You can lead a horse to water

As you know, at the end of June we were gifted with new AML legislation here in the UK.  One of its main features was an absolute clarification about the AML status of estate agents: “In these Regulations, ‘estate agent’ means a firm or a sole practitioner, who, or whose employees, carry out estate agency work, when the work is being carried out”, and “for the purposes of these Regulations, an estate agent is to be treated as entering into a business relationship with a purchaser (as well as with a seller), at the point when the purchaser’s offer is accepted by the seller.”  Until June, there was some (perhaps disingenuous) confusion among estate agents about whether we could really, possibly, actually mean them – but now it’s clear that we do.

I do already have a small number of estate agency clients, and a couple of them had previously asked me to write a piggy edition for them.  I had demurred, on the grounds that I wouldn’t sell enough to cover my costs.  Ignoring the time I spend writing a piggy book – not that the time’s not worth anything, but it is my choice to do it – there are still actual costs involved.  The books are self-published, and I have to pay a cover designer to (you’re ahead of me here) design the cover.  For the piggies, that comes in at £99 a cover.  When I sell a (staff, rather than NED) piggy through Amazon, Amazon charges the buyer £5.99, and I eventually get £2.03 of that.  So to pay for the cover, I need to sell forty-nine copies of the book.

When the Regs were updated so crisply, I re-thought my position on the estate agency piggy.  Surely, I reasoned, with all the publicity about the new Regs, and all those estate agents who thought they were excused suddenly realising they are not, and all the negative press about the UK property sector being abused by money launderers, and the medium risk rating for the sector in the National Risk Assessment, well, they’ll be biting my hand off to get some accessible and digestible information for their staff.  And so I wrote like a demon and got the estate agency piggy out within a week of the Regs appearing.  I alerted the various estate agency trade bodies, I tweeted, I emailed every estate agent I knew, I contacted the estate agency press.  And the response has been: pffffff.  In July I sold five copies.  I guess we’re waiting for a high profile regulatory fine to focus the mind – for which all hopes are pinned on HMRC.  Those piggies may be waiting quite some time to be rehoused.

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Some are more equal than others

The connection between PEPs [politically exposed persons] and money laundering is recognised: with access to public influence and public money, these individuals in positions of high public service can fall prey to their baser desires and start feathering their private nests with public, well, feathers.  The accepted definition of PEPs has recently been updated in EU Member States to include homegrown domestic PEPs as well as foreigners, and “grand corruption” is (quite rightly) under fire from all sides.

What is interesting, however, is seeing what happens to PEPs who are accused of (some combination of) illegal enrichment, corruption and money laundering.  Of course, their very PEP status does mean that they will be a target for political enemies who wish to blacken their name, and an accusation of corruption is a good place to start – so an accusation is by no means always well-founded.  But still, the differences can be stark.

On 14 July 2017 it was announced that the former president of Peru, Ollanta Humala, and his wife Nadine Heredia had been placed into pre-trial detention to await the preparation of a money laundering case against them – which will take about eighteen months.  They deny all charges and have handed over their passports, but the courts have deemed them a flight risk.  Humala is now being held in Barbadillo prison, whose only other inmate is his political rival Alberto Fujimori (serving a 25-year sentence for human rights abuses).  It is unlikely that the two will socialise.

In the same week, Brazil’s former president Luiz Inacio Lula da Silva was sentenced to nine-and-a-half years in prison for corruption and money laundering.  However, it was not “go straight to jail, do not pass Go” for Lula: Judge Sergio Moro was minded to feel sympathy for him.  He said that said he would not order Lula to be arrested and imprisoned because the conviction of a president is such a serious matter that an appeal should be heard first.  Perhaps Judge Moro also has an eye to his future career: Lula, who was president between 2003 and 2010, is currently leading the polls for next year’s presidential election in Brazil…

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Ladies first

In an era when we have the first female Doctor Who, female heads of the Met, the London Fire Brigade and the London Ambulance Service, and a female sort-of-Prime Minister, it is perhaps only right that women should be in the money laundering ascendency as well.  We have had plenty of instances of men being the instigators and their female significant others allowing their accounts to be abused, or paying in money, or otherwise playing a subsidiary role.  But a recent case from Shropshire reversed the roles, when a female finance director pinched £660,000 from her employer and used her husband’s personal and business accounts to launder it.

Personally I am an equal opportunities loather: I hate all money launderers, regardless of gender, sexual orientation, religion, appearance, colour, nationality, age or state of physical/mental health.  But professional criminals know that courts often think differently – particularly when more traditional individuals are on the bench or in the jury box.  Moreover, there has been – quite rightly – concern that sentencing courts do not take enough account of the damaging impact that custodial sentences can have on the children of imprisoned primary carers (usually, mothers) and there has been a call for courts to “be more lenient to women criminals”.  Again, professional criminals know how to work the system, and for decades the mafia, for instance, have entrusted their female family members with the money laundering.  It’s not the sort of equality that women usually seek, but perhaps it is a real sign of the times that female criminals are now doing the same.

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The law of the wild

In a quest to find a country that is still outward-looking and welcoming, I am going to have a look at Canada this summer.  Although I will still be keeping a weather eye on all things AML, please note that for the next month this blog will feature only one post a week, on Wednesdays.  Normal service will resume in September.

Despite its socially liberal tendencies, generous immigration policy and media-friendly PM, all is not perfect in what its inhabitants like to call the Great White North.  In May 2017, a Vancouver lawyer called Donald Gurney was found guilty of professional misconduct by the disciplinary panel of the Law Society of British Columbia.  The panel determined that Mr Gurney had ignored “a sea of red flags” by allowing C$25,845,489.87 [about £15.7 million] of offshore cash to pass through his trust account between May and November 2013, while he made no enquiries at all about who the lenders were, the source of the funds or the client’s intended use of the money.  He did however recognise “the risk involved”, and so he charged a tenth of one per cent as his fee but did no legal work for the client.  The panel was not impressed with the lawyer’s attitude: “He was evasive in that he would not answer questions put to him and was self-serving with regard to his knowledge of the Law Society accounting rules.”

You might think that this sort of behaviour would embarrass Canada’s legal fraternity, but far from it.  In its most recent mutual evaluation  of Canada – published in September 2016 – the FATF observed that “all high-risk areas are covered by AML/CFT measures, except legal counsels, legal firms and Quebec notaries – this constitutes a significant loophole in Canada’s AML/CFT framework”.  And the situation has yet to be rectified, not least – in fact, in main – because of opposition from the legal sector itself.  Ironically, a decade ago Canada was one of the first countries to propose legislation pulling accountants and lawyers into the AML family.  Accountants acceded graciously, but the very Law Society of British Columbia that has chastised Mr Gurney has also successfully fought all proposals to include lawyers in AML requirements.  On 13 February 2015 the Supreme Court of Canada found that the wording of the latest draft legislation breached the constitutional right to attorney-client privilege – and no new provisions have been submitted since then.  Frankly, it is an embarrassment for Canada (a dangerous embarrassment), and I shall give a special Paddington hard stare to any local lawyers that I encounter on my travels.

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Feeling the benefit

One of my very favourite things in my professional life is the concept of criminal benefit.  I like what this says about our attitude to crime and those who commit it.  Put very simply – and I am sure a lawyer or asset recovery specialist could elaborate enormously – when decisions are being made in sentencing and confiscation hearings, what matters is not the amount of money the criminal originally stole or made illegally, but what benefit he has accrued from that money.  In a ridiculous example, if someone picks my pocket and steals a pound and then buys a lottery ticket with that pound and wins a million quid, then their benefit is one million pounds – and any subsequent confiscation proceedings will seek to recover the million, not just the original pinched pound.  As you can imagine, criminals are not keen on this way of calculating things.

But there’s no getting away from it, as a recent case confirmed.  Between early 2010 and late 2011, Cornishmen Gary Fulton and Daniel Wood were involved in a missing trader scam – a sort of carousel fraud.  In June 2016 they both pleaded guilty to money laundering and were jailed – Fulton for four-and-a-half years and Wood for seven.  In June 2017 they appealed (R v Fulton and Wood 2017 EWCA Crim 308, for those of you who track these things), on the basis that their sentences had been calculated on the total amount laundered in the scam (there were demonstrably 597 transfers involving about €35 million), with the judge assessing the relevant harm as £30 million.  Fulton’s defence, however, contended that the relevant loss was the loss to foreign revenue authorities, and as the tax in Germany was 19% and that in the Czech Republic 20%, the relevant harm was only £6.1 million.  Moreover, as Fulton claimed that he was involved in only 60% of the trading, he felt that his sentence should be based on 60% of £6.1 million, making £3.6 million.

Sadly for the two gentlemen concerned, the Court of Appeal was not with them on this point, noting that it is inherent in the concept of money laundering that criminal property will be mixed with other money in the financial system.  Thus the criminality of the offence must be gauged by the nature and scale of the laundering, not the nature and scale of the underlying crime.  As the appeal judges correctly observed, it is the whole amount involved, not merely the part that comprises criminal property, which impacts the financial system.  Dismissing their appeals, Mr Justice Popplewell said the original trial judge was entitled to take the whole sum into account when considering how serious their roles were.  Sitting with Lord Justice Gross and Judge David Griffith-Jones QC, he added: “We take the view the sentences were not excessive, let alone manifestly so.”  And so say all of us.

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Near-o tolerance

A recent article in the Economist made a very valid point about recent AML endeavours – that sometimes they can have unfortunate consequences.  I have blogged quite a bit about “de-risking”, or what the FATF calls “the wholesale cutting loose of entire classes of customer”.  In the past year, dire warning about the dangers of dealing with money service business and with charities have resulted in these businesses finding themselves unable to open bank accounts or send wire transfers.  As the Economist explains, echoing the FATF’s own concerns, what this does is send these businesses into the arms of the unregulated financial system, so that even legitimate transfers with no criminal undertones are now impossible to record and monitor.

The Economist is clear where it thinks the fault lies: “Popular though it has become to bash banks, they have been acting rationally.  The blame for the damage that de-risking causes lies mainly with policymakers and regulators, who overreacted to past money laundering scandals.”  However – and not that they need it, as they’re big enough to defend themselves – I feel that it’s important to point out that the FATF has always suggested that financial services firms should take informed decisions, not the wholesale approach.  Moreover – and crucially – they also accept that mistakes will occasionally be made, but that the application of the risk-based approach is so much the better way that occasional failures should be accepted.  In the statement they issued after their plenary meeting in October 2014, they were quite clear: “The risk-based approach should be the cornerstone of an effective AML/CFT system, and is essential to properly managing risks.  The FATF expects financial institutions to identify, assess and understand their money laundering and terrorist financing risks and take commensurate measures in order to mitigate them.  This does not imply a ‘zero failure’ approach.”

Institutions have sometimes used AML as an excuse – a scapegoat – for doing things the way they want to, from demanding certain documents to refusing business.  And de-risking is simply the latest example of this.  The AML intention as viewed by regulators is always to make a reasoned, risk-based, individual response to a situation, but – as the Economist points out – profitability is thrown then into the mix: “No wonder banks dumped less-profitable clients tainted by the merest hint of risk.”  The article calls for “a new approach to financial regulation – one that accepts mistakes can be made in good faith”, and I would contend that this is what we have already.  What we need to balance it is a new approach to AML by institutions – one that accepts that all AML decisions must be made in good faith.

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Standing my AML ground

Money laundering and I – or rather, AML and I – have been on intimate terms for more than two decades now.  The muscle memory in my fingers is such that I cannot type the word “money” without following it with “laundering”, and almost any word beginning with a capital M ends up as “MLRO”.  I feel rather protective of AML, even maternal towards it.  We’ve been through a lot together.  We weathered the storm in 2005 when the Third European Money Laundering Directive allowed that upstart, that impostor, that johnny-come-lately terrorist financing to have equal billing, so that all of a sudden everyone wanted to talk about some hybrid creature called AML/CFT (and sometimes AML/CTF – even uglier).

But recently things have Gone Too Far.  As I have said in earlier posts, the new AML legislation in the UK has the most ghastly name: the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 – so that’s someone else muscling in on AML territory.  And in Guernsey they are now talking of renaming the MLRO as the FCRO – Financial Crime Reporting Officer.  The cuckoo in the AML nest.

I am often asked whether I can deliver training on “financial crime, including money laundering, corruption, tax evasion, cybercrime and so on”.  To me, this makes little sense.  Money laundering is not a financial crime: it is the financial crime.  All of the others are simply crimes that generate money – with some of them doing it by abusing financial institutions.  Once the basic crime is committed – whether it’s drug trafficking or bribery or cyber-fraud or art theft  or tax evasion – the criminals proceeds are then available for the main event: money laundering.

Money laundering is not like other crimes: it is not done to make money, but rather to preserve and disguise money from other activities.  (Granted, there are a few professional money launderers who make their living from money laundering, and when we consider how to prosecute them – for laundering the proceeds of laundering – it’s something of a legal minefield.)

So please: let’s restore money laundering to its rightful place as the financial crime supreme, the one that touches every other acquisitive crime.  Demoting it to the status of a standalone crime, just something else that can be done to make money, downplays its importance, its spread and its danger.  AML for one, and one for AML!

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Measuring the uncountable

One of the hardest aspects of any AML regime is measuring its effectiveness.  A bit like insurance, it’s trying to quantify what might have happened if you hadn’t had it.  (That sounds like a nightmare sentence from the translation paper of my French “O” level!)  The FATF has struggled with this, and in 2013 it brought in a revised mutual evaluation methodology to include an effectiveness element which focuses on “the extent to which the legal and institutional framework is producing the expected results”.  And one of the outcomes that it measures is the use of financial intelligence, for instance by gathering “information on STRs (e.g., number of STRs/cases analysed; perception of quality of information disclosed in STRs…”  To those tasked with hosting an FATF (or FATF-style) mutual evaluation in their jurisdiction, this must come as a blessed relief: at last, something that can actually be counted – although “perception of quality” opens another can of AML worms…

Nonetheless, in recent years we have seen much more openness from FIUs about their work – at least at this statistical end of things.  And the Italians are the latest.  In a widely-reported presentation, Claudio Clemente – Director of the UIFI, Italy’s FIU – announced that there has been a “trend of exceptional growth in the influx of reports which, in 2016, reached 101,065 overall, a level eight times higher than was reported when the FIU was established [ten years ago]”.  Now this sounds good – or does it?  If more reports are made, does that mean that more money laundering is being spotted?  Or that more money laundering is happening, and actually the proportion of it being spotted is the same?  Or – if there’s a spike in reporting in one year, for instance – could the heightened vigilance be attributed to something like a tax amnesty, or a local banker going to prison, or even something as pedestrian as the improvement of the reporting mechanism or form?

“Perception of quality” is just as hard to pin down.  Signor Clemente tells us that 60,000 of the reports made in 2016 – 70% of them – were deemed by the Financial Guard’s Special Unit of the Monetary Police to be “of investigatory interest”, which suggests that there was something in them.  When I read annual reports put out by FIUs, there is rarely any mention of the quality of the SARs that they receive, beyond the bald fact of how many are passed on for investigation.  Anecdotally, I am told that things are improving all the time: MLROs are learning what FIUs will need to know in order to launch an investigation, and FIUs are learning what MLROs can and cannot be expected to know about their clients.  But, as with almost everything in the AML world, the improvement is hard to measure.

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Yippee – more acronyms!

Last week I discovered that something that exercised me a great deal – the “once a PEP, always a PEP” stance of Guernsey, Jersey and the Isle of Man – did not seem to concern the MLROs in those jurisdictions (or at least the ones who read and comment on this blog – in person, many tell me that it is a pain in the due diligence backside).  And as Guernsey puts out its draft updated regulations and Handbook for consultation, I find myself in a similar position.  They have proposed two innovations which I think will cause workability difficulties for MLROs – but I may well be wrong.

The first is the introduction of a new layer of due diligence.  We have the familiar CDD, and its variants SDD and EDD (although these have been renamed SCDD and ECDD), but then, to quote from the draft Handbook: “In addition to customers assessed by the firm as posing a high risk… and for which ECDD is to be applied…, there may be circumstances where the firm enters into or continues a business relationship, or undertakes an occasional transaction, with a customer which exhibits one or more of [these] characteristics: (a) the customer is not resident in the Bailiwick; (b) the firm provides private banking services to the customer; (c) the customer is a legal person or legal arrangement used for personal asset holding purposes; (d) the customer is a company with nominee shareholders or that issues shares in bearer form…  [In these circumstances] the firm shall undertake ACDD [additional customer due diligence] in order to mitigate the particular risks arising.”  And then a description of what ACDD is appropriate for each of the four circumstances cited is given – such as “understand the reason(s) behind the customer seeking to establish a business relationship or carry out an occasional transaction in the Bailiwick”, and “take reasonable measures to establish the source of funds and source of wealth of the customer”.

Personally I find this confusing.  Isn’t this meant to be part of EDD (sorry, ECDD)?  Is it taking away some of the latitude granted by the risk-based approach, and specifying situations in which ECDD-ish measures must be taken?  As I say, I may well be being over-sensitive about this: what do you MLROs – who (if you were in Guernsey) could have to apply this new regime – think of it?

And this brings me to my second point of concern: the MLRO.  For the Guernsey MLRO will soon, if the draft gets it way, be a distant memory.  Instead, we will have the Financial Crime Reporting Officer (FCRO) and the Financial Crime Compliance Officer (FCCO).  Quite apart from the implication that the poor old MLRO will now have to become expert in assessing suspicions of every type of financial crime (fraud, cyber-fraud, identity theft, corruption, tax evasion, etc.), I do wonder about the wisdom of creating a job title that will be instantly unrecognisable to other jurisdictions.  Neighbouring Jersey already has enough trouble explaining its MLRO/MLCO split to the rest of the world.  And although I can see the benefit in trying to emphasise that it’s not all about money laundering (there’s terrorist financing too), I do worry that it’s going to end up like my one-woman campaign against the term “road tax”.  (It’s not road tax, it’s vehicle excise duty, calculated on the engine size and emissions of the vehicle, which is why I don’t have to pay it for my bicycle – but that doesn’t cut much ice with van drivers who yell at me that I should pay road tax or get off the road.)  I can tell the GFSC from long experience that being technically right but out on a limb is energy-sapping and ultimately a waste of time.  But again, I may be making an MLRO mountain out of an FCRO molehill – what do you think?

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Thoroughly Modern Piggies

So tell me: what did you do this weekend?  Sit in the garden?  Sail to France?  Slap a few prawns on the barbie?  I did none of these: instead, I sat at my desk, surrounded by the new Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, wielding a red pen, and updated five piggy books.

But let’s start at the beginning.  On Friday I was minding my own business, writing an article, when an email came in announcing that HMT had put out a press release about the new Regs.  “Crack down on terrorist and criminal financing”, said the headline. “Terrorists and criminals will find it harder to move money through the UK financial system thanks to new rules coming into force on 26th July 2017.”  I did a double-take: July?  Had we missed the deadline by exactly a month?  Was it normal to bring out new Regs on a Wednesday?  Or was it a misprint?  I called everyone I could think of at HMT – barring Gladstone, the Treasury cat, who never gives much away – and eventually tweeted them.  After an exciting hour, it was confirmed that it was indeed a typo, and that we were all systems go for the MLD4-sanctioned deadline of 26 June.

As for the major changes, well, I don’t want to spoil your fun as you hunt for them yourselves, but there’s a lot about risk assessment (the government must do a national risk assessment, supervisory bodies must do sectoral risk assessments, and firms’ in-house risk assessments must take these external ones into account).  “Where appropriate with regard to the size and nature of the business” you must: appoint a Board member or similar senior person to be responsible for AML/CFT compliance (and give their name to your regulator); and establish an internal audit function to check your AML/CFT efforts.  If you can’t identify a beneficial owner, you must keep records of all your attempts to do so – I’m really not happy with this one.  There’s plenty of information about EDD – when it must and could be applied, what it must and might entail, etc.   And then there’s that change to record-keeping that I highlighted before, with one small alteration: if you’re looking at transaction records in the context of a client relationship, you must keep them for ten years, or for five years after the end of the relationship, whichever comes first.

The piggies, as I say, are all updated and raring to go – forgive the plug, but now that I’ve spent a whole weekend force-feeding them the new Regs, I want to see them flourish.  Thanks to the magic of print-on-demand publishing, there are no piles of old stock lying around – in a rather fairytale way, no piggy exists until someone orders him.  The link to the updated piggy for UK NEDs can be found here, and the updated four piggies for staff in the UK regulated sector (accountancy, banking, insurance and investment versions) can be found here.

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