An MLRO of one’s own

At a training session recently, someone asked me about the reporting regime in their firm, and whether they had to send their SAR via their manager.  Oh no, I said – in fact, definitely don’t send it via the manager, in case the manager is the inside man for the laundering (this always gets a laugh); by telling them you’re suspicious, you could be tipping off.  And back came the question I have had a few times: what if the MLRO is the inside man?  And it’s a very fair comment: I have always thought that, were I to move over to the dark side, I would do my best to buy a tame MLRO and then feed all of my money through his institution, safe in the knowledge that his staff can be as suspicious as they like but he’s not going to pass on anything to the authorities.  So have we had any instances of corrupt MLROs – or, in the current vernacular, professional enablers holding the role of MLRO?

I must admit that I can’t think of any.  We’ve had lazy MLROs – Mr Hussain at Habib Bank comes to mind.  Back in May 2012, the UK’s FSA (as it then was) fined him £17,500 for poor performance in almost every area of his MLRO duties, from designing the due diligence procedures to overseeing them, from training staff to sharing AML information with his board.  And we’ve had MLROs whose behaviour sailed so close to the wind, such as Mrs Jardine in Jersey in 2015, that they have been banned from working in their regulated sector.  But I don’t think we’ve had an MLRO who has been shown to be willingly complicit with criminals.  Or perhaps they are so good at this that we haven’t yet spotted them.  One thing’s for sure: they’d be past masters as laundering their corrupt payments.

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In praise of the lecture

I’ve had an epiphany.  I’ve been training people for a quarter of a century now – longer, if you count the innocent young minds once given over to me by the National Curriculum – and I’ve realised something important.  I don’t like interactive training.  Let me qualify: I don’t like role playing or group scenarios or breakout rooms.  I don’t think they work or are necessary in the AML environment.  Sometimes a client will say that they want the training to be “very interactive” so that staff can “practise their AML skills”.  AML skills?  You mean reading and writing and thinking and talking to their colleagues?  I can understand that a pilot or a surgeon or a chef might need refresher interactive training to practise their skills, which have a significant motor component to them, but AML?

My version of interactive training is different.  I encourage – love, even demand by shameless nagging – questions and debate.  I enjoy presenting and discussing money laundering case studies, and situations where AML responses have been deficient.  And in long training sessions, I always suggest including a money laundering themed game for light relief.  But to create – as I am sometimes asked to – a money laundering worked example that people can use for practice seems to me to be worthless.  For a start, for it to be anywhere near realistic and complicated enough to stretch them, it would need to be played out over days, even weeks, rather than in thirty minutes.  And it would require role play – someone to be the difficult client, someone to be the unbelieving director – and if your staff had wanted to be actors, they wouldn’t have taken jobs in the regulated sector.  These are the readers, writers and thinkers of our community – not the actors or the detectives.

So what do I see as my training role, if not as a facilitator of practice sessions?  Well, I think that people have plenty of time in their jobs to practise their AML reading, writing and thinking skills – they do that all day long.  What they don’t have time to do is research all the latest AML trends, techniques, regulatory thinking, legislative plans, government pronouncements, cases and scandals, and then decide which of these are relevant to their jobs.  So that’s what I do for them: I distil all of that information and present it to them in a digestible form so that they can absorb the nuggets that are of most value.  I tell them about it, and I encourage them to ask questions about it and consider its significance for them and their work.  In short, I am paid to be a know-it-all on their behalf.

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Panama: a drop in the ocean

So the Panama Papers are Out There.  Hands up who has gone into the database and searched on their own name….  Of course I did, with such an unusual name – not that I have ever done anything myself, you can be sure, but because I thought some money launderer with a wicked sense of humour might have stolen my identity for his own ends.  But nothing.  I was checking merely out of morbid curiosity, but for one friend of mine, it was a matter of great seriousness.  Regular readers of this blog will know that I have a friend who used to be married to a money launderer but is now a staunch supporter of the AML cause.  As soon as the database was made public, she was online, and here’s what she found (I have edited slightly to protect her identity and that of her children, but otherwise, it’s just as she put it):

“Yep, my ex is mentioned in the Panama Papers [but] I am happy to say I am not!!  My son said that when he was in Monaco, he had to do some archiving for his dad – moving boxes to a cellar one street further.  That is how he always has kept some more sensitive files, out of reach of an eventual search warrant.  I think my ex is actually good at his ‘job’ because the real beneficial owners of those accounts (his clients) are not mentioned [in the Panama Papers].  He has a big client in Belgium [but] at the time, my ex’s best friend from his childhood years, now living in Australia, was the official owner of the company – they even used to organise official visits of this ‘owner’.

“I looked up [in the Panama Papers, and without finding him] one of his clients that we used to see a lot, [an American], [who] is so corrupt!  He deals with government officials in the aviation business everywhere; I remember a Canadian minister getting $500,000 to sign the purchase of an Airbus.  But the whole deal was corrupt.  At the time I was working for a Lloyds of London insurance broker in Monaco, and I was allowed to quote for the insurance.  But then I saw that the value they put was wrong, and I pointed this out to Lloyds of London, that it must have been a mistake (I was so innocent…).  So obviously the insurance was more expensive.  Oh, the client was not happy…  These are just the things I know, so you can imagine how corrupt the whole deal just was.

“My ex had a whole range of friends and relations who acted as company directors.  They would be living in a jurisdiction where they would be harder to touch, e.g. in Monaco, you cannot be sued for fiscal fraud, so no international warrant will ever be issued against you there.  My ex is director of 175 companies… (he is mentioned only 8 times in the Panama Papers, so you see that is just a drop in the ocean).”

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An oversight oversight over there?

One of the joys of writing a blog is that it’s like having an informal team of researchers, or moles even, looking out for money laundering stories for me.  I adore anti-money laundering as you know, but I’m just one person and I can’t read everything on the subject, so these extra eyes are invaluable to me.  And last week top mole Tess in the Isle of Man sent me a link to this story about the Irish gambling sector.

I do quite a bit of work for gambling regulators, one way or another, both bricks and clicks, so I was very surprised to read that the Irish gambling sector has no AML supervisor.  Gambling businesses in Ireland – casinos, dog-tracks and betting shops, for instance – do have to get a licence, which entails a fit and proper test, but they are not covered by the local AML requirements (as defined by the Criminal Justice [Money Laundering and Terrorist Financing] Act 2010) and have no AML supervisor.  Crucially – and this is the main thrust of the article that Tess spotted for us – they are under no obligation to report suspicious transactions.

Now doesn’t this seem like something of a large gap in the Irish provisions?  A piece of legislation intended to address this was put out in draft form in July 2013: the Gambling Control Bill.  This would create a new regulatory authority, issue licences, prohibit super-casinos (with more than fifteen tables) and much more, intended to protect the sector from criminal infiltration and its customers from gambling addiction.  Sadly, the bill has not progressed an inch, and none of these proposals has been implemented.

I am a simple creature at heart, and I find this confusing.  I know we’re all about the Fourth Money Laundering Directive these days, but cast your mind back to its predecessor.  And Article 10 of the Third Money Laundering Directive says: “Member States shall require that all casino customers be identified and their identity verified if they purchase or exchange gambling chips with a value of €2,000 or more.”  So just how has Ireland been checking that this has been done since 15 December 2007 – the implementation deadline of MLD3 – without an AML supervisor?

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Make mine a Jaffa Cake

I wonder if anyone has ever invited Rory Sutherland to be an MLRO?  I ask only because several of his recent Wiki Man columns in the Spectator magazine, although ostensibly about (I think) psychology as it relates to business and consumers, have given me all sorts of AML-ish ideas.  The one dated 7 May 2016, for instance, is entitled “Tea and honesty” and discussed the moral obligation placed on us to behave honestly and ethically to someone who has been generous to us.  His argument is his to make, and he makes it very well, but what pulled me up short was this: “It is human nature to feel far more shame in overcharging someone who buys you lunch that in skimming profits from the face owner of account number 567842/06b.”

Hmmmm.  If we transpose that, so that “overcharging” becomes “laundering money through”, perhaps we can turn this to our AML advantage.  If indeed, as Mr Sutherland concludes, “you risk greater shame and moral outrage for cheating a benefactor than a stranger”, this could be a fairly efficient and cost-effective way to influence the behaviour of clients (and indeed staff).  The example the Wiki Man uses is that of the current vogue for not providing visitors with hot drinks and biscuits, as a cost-cutting measure.  But this is a mistake, he contends, as it removes some of the social niceties that foster this feeling of obligation, which in turn can prompt us to behave better.  With one eye on the Bribery Act, none of us is advocating a return to eye-wateringly sumptuous expense account lunches, but simply treating a client as a valued and welcome visitor rather than a biscuit-snarfing cost-centre would be a good start.  And if staff are treated with generosity and dignity rather than – as in one office I visited recently which shall remain nameless (and soon, no doubt, staff-less) – told that bottles of mineral water are to be locked away for “important people”, they will repay the act with good work and loyalty.

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Bye bye banknote

Usually news about banknotes focusses on their design (we’re getting Turner and the fabulous “Fighting Temeraire” on our new £20 note in 2020), their devotees (the New Zealand $5 note has just been named Banknote of the Year for 2015) or their general demise (we’re all going to hell in a hand-basket, and funding the trip with bitcoins).  But on 4 May the European Central Bank dropped something of a bombshell when it announced that from the end of 2018, it will no longer produce the €500 euro note, although the ones that are already out there will remain legal tender.  The rich purple paper has long – police maintain – been a favourite with criminals, who value its, well, value: you can carry a lot of money in a few notes.  A million euros in €500 notes weighs just 2.2kg, and fits into a laptop bag.  The ECB’s more restrained reasoning is that there are “concerns that this banknote could facilitate illegal activities”.  According to ECB statistics, the €500 note accounts for 3% of the total number of banknotes in circulation, but 28% of the total value.

In the UK, of course, we took action on this some time ago: after a large money laundering case involving bureaux de change and sacksful of the note, the €500 euro note was banned from sale in the UK on 20 April 2010.  You can still tip them in here – sell them to a bureau de change, or deposit them into your bank – but you can’t get them out.

The €500 note is actually only the third most valuable in the world, among notes that are in regular circulation: top spot goes to the Swiss 1,000 franc note, followed by the Singapore $1,000 note.  The UK’s most valuable note is actually quite small – the £50 – but there are those, among them the former boss of Standard Chartered, Peter Sands, who think that this note too should be withdrawn, to discourage cash-in-hand tax evasion by builders and plumbers.  Mind you, I have to say that my real challenge here in Cambridge is not finding a £50 note, but finding a plumber.

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Order, order – Unexplained Wealth Order

There’s nothing new under the sun, they say, and Unexplained Wealth Orders certainly comply with that dictum.  On 21 April 2016 the UK government announced its action plan (these days a simple plan is not enough: it must be galvanised and girded with action) to tackle money laundering and terrorist financing.  As part of the action, there are now two live consultations – one on the UK’s AML supervisory regime (which came in for much criticism from Transparency International) and the other on AML legislation.  (Of course I will be sending in my comments.  Have you ever known me to ignore a call to express my view on anything to do with money laundering?)  One of the proposed changes to the legislation is the introduction of UWOs, to (as the consultation has it) “require individuals to declare their sources of wealth”.

Of course MLROs and their staff have been making, or trying to make, enquiries into their clients’ (or at least, their high risk clients’) source of wealth for years.  But this would be a court order – a legal compunction.  UWOs already exist in a few jurisdictions, including Ireland (where they are known as POCA Orders, as they are provided for in the Proceeds of Crime Act 1996) and Australia.  They have been very successful in the former country and rather a damp squib in the latter.  And I know this because the Americans have very thoughtfully done a lot of research into UWOs and published their findings.  Transparency International has also had a think about them, and they consider that – with “guarantees to avoid the mechanism to be abused and to ensure constitutional guarantees, such as due process and presumption of innocence, are respected” – UWOs could be a useful anti-corruption tool.

No doubt Mrs May and her advisers are alert to all of these deliberations and discussions, and will address all concerns in a timely fashion.  MLROs, meanwhile, will probably smile indulgently and wish her the best of luck with what has proven, in their experience, to be very much easier said than done.

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Seek and ye shall find

At least once a month someone, on hearing my line of work, will have a go at me about how “money laundering” has got in the way of their opening a bank account, getting a loan, buying a house or some other financial activity without “having to give them loads of information”.  I just smile and nod and trot out the usual explanation that the law is actually quite reasonable but sometimes financial institutions blame it when they are collecting information for other purposes (to safeguard their investment, for instance, or to sell you more stuff).  But sometimes the AML legislation does have unintended consequences.  When the sale of marijuana for recreational purposes was legalised in several American states in 2014, for example, the businesses that set up to sell the stuff quickly found that they could not get bank accounts.  If a bank accepts money from the sale of an illegal substance it is laundering that money, and most banks did not have their head offices in the states where the sale of pot was now legal.  I am told that the cities where pot sales are highest (boom boom) – such as Denver – are now criss-crossed by armoured vans full of cash, collecting from licensed shops and paying authorised suppliers, as none of them can use the banking system.

And it appears that a similar situation is developing in western Europe, where AML requirements are making it difficult for a certain class of legal customer to get access to financial services – this time, it’s asylum seekers.  The situation is particularly acute in Sweden, now home to one of the highest number of migrants fleeing conflicts in Syria, Afghanistan and elsewhere in the Middle East.  In 2015, 163,000 migrants headed to Sweden, attracted by its generous asylum laws and well-functioning welfare system.  But so far, according to Swedish Financial Markets Minister Per Bolund in an interview in April 2016, fewer than 500 of them have so far found a job.  And the main reason?  If a bank cannot verify an applicant’s identity, it will not open an account for him.  Asylum seekers – in legal limbo as they are – often lack the standard identity documents that a bank would want.  And without a bank account, it is not easy to receive a salary in a sophisticated western country.  The irony is even greater as in Sweden there are jobs aplenty for the asylum seekers: the country is currently experiencing an economic boom, and the government has said that 700,000 new homes need to be built by 2025 to address a housing shortage created by population growth – which means that about 10,000 workers will need to be recruited each year in the construction industry alone.

Step forward the European Banking Authority, which on 12 April 2016 issued an Opinion on the application of CDD measures to asylum seekers, stating that asylum seekers’ access to financial products and services is “important and necessary”.  A well-written and helpful document, it offers a solution to ensure that asylum seekers can gain access to essential financial services: “In most cases, money laundering and terrorist financing risks – including those associated with weaker forms of customer identification – can be managed effectively by offering a more limited range of services or setting up stricter internal controls, which will facilitate early intervention in the event of suspicion.”  Perhaps we should get the EBA to say something about de-risking: they sound a sensible, practical and compassionate bunch.

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Slaves to the legislation

In recent weeks there has been a huge amount of soul-searching and hand-wringing about money.  Much of it has concerned the slippery distinctions between tax evasion, tax avoidance and aggressive tax avoidance, with phrases like “morally repugnant” being bandied about (followed swiftly by accusations of hypocrisy and elitism).  We all – barring perhaps a few hermits and maybe the Dalai Lama – have a vexed relationship with money, with our attitudes forged early in life as we either mirror or rebel against the attitudes of our parents.  My parents were both poor as children and made good later, but always retained a care with and great respect for money.  Brought up in an affluent household, I nonetheless imbibed their concern that it might all disappear one day, and as a result I am a saver of epic proportions and am rather sniffy about people who are profligate with money.  In her excellent “Point of View” a couple of Sundays ago, the author Sarah Dunant explained her own “conflicted” relationship with money.

But interesting though this all is – and personally I’m fascinated to see what anti-avoidance measures will look like (it’s a bit like trying do something about those big holes that some people create in their earlobes: most people don’t like them, and indeed they can make you feel a bit squeamish when you look at them, but as they’re not actually illegal, it’s live and let live) – we in the AML community must not lose sight of the simple definition at the heart of all that we do.  Money laundering is perpetrated on – and confined to – the proceeds of crime.  And proceeds of crime are generated by criminal acts.  So we might find the sale of fur coats or abortions or sexual favours to be morally repugnant, but that’s nothing to do with our job.  Our job is to look out for, prevent and react to money laundering – we are slaves to the legislation.  We can campaign and activate and vote for change as we wish, but our AML duties are (mercifully) clear.

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No escape for NY compliance officers

Ever since it burst onto the regulatory scene in 2011, the New York Department of Financial Services has specialised in ruffling feathers.  In August 2014 they stepped out of line with all other regulators (who were considering a united approach) and issued their own penalty of US$300 million against Standard Chartered for AML failings, while in June 2015 they lost patience with international foot-dragging on the matter and announced their BitLicense, “the first comprehensive framework for regulating digital currency firms”.

And now they’re at it again.  On 1 December 2015, they issued a proposed AML regulation that, inter alia, requires chief compliance officers of banks and money transmitters to annually certify that, “to the best of their knowledge”, their monitoring and filtering programs are in compliance and that they had reviewed, or caused to be reviewed, those programs.  These poor souls will then be held personally liable for the effectiveness of the AML transaction monitoring and sanctions screening regimes of their institutions.  And criminally liable: “All regulated institutions shall be subject to all applicable penalties provided for by the Banking Law and the Financial Services Law for failure to maintain a transaction monitoring program, or a watch list filtering program complying with the requirements of this [regulation] and for failure to file the certifications required…  A certifying senior officer who files an incorrect or false annual certification also may be subject to criminal penalties for such filing.”  This is not actually a surprise development: earlier this year, DFS then-supremo Benjamin Lawsky indicated that the regulator would start holding bank executives personally accountable for their institution’s AML and sanctions shortcomings.

The Rockefeller Center skating rink, Rizzoli’s bookstore and the Metropolitan Opera House may not be enough to make up for this.

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