sprang up all over town, priced beyond the reach of many natives, and even suburban property was snapped up – and much of it was left empty, seen simply as an investment.  When Vancouver came second in a poll entitled Most Unaffordable City In The World for the fourth time, the Canadian government decided enough was enough: the IIP was halted in February 2014.  65,000 pending applications (70% of them Chinese) were cancelled and refunded – although (as the IIP website still notes) the returned application fees did not have interest added, and no refund at all was made for “language tests, financial audits, bank charges [or] representative fees”.

Announcing the thinking behind the cancellation of the scheme, the federal budget of 2014 said that “there is little evidence that immigrant investors as a class are maintaining ties to Canada or making a positive economic contribution to the country.  Overall, immigrant investors report employment and investment income below Canadian averages and pay significantly lower taxes over a lifetime than other categories of economic immigrants.”  In other words, it’s not financially worth it to the government.  And this may eventually be the death-knell for all such schemes: the money.  If a government works out that its golden visa scheme costs it more – in lost reputation, lost genuine business and lost tax revenue – than it earns from it, the doors will close.

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Something in the way she moves

A while ago I wrote about facial recognition software being used for client identification at ATMs and to apprehend scallywags out in public.  But of course technology does not stand still, and one of the shortcomings of facial recognition software is that it has to have a fairly clear view of, well, your face.  If you’re wearing sunglasses or a wintry hat/scarf combo, or maybe just looking a bit ropy after a long flight or heavy night, the system cannot identify you.  But what does not change, no matter how hot, cold or overly-refreshed you may be, is the way you walk.  And now those clever programming people have come up with “gait recognition” software.

I can see the sense in this, from personal experience.  When I was a child it was a great treat to go to the airport to collect my father after one of his business trips.  Peering from behind the barriers I could always spot him a mile away because of his stiff-legged walking style – rather like Mister Benn, for those of you of a certain vintage – and the “teapot” way in which he leaned over to one side (straight-legged all the while, with the other arm out for balance) to pick up his suitcase.  Absolutely unmistakable.  And I have been told that I have a distinctive gait myself, thanks in part to a badly-mended broken foot (larking about at school and didn’t dare confess the injury) that makes one leg turn out a bit.  You’ll all be staring if you ever meet me.

Talking note of this (no, not my leg specifically) Chinese firm Watrix has developed a gait recognition system that, it says, fills a gap in biometric identification, as it can work at a distance of up to 50 metres with an average recognition rate of 94% – and it doesn’t care whether you are walking towards the camera or away from it, and whether you have your face on show or not.  It can also work in low lighting and – it’s hard to see how this might concern the financial sector but you never know – can identify animals other than humans.  Of course, quite how it would cope with the men from the Ministry, I am not sure.

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Interesting times

I like AML legislation as much as the next person – perhaps more, unless that person is an MLRO.  If there’s updated AML legislation on the horizon I really look forward to it, and I’ve been on tenterhooks for about eighteen months ever since hearing about changes being proposed in Guernsey.  Not just new legislation but also a whole new Handbook of guidance – riches indeed!  But timing is all.

Twice a year I run a full-day MLRO workshop in Guernsey – and the second one of 2018 was last Thursday.  Of course I have to prepare my material weeks ahead of time, to allow for print-outs to be duplicated, put into folders (that’s a fun morning chez Grossey) and then posted to Guernsey.  Plus – perhaps more importantly – I have to know what I’m talking about at the workshop.  So you can imagine my delight when the new legislation (in draft-but-fairly-final form) was released on the Friday before the workshop.  Worse, it turned out to be only the opening salvo of the week from hell.  Let me elaborate:

  • Friday 9 November: Guernsey releases significant new AML legislation
  • Monday 12 November: I fly to Guernsey and – while I am in the air – the Guernsey Financial Services Commission publishes its new (311-page) Handbook
  • Monday 12 November: the Sixth Money Laundering Directive is published in the Official Journal, thereby setting its own transposition deadline
  • Tuesday 13 November: the UK government publishes draft legislation outlining what will happen to our AML legislation on what is apparently being called “exit day” (spoiler: nothing, except the global removal of all preferences to the EU, because they will be Dead To Us)
  • Thursday 15 November: the husk of a woman formerly known as me presents a workshop covering all of the above material, having had about six hours of sleep each night in order to make time for reading new legislation, etc.

But how kind people are: friends in Guernsey rallied to my aid and made sure that I had a printed copy of the Handbook and handouts containing the updated information.  And now I need a lie-down in a darkened room.

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‘Dammed if you do

In a rather handy follow-on to my last blog post, which discussed my reasons for supporting the inclusion in the AML family of businesses that sell services for cash, Amsterdam’s administrative court has taken an interesting step.  A team of experts from, among others, the city authorities, the Public Prosecution Service and the police has decided to reverse the burden of proof for restaurants, bars, pubs and cafés applying for licences to trade in Amsterdam.  In short, applicants will now have to prove that their source of funds is non-criminal before a licence will be considered.  Previously the burden of proof was on the municipality: the city licensing authorities could refuse or revoke a permit to trade only if it could prove that the establishment’s money was the proceeds of crime.  Now, if the source of funds is not clearly legitimate, the permit application will not be processed.  And the system is already taking effect: the municipality recently refused a permit for a restaurant on the banks of Sloterplas – an artificial lake in Amsterdam popular for water-sports – because the entrepreneur could not sufficiently demonstrate that the investment money was clean.

The aim is to ensure that dodgy money is not used to bankroll businesses in Amsterdam, particularly as such cash-intensive businesses – once established – are often used for future laundering.  The city has tried other ways to tackle the problem.  In June 2003 the BIBOB (Wet Bevordering Integriteitsbeoordelingen door het Openbaar Bestuur – or Public Administration Probity in Decision-Making Act) Law came into effect, giving Dutch administrative authorities the power to refuse contracts, subsidies or permits for organisations and companies if they have serious doubts about the integrity of the applicant.  And in April 2009 the Amsterdam authorities withdrew the operating permits of the Delta Hotel, the Hotel De Korenaer, the Hotel Keizerhof and an Intalian restaurant called Silicio – all were in the touristy Damrak area, and all belonged to the controversial Barazani family.  Asaf Barazani had made clear his opposition to plans to clean up the area; as Damrak is the street that runs from Central Station to Dam Square, it is usually the first street tourists see when they enter the city, and there were hopes to turn it into a “red carpet” entrance to the city.  Referred to by locals as the “Kosher mafia”, the Israeli Barazani family owned some fifteen buildings along Damrak.  In 2004 the family was investigated on suspicion of money laundering, and after those licences were withdrawn in 2009 some of their properties were sold to the municipality for forty million euros.  Members of the Barazani family were later convicted of tax evasion.

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Back to school for AML

British public schools have a lot to answer for – David Cameron, BoJo, Michael Gove, rugby – but to this list we can now add money laundering.  I don’t want to claim any glory (well, maybe just a bit) but I’ve been banging on about this for a while.  Our current definition of high value dealers – those who trade in goods for large amounts of cash – is missing a trick that money launderers do not miss: the laundering of cash through businesses that accept cash in exchange for services.  Businesses such as clinics, sporting academies, universities and public schools.  Imagine how simple it is.  You send your child off to school with the year’s fees in cash in his satchel.  Only when the bursar opens the envelope, why, there is ten times too much money!  Apologies, say the parents on being contacted, we have muddled up the exchange rate – those pesky decimal places.  But we don’t want little Egbert spending all that cash on comics and gobstoppers, so please could you just pay it into our bank account – here are the details.  Et voilà, as they say: lots of lovely lolly laundered.

Personally I cannot understand why businesses that sell goods for cash should be expected to do all the AML stuff – due diligence, record-keeping, etc. – while those taking huge cash amounts for services do not.  Surely the key thing is how you’re paying, not what you’re buying.  If you pay by credit/debit card or bank transfer or (dinosaur alert) cheque, at least the money is going through a financial institution somewhere along the line, and there is an expectation (at least in reputable jurisdictions) that some AML checks will have been done by them.

In a recent interview with the Guardian, Ben Wallace (who is either the UK Minister of State for Security and Economic Crime or an American retired professional basketball player, depending on which Wikipedia entry you favour) finally got the idea: “We need to go after the people who have not played their part in hardening the environment and reporting.  So the purveyors of luxury goods, the public schools, the sporting institutions, who don’t ask many questions if suspicious people come along with cash or other activities, we will come down on them.”  In my opinion, such businesses have had enough chances to show that they are on the ball and looking out for dodgy transactions, and they have blown it – now is the time to amend the definition of high value dealer to include sellers of services.

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Getting the hump with money laundering

My father spent most of his working life abroad and when my mother and I were being awkward, he used to roll his eyes and say, “In a sensible country, I’d be able to trade you two in for a nice herd of camels or cattle – they don’t answer back”.  And it seems that beastly herds have other uses too.  A few days ago, livestock trader Syed Fazli Qayum filed an application with a court in Islamabad asking them to charge Pakistani former prime minister Nawaz Sharif with laundering billions of rupees through livestock gifts sent to the UAE, Kuwait and Saudi Arabia.  Also named as respondents were Sharif’s former secretary Fawad Hassan Fawad, Deputy Chief of Protocol Naeem Iqbal Cheema, the Ministry of Commerce, the Ministry of National Food Security and Research (Livestock Wing), the Federal Board of Revenue and the Director of the Animal Quarantine Department.  Mr Qayam’s application claims that proceeds of a fake bank account scam were used to buy livestock in Pakistan; the livestock were then exported to the Gulf states (in contravention of the Export Policy Orders of 2013 and 2016, which forbid the export of live animals because of a shortage of animals in the local market) and sold there, with the proceeds being paid into offshore accounts.  The application estimates the loss to the Pakistani exchequer at about 6.1 billion rupees, or about £35.7 million.

Mr Qayam cites specific trades: he says that in September 2017 Mr Sharif sent 2,500 cattle (worth about £1.9 million) from Pakistan to a member of the royal family in Saudi Arabia, while 1,100 camels (worth £2.6 million) were sent to the UAE and Kuwait on different dates.  More than 5,000 goats and sheep (valued at around £860,000) were sent to the UAE and Kuwait, while at least 700 cows and bulls and 50 buffaloes (worth £641,000) were sent to the royal family in the UAE.  In his application to the court – asking them to declare the gifts illegal – Mr Qayam states: “Despite being a banned item, the livestock was exported by the previous government as a gift parcel for money laundering [and] huge amounts of ill-gotten wealth is laundered under these gift schemes every year.”  And he asks the court to ensure that “all those found involved are proceeded against and the money laundered is recovered from them”.

And in case you’re now wondering the same thing that I am (i.e. how much were my mum and I worth back then), this means that a camel costs £2,364, a cow £760, and a goat or sheep £172.

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Once more with conviction

Every few months I indulge myself in a little daydream of doing a PhD in criminology.  Like all good daydreams, it’s rich in lovely feelings – imagine sitting in the library all day, thinking deep thoughts about money laundering, breaking off occasionally to have a cheese scone in the tea-room – and poor in detail.  I have no idea which aspect of money laundering would actually bear close examination for three years and – more importantly – I know that I would both hate and be useless at the statistical side of things.  Maths and I have learned to tolerate each other, but we are not natural playmates.  In this spirit, I bring you some money laundering-y numbers, recently published by the UK’s Solicitor-General in response to a question from an MP.

  • In 2017, there were 878 prosecutions in England and Wales under s327 of the Proceeds of Crime Act – concealing, etc. Of these, 537 led to convictions – or 61.2%.  [For comparison, the overall conviction rate in 2017 across all crimes and all courts in England and Wales was 86%.]
  • In the same year, there were 288 prosecutions under s328 – arrangements – leading to 225 convictions (78.1%).
  • In the same year, there were 737 prosecutions under s329 – acquisition, use and possession – leading to 581 convictions (78.8%).
  • And in the same year, there was one prosecution under s330 – failure to disclose: regulated sector – leading to one conviction (go on – you can do this one in your head).

The Solicitor-General gives a bit of background explanation: “The figures given relate to defendants for whom these offences were the principal offences for which they were dealt with.  When a defendant has been found guilty of two or more offences it is the offence for which the heaviest penalty is imposed.  Where the same disposal is imposed for two or more offences, the offence selected is the offence for which the statutory maximum penalty is the most severe.”  In most cases the money laundering conviction is going to attract the stiffest penalty, so these numbers are pretty much representative of action taken in the criminal courts against money laundering.  As for what to read into them, well, you’ll need to ask a PhD student.

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Debt and dishonour

One* of the best things about writing this blog is that lots of lovely readers send me great stories.  David in London (I’m using only his first name out of deference to his security background, but with that security training he will know immediately who I mean) spotted a great piece in the Evening Standard a fortnight ago and emailed it to me.  I did consider paraphrasing it, but on reflection it’s so well-written that I shall simply quote it in full:

It has emerged that up to 150 celebrities have been barred from receiving honours after the Government has taken to vetting people’s tax affairs before doling out the gongs.  Apparently they use a traffic-light system: red is for those under criminal investigation, serial tax dodgers or those who keep their dough offshore; amber is for those under non-criminal investigation or known to participate in one or more avoidance schemes; green is for the good children.

Much as we can all agree that tax avoidance is to be deplored, and that it should indeed debar you from an honour, there’s a problem here.  Up till now, any person of great eminence who remained plain Mr or Ms was assumed to have modestly, and privately, declined an honour.  Great kudos attached to this.  Now, though, people who have turned down honours will be widely suspected of being on the fiddle.

This seems a bit unfair.  Wouldn’t it be in the interests of openness and transparency — as well as more amusing for all the rest of us — if each year the palace published a nonhonours list, naming all those who would have got a K but didn’t because they are tax-dodging cads?

What a marvellous initiative that would be – although perhaps a “dishonours list” would be a better name.  The trouble is, how would we keep it down to manageable levels?  Once you start listing everyone who shouldn’t get a gong because of dodgy behaviour of some sort or other, well, that’s one giant can of worms.  Literally.

* Another of the best things is that I can write a post and then schedule it to appear at a later date.  This freaks people out, if I am in front of them during a training session and a blog post from me suddenly appears on their phone…

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