Back to school

When I was eleven I spent four terms in a girls’ boarding school in Worcestershire – as an only child I did not take well to the lack of privacy, and by far my fondest memory is of a day spent sliding down the Malvern Hills on a tea-tray pinched from the school kitchen.  I also remember having to queue up on Sunday evening for our housemistress to dole out our pocket money: she had an enormous ledger and we had to sign against our name to show we’d had the dough.  It seems that not all public schools are as diligent when it comes to monitoring transactions.

I’ve been banging this drum for a couple of years now, suggesting that the private education sector should be encouraged, if not compelled, to pay more attention to source of funds.  I’m not the only one to see the possibilities; in October 2019 Transparency International published a terrific report titled “At Your Service: Investigating how UK businesses and institutions help corrupt individuals and regimes launder their money and reputations”, and in that they warned that “prestigious UK educational institutions are a key pull factor that brings corrupt individuals and their families to the UK”.

In October 2014, allegations surfaced that Millfield School in Somerset had received payments as part of the “Russian Laundromat” via which wealthy Russians were getting their loot away from Kremlin control.  One of the companies uncovered during an investigation into the laundromat was Valemont Properties Limited, registered in the UK.  In September 2011 Millfield sent Russian businessman Vadim Zadorozhny a bill for £10,943 for the education of his son – and the bill was settled by Valemont Properties Limited.

And now the UK’s National Crime Agency has published an “amber alert” titled “Bribery & Corruption Risks to UK Independent Schools: Case Studies and Red Flags”.  The alert is written for banks, legal and accountancy professionals – and the independent school sector itself.  With its examples of how laundering can be done, and red flags to consider, it’s a lesson for us all.

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I beg your pardon

In the last few days of the presidency of Donald Trump, when he was granting pardons to his chums and executing three black men and a woman while his mob was looting the Capitol, I read a tweet that has stayed with me.  I can’t remember who wrote it, or if they were quoting someone better known, but it said this: “If you want to know whether you are on the right side of an argument, look at who is standing next to you.”  This has caused me a fair bit of soul-searching in relation to a couple of stories.

Back in November 2006, Glaswegian publican and restaurateur David Martindale was jailed for 6½ years for drug offences and money laundering.  While in jail he started working on a university course, and when he was released in 2010 he continued and was awarded a degree in construction management.  Once a promising young footballer, he started coaching and eventually found his way to Scottish Premiership club Livingston.  And on 26 January 2021 he was deemed a fit and proper person to work as the club’s manager – a test he had failed before.

In 2003, Shadab Ahmed Khan set up his own law firm and was named professional of the year at the Yorkshire Asian Business Convention.  In 2007, after being found guilty of money laundering, by conducting conveyancing for properties worth £593,000 for convicted drug dealer Khalid Malik, he was jailed for four years.  He was struck off by the Solicitors Disciplinary Tribunal in 2011, after he was found to have acted with a lack of integrity, but not dishonesty.  And a couple of weeks ago he was readmitted to the roll by the SDT after they found that he had been “totally rehabilitated”.  The move was opposed by the Solicitors Regulation Authority, which said that “limited evidence of recent rehabilitation” had to be balanced against Khan’s conviction for “serious offences involving money laundering in relation to drug dealing”.  The SDT imposed conditions on his practising certificate, preventing him from being a sole practitioner, a partner or manager of a law firm, a COLP or COFA or holding client money.

Now here’s my confession.  In all other aspects of my life, I am a strong believer in second chances and in rehabilitation.  The point of the criminal justice system must be to punish, of course, but also to repair and re-direct.  I make a point of patronising businesses, like Timpson’s, that employ ex-offenders.  But when it comes to money laundering, I can feel myself getting ready to throw away the key.  So I think I need to chill.  Yes, I hate money laundering – see, it’s written up there, right across the top of this page.  But I shouldn’t hate the money launderer – and the more of them that we can steer back onto the path of righteousness (like David Martindale, and Jerome Mayne, and the Fraudster behind the Diary), warning others of the dangers, the better.

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Name and shame

We’re all used to lists and databases.  There are sanctions screening systems and PEP screening systems.  Within their organisations, MLROs have access to client databases.  And, to a greater or lesser extent, jurisdictions are getting on board with beneficial ownership and setting up searchable registers.  What all of these have in common is names: you put in the name of a client and see what comes back.  If nothing comes back and you’re smart, you try a slightly different spelling, or put the name in a different order (you’ve heard before about my friend Simon Anthony and how he’s regularly recorded as Mr Simon).  But it seems that some sneaky individuals are simply sidestepping the whole “being on a list” thang by changing their names.

Now that I’ve heard of it, it seems the most natural reaction in the world.  But I had assumed that there would be some way of tracking through from the original name to the new one, that would make the change more of a personal preference than a successful attempt to disappear from view.  And then on 20 January 2021 we read that Raimbek Matraimov, former deputy chief of Kyrgyzstan’s Customs Service, had changed his surname after being placed on the US Magnitsky sanctions list for his alleged involvement in the illegal funnelling of hundreds of millions of dollars abroad.  How could this work, you might ask?  After all, when someone’s name changes through marriage or divorce – or wanting to be a squiggle rather than a Prince – their financial institutions will insist on seeing proof of the official change from one to the other.  But Damira Azimbaeva of the state registration service of Kyrgyzstan confirmed that both Matraimov and his wife Uulkan Turgunova had changed their surnames – and that she would not be sharing their new surnames because of data confidentiality.  Thankfully, the couple have also been embroiled in a libel lawsuit, and to clarify things the judge in that case helpfully announced that Matraimov had changed his last name to Ismailov, and his wife had changed her surname to Sulaimanova.  (So the names you’re after are Raimbek Ismailov and Uulkan Sulaimanova.  For now at least.)  Another judge, Klara Sooronkulova, told the media she believed that Matraimov and his wife had changed their names specifically to avoid sanctions: “I think after being placed under the Magnitsky Act, many doors around the world will be closed for them.  Many problems may now arise for them to keep their property under their ownership.”  I jolly well hope so.

So that’s yet another question for the MLRO to ask clients (along with “is this your only nationality?”): “Have you ever changed your name, and what was it before?”.  When I was a girl I dreamed of being Mrs Victoria Osmond – Victoria because it was my favourite name, and Osmond because of the warbling toothsome one and “Puppy Love”.  So if things ever get too hot for me in the world of AML, you know who I’ll be next.

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The age of the mistress criminal?

I have written a couple of times before (here and here) about the ascendency of women in the world of criminality in general and money laundering in particular.  And it seems that this is no short-term trend – it’s a continuing development.  When Greater Manchester Police issued this press release just before Christmas, one thing caught my eye immediately: three of the mugshots are of women.  Moreover, two of them – sisters Abia and Shazia Din – were the ringleaders and netted the longest sentences for their troubles.  When one of their henchmen was sent to prison, his place in the gang was swiftly taken – not by a son or brother but by his daughter, Natalie Wrafter.  Actually, this is how Shazia and Abia themselves came to be in charge: one brother was arrested and another went on the run, and they picked up the reins of the family business.

I’m not one to perpetuate gender stereotypes, but some of the details of the case are rather feminine.  Shazia seemed to be in charge of the money, and her main front business for the laundering was the Beauty Booth – a legitimate company selling mascara, lipstick and body lotion via Amazon.  And when surveillance officers filmed Shazia and Natalie in the car park of the prison in Doncaster, exchanging thousands of pounds in cash, Shazia had a toddler in her arms – the toddler ran off and Natalie chased it while Shazia stowed the cash in the boot of her car.  This very ordinariness may be part of the secret of the success of female criminals – indeed, the Din gang favoured using female drug couriers because they are less likely to be stopped and searched by police.

Another recent example of a female-led crime syndicate is that of Ruja Ignatova – aka “The Missing Cryptoqueen”.  There has been an excellent podcast telling her story, so I won’t even attempt it, but I do think it’s interesting that (a) she gave herself the nickname Cryptoqueen (in other words, she chose to stress her gender) and (b) many of her female victims (in essence, she was running a Ponzi scheme, enticing people to invest and then bring in other investors for a commission) trusted and admired her precisely because she was a woman.  As Jen McAdams told the BBC, she was persuaded by seeing that Ignatova had spoken at a prestigious conference: “That ticked a box… The power of the woman – well done!  I felt proud of her.”  Male criminals may have to look to their laurels; if these stories are anything to go by, their dominance of the modern criminal world (where brains are now more lucrative than brawn) may be coming to an end.

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Fishy business

For years, the AML community has been trying to get their message heard at the highest levels of the regulated sector.  Business schools have various terms for it, from “tone from the top” to “business culture” to “the rotting fish” (as in, a fish always rots from the head).  But for the most part, it’s a very hard sell.  CEOs and other board members know that financial penalties – although irritating – will not harm them unduly.  The share price may take a short-term hit, but market forces will soon reassert themselves and the ship will be righted.  And the media is more likely to focus (understandably) on the criminals making the money than on the businesses laundering it for them (particularly if the laundering technique is complicated and/or boring to explain).  But last week was a bad week for regulated sector CEOs – and a good week for AML-ers.

On 20 January 2021 Swiss regulator FINMA issued a notice confirming that Julius Baer bank “fell significantly short in combating money laundering between 2009 and early 2018” and that “organisational failings and misplaced incentives encouraged breaches of the legal obligations to combat money laundering”.  (“As an example, a client adviser looking after Venezuelan clients in 2016 and 2017 received bonuses and other remuneration in the millions, even though Julius Baer had reported a number of his clients… to the [Swiss FIU]” – but that’s a story for another day.)  One of FINMA’s requirements is that “the bank must establish a Board committee specialising in conduct and compliance issues, or set up a similarly effective mechanism” – I’m fairly surprised that it didn’t already have one, but hey ho.

In a further notice issued a day later, FINMA announced that they had issued written reprimands to two managers at the bank.  They stop short (why?) of naming names, but several media sources confirmed that the two lucky recipients of the billets doux were Boris Collardi and Bernhard Hodler.  Collardi was Julius Baer CEO from May 2009 until his unexpected resignation in November 2017 (and is now a partner at rival wealth management firm Pictet) while Hodler was head of compliance and took on the CEO mantle for eighteen months.  The current CEO, Philipp Rickenbacher, has vowed to clean up his bank’s client base.

On the same day, Angelo Caloia – former president of the Institute of Works of Religion (more informally, the Vatican Bank) – was sentenced to eight years and eleven months in prison after being found guilty of embezzlement and money laundering.  He was president of the IOR from 1999 to 2009, and was convicted of embezzling money while managing the sale of Italian real estate owned by IOR between 2001 and 2008, declaring less than the actual value of the sale and pocketing the difference – some €50 million.  Two lawyers (father and son) were convicted of the same offences alongside him and also jailed.  All three men were fined, were ordered to repay the money, and were banned from public office in perpetuity.  In perpetuity: now that’s the right tone to strike.

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All in the mind

I have a daily Google alert that sends me anything containing the phrase “money laundering”, and earlier this month it sent me down the rabbit-hole of reading about “mental money laundering”.  It’s not – as sometimes happens – the simple adoption of the phrase by an unrelated subject; there is actually something in it that is of relevance and interest to MLROs and other AML-ers.

There is a sphere of behavioural science that looks at how mental accounting – i.e. our propensity to treat money differently depending on, for instance, where it came from or how we intend to use it – affects decision-making.  This goes against the perceived wisdom (much beloved of those who oppose AML efforts) that money has no smell – that there is not good money or bad money, dirty money or clean money, but just money.  Rather, recent research shows that we treat money more frivolously if we came by it easily – a win on the lottery, perhaps, or finding a tenner in the street.  Indeed, I remember my mother winning an outside bet on a horse in the Grand National and calling it her “mad money” – and spending some of it on a tennis racquet for me, which was certainly not part of her usual strict household budget.

Money that we come by unethically falls into the same “mad money” category.  Numerous experiments have demonstrated that people are more generous with money they’ve earned deceitfully (perhaps because they know, in their heart of hearts, that they don’t really deserve to keep it).  So what to do if you’ve acquired some money in an underhand manner but don’t want to feel that uncomfortable pressure to give it away?  Why, you indulge in a spot of mental money laundering.

In a series of experiments, researchers set up a game in which participants were incentivised to lie.  They then offered all participants (the honest ones and the liars) the opportunity to donate to charity – and the ones who had taken the incentive to lie gave more generously.  A subset of those who had taken the incentive were entered into a lottery, where they “won” exactly the same amount as they had gambled.  When they were then offered the opportunity to donate to charity, they were less generous than those who had taken the incentive but not gambled – which suggests that, in their minds, they had taken the stain of dishonesty from the money by putting it through the lottery.  The same effect was observed when those who had lied were offered a chance to pool their money with that of honest people – their subsequent pattern of donation (matching that of the honest people) suggested that they now considered their pooled money to be cleansed.

In short, if a firm launders money for a client, they are providing a double service: they are both laundering the money and improving the client’s mental wellbeing.  How very marvellous.

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Piggy’s Progress

At the end of each year I do a stock-take of my piggy sales – by which I mean, I add up how many copies of I have sold of my two suites of AML books for non-exec directors (i.e. those with AML oversight and steering responsibilities) and for staff (i.e. those with AML implementation responsibilities).  The NED piggy comes in five flavours (UK, Guernsey, Jersey, Isle of Man and generic international), while the staff piggies come in a wide combination of jurisdictions and sectors.  They’ve been on my mind recently because luckily I was able to fill that peculiar week between Christmas and new year with updating all the UK piggies to reflect Brexit – black armbands on their little trotters, etc.

So how did we do in 2020 with rehoming our little piggies?

  • The NED piggies are moving very slowly – eleven in the UK, five in Guernsey and one international only, and no interest at all from Jersey or the Isle of Man. But with directors being fined more regularly for failing to engage fully with their AML responsibilities, the piggies and I live in hope.
  • The staff piggy picture is more complicated because there are seventeen versions of the book. Still, I can see straight away that not one of the four Gibraltar piggies sold a single copy.  We did only slightly better in Guernsey, selling ten piggies – six of those to the fiduciary sector.  Jersey was a bit more piggy-friendly: 31 piggies moved to the sun-drenched shores of St Helier, with 23 of them sharing their new homes with bankers.  But top destination for piggies was once again the UK: 185 porcine adoptions took place – with the banking sector taking home 143 piggies.  Only four piggies moved in with UK estate agents.

I have made a push for the Brexit-ready UK piggies, sending notes about them to all the relevant trade bodies – with a particular plea for help to those representing estate agents and letting agents (with the recent headlines about continued high-level laundering through the UK property sector, surely they would welcome a bit of book-learning).  Of course, the Brexit changes to the piggies are not seismic, but it would be handy for an MLRO to be able to demonstrate to a regulator that staff have the very dernier cri in AML info.  (In protest at being dragged out of the EU I plan to use more Continental turns of phrase – call it self-Schadenfreude.)  But so far, only four UK piggies have left the pigsty in 2021 – perhaps they’re under lockdown.

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Head, brick wall, etc.

I first started designing and delivering AML training in 1996.  That’s a full quarter-century ago.  And can you imagine how many times I have said, over those twenty-five years, things like “check regularly for PEPs – regulators are hot on EDD for PEPs” and “make sure you chase down any deficiencies in CDD as quickly as possible”.  These are not new concepts.  And yet still – still – we are seeing regulators taking businesses to task for the most basic of AML failings.  We’re not talking about people wrestling with the finer points of defence SARs or struggling to define legal professional privilege – it’s the really basic, obvious, well-documented stuff, spelled out in everyone’s guidance, that is still being done wrong.

In a Guernsey finding at the very end of 2020, we read of a client who was “an ultra-high net worth individual from a high-risk country [who was] working with and being associated with individuals who were politically exposed, [while himself] being involved in the management and control of state (high-risk country) owned organisations linked to armaments, the extractive industry and IT services for the military” – and yet the business concerned “failed to identify the client as a PEP for the first ten years of the relationship”.  To misquote Chandler from “Friends”, could the client BE more PEPpish?

Three weeks earlier the Maltese authorities had fined a “prestige” credit card provider for various AML failings: one client had declared an annual income of £150,000 and then over a few months made €1.2 million in payments – most “transferred into the company’s bank accounts from the company’s interrelated company incorporated in Hong Kong”, but no processes were in place to identify the source of those funds.  Source of funds?  Really?

And in June 2020 the UK’s FCA fined Commerzbank an eye-watering £37,805,400 for numerous shortcomings in its AML regime – made all the more baffling because “they occurred following visits by the Authority to Commerzbank London in 2012, 2015 and 2017 to discuss issues relating to its AML control framework, during which the Authority identified weaknesses that Commerzbank London was to address”.  Again, these were not complicated issues: for instance, “2,226 existing clients were overdue refreshed KYC checks” and “[the bank’s] automated tool for monitoring money laundering risk on transactions for clients… did not have access to key information from certain of Commerzbank’s transaction systems”.

Hello?  Is anyone listening?  These are standard, basic AML requirements.  Please don’t make me wonder whether I’ve wasted that quarter-century.

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Let’s risk it for a Brexit

Better late than never, I suppose – the UK’s third National Risk Assessment, due in October 2019, was finally published on 17 December 2020.  When discussing risk assessment with MLROs, I describe it as a focussing exercise: you start big, with the broad sweep of a National Risk Assessment, then you look at any sectoral risk assessments that may be relevant, then you devise your much more tailored Business Risk Assessment (which refers to the previous two steps and shows how your specific business either reflects or refutes the risks identified for your jurisdiction and sector), and finally – the ultimate purpose of the whole exercise – you do a risk assessment of each and every client in order to apply the appropriate and proportionate CDD to them.  Logically, therefore, the NRA should be the first step – but in reality nearly all MLROs, whatever their jurisdiction, have had to set about their BRA long before an NRA appeared over the horizon.  It reminds me of the Queen in “Alice in Wonderland”, with her preference for “sentence first – verdict afterward”.

We’ve had a risk-based approach to our in-house AML endeavours since at least 2007, when the FATF published its “Guidance on the Risk-Based Approach to Combating Money Laundering and Terrorist Financing: High Level Principles and Procedures”.  But the concept of an NRA did not gain traction until the FATF Recommendations were updated in 2012, when new Recommendation 1 stated that “countries should identify, assess, and understand the money laundering and terrorist financing risks for the country, and should take action, including designating an authority or mechanism to coordinate actions to assess risks, and apply resources, aimed at ensuring the risks are mitigated effectively”.  And in the EU it was not until the arrival of the Fourth Money Laundering Directive in 2015 that an NRA was actually required: “Each Member State shall take appropriate steps to identify, assess, understand and mitigate the risks of money laundering and terrorist financing affecting it, as well as any data protection concerns in that regard.”

There is plenty to read in the new UK NRA but given the timing [black armbands at the ready – 36 hours to go], I thought I would concentrate on the Brexit-y bits.  Interestingly, the word “Brexit” is not mentioned once in the NRA, although “transition period” gets a look-in now and again.  The section on SAMLA concentrates entirely on sanctions and does not mention money laundering at all – no intent is expressed with regard to future AML legislative plans.  We can perhaps take some comfort from this undertaking: “Although the UK has now left the EU, FATF recommendations that were implemented via EU legislation have been retained in UK law under the European Union (Withdrawal) Act 2018.  The UK will continue to meet and exceed FATF standards.”  Sadly, given the UK government’s recent abysmal record for keeping its promises, I’m not holding my breath.  See you next year!

And in case you all thought I was just sitting around between Christmas and new year, reading a book on the filming of “Cranford” and mainlining Montezuma dark chocolate buttons, I can confirm that I have now updated all six of my UK piggy books to be Brexit-compliant.  The covers may be a little tear-stained, but any copies you order from Amazon from today onwards will be the very dernier cri in AML info for your UK staff and NEDs.

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Ho-ho-ho and CDD

I am assuming that one or two of you might be at work today, so let us turn our AML minds to an important seasonal matter: conducting CDD on Father Christmas.  For this particular individual even the most basic identity checks are difficult, as he goes by almost ninety different aliases around the world – including Father Christmas, Santa Claus, Sinterklaas, St Nicholas, Joulupukki, Pascuero Viejo and Grandfather Frost.  Some of these names suggest a link to an organised religion, while others are determinedly secular.  His age is all but impossible to ascertain – he appeared regularly in Victorian publications and even then was shown in pictorial ID as an elderly gentleman with white hair and beard, and now it’s nearly two centuries later.

His residential address is equally concerning.  According to hearsay, he stays at home for 364 days a year and then spends one single night traversing the globe – seemingly with no interference from border guards or customs officers.  Children tell me that putting just “Father Christmas” on the envelope is sufficient, so perhaps enquiries could be made of your local postal service to ascertain the address they hold on file for this individual.  Legend suggests that he resides in Lapland, but Lapland covers nearly forty thousand square miles, and ascertaining the location and ownership of any grotto or similar place of seasonal residence or business would be tricky: the 2019 FATF mutual evaluation of Finland warned that “the ability of competent authorities to establish the beneficiary ownership of legal persons in a timely manner is limited [as] the public registries are not fully reliable and relevant remedies to ensure that registers are kept up-to-date are not available”.

We must also consider whether he is a PEP and therefore subject to enhanced due diligence.  In my AML training I encourage people to all but ignore job titles (which are often nonsense – Kim Jong-un of North Korea styles himself “The Genius Among Others” and “The Brilliant Comrade”) and instead to remember why we are concerned about PEPs in the first place: they have access to public influence and to public money.  FC scores highly – very highly – on the first measure: there cannot be a head of state or senior politician, judge, military leader or police officer whom he has not met, and many of them boast of having entertained him in their own homes, even plying him with food and drink in exchange for his company and good wishes (which could be interpreted as an emolument approaching corruption).  As for the second measure of PEPitude, well, now you’re asking.  There are 2.2 billion children in the world.  Even if 1% of them have been naughty rather than nice, that still leaves a requirement for 2.178 billion presents.  So we’re looking at the purchase of raw materials and then the wages of manufacturing elves, admin staff (checking the naughty/nice lists and matching presents to children), distribution managers – and a vet for the reindeer. All of this costs money, and we have no idea of FC’s source of wealth or source of funds.

So how to proceed?  Well, I’m not given to turning a blind eye when it comes to CDD but perhaps, just this once, that would be my recommendation.  Turn off your computer, lock your office door and remember to leave out the port and Stilton for your overnight visitor [my father said with great conviction that by the time Father Christmas reached our house he would have had his fill of milk and cookies].  Merry Christmas, one and all!

Parts of this appeared initially in the most recent issue of Money Laundering Bulletin – many thanks to the editor, and it’s a recommended read!

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