Riches beyond imagination

If you were asked to prove where all of your assets have come from, could you do it?  For myself, I have the mortgage documents for the house, and the original receipt for my car (bought for £4,950 cash in 1987 – yes, that’s 1987), and company accounts since the birth of Thinking about Crime Limited, and personal tax returns for the past seven years.  Whether that would satisfy a court that my assets are legitimately acquired, I cannot say.  But if you are a PEP, or someone suspected of serious criminality, and you have more than £50,000 under suspicion of being dodgy (or, less sensationally, where there are reasonable grounds for suspecting that those assets are disproportionate to your known income), thanks to section 1 of the Criminal Finances Act 2017 (which amends the Proceeds of Crime Act 2002) the UK authorities can now serve you with a unexplained wealth order and compel you to come into court and explain it all.

Opinion is divided on UWOs, as we must learn to call them.  (Reminds me of something vaguely Star War-ish – oh yes, Ewoks.)  Transparency International – the anti-corruption campaigning organisation – is thrilled to see them.  Lawyers are less jubilant, many of them concerned that UWOs are retrospective – in other words, they can be used to target assets that were acquired before UWOs were invented – and that there is no need for proof of criminality to be obtained before an UWO is deployed. If an UWO is “successful” – i.e. it roots out criminal assets – then the next step is likely to be a civil recovery investigation.  And an MLRO might find himself being handed a POCA civil recovery order that is the fruit of an UWO.

We did not invent the UWO, of course – they are already used in other jurisdictions such as Ireland (where they work well) and Australia (where results are more mixed).  And, as far as I know, we have not yet used one.  When we do, lawyers are anticipating numerous challenges, such as how much detail does the respondent have to provide in order to be deemed to have complied with an UWO, and what will be done with the information obtained.  As they say in Ewokese, danvay – or be careful.

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Plea for proof

Over two decades of AML training, I have heard many questions over and over again.  I don’t mind this at all, and I like to think that I have refined my answers so that they are more succinct and helpful.  But occasionally someone will ask something that I have not considered before.  I was reminding a group about the importance of keeping a record of their important AML decisions.  After all, in the risk-based AML environment in which we nearly all operate, you might need to demonstrate how you came to the AML conclusion that you did.  For instance, if you decide to accept a non-standard piece of identity documentation, or to downgrade the risk rating of a client from high to medium, or to hold off making a SAR about a client until they answer just one more request for information, you need to be able to show that your decision was appropriate and proportionate given the money laundering risk with which you were faced.  If you like, it’s the administrative price you pay for being granted the latitude of a risk-based approach rather than having to operate under a more prescriptive regime.

All fine and dandy, said someone last week, but what if you leave the company where you were making all these important AML decisions, and you don’t take the records with you (of course).  And then something changes – the company goes bust, or is taken over – and the records are gone.  How then do you demonstrate, perhaps years later, that you did the right thing?  What if it turns out that one of your clients was a money launderer, and your handling of their account is being questioned?  How can you show that you did indeed apply the risk-based approach with diligence and professionalism?

I answered as best I could.  In short, I said, the system is not perfect.  But investigators and regulators will recognise and understand that former employees are not permitted to take records with them on departure.  They will use all the legal weapons at their disposal to winkle those records out of the former employers’ file as part of their investigation, but this may not be possible.  And the aim of investigators and regulators is not to set traps for the regulated: if you are doing a good job for your current employer, the assumption will be that you did a good one for your former employer.  By this point, I realised that I might be flannelling a bit.  What do you think?  Does anyone have any more practical words of comfort?  Has anyone – heaven forbid – found themselves in this situation?

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Gamekeeper turned poacher

Last week my husband and I were on one of those long car journeys when you discuss all sorts of crazy things just to keep the boredom at bay.  We were talking about careers and whether we would choose the same ones again, and he asked me, “Do you think you would make a good money launderer?”.  Resisting the temptation to answer, “Only if you buy the wool”, I had a think about it.

I’m certainly good at the theory of money laundering – I doubt even professional launderers read as widely as I do about money laundering trends and techniques.  I know which institutions and jurisdictions take AML seriously, and which pay it lip service only, and which couldn’t care less.  And I might well escape detection for a while, as the idea of the woman who has vented her AML spleen in a blog called “ihatemoneylaundering” for six years turning into a launderer (or perhaps continuing all of that AML stuff as a fiendish disguise…) might not even occur to investigators.

But we came to the conclusion that I would betray myself.  I do not have a poker face, and am only a fair to middling liar.  The real giveaway, however, would probably be my inability to hold back from chastising (for which, read “throttling”) the people who would help me with my laundering.  The incompetent and the ignorant, I might just about tolerate.  But the complicit and the cunning, the scheming and the slippery – well, I’d just have to run them through with their own Montblanc fountain pens.

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Miffed at MiFID II

Fifty-two.  That’s how many triple packs of Jaffa Cakes I could have bought with the £138 I have just had to shell out to buy an LEI for my company.  That’s a Legal Entity Identifier: a 20-digit identifying number required under MiFID II for all companies, trusts, charities and unincorporated bodies that wish to indulge in any financial transactions.  Here in the UK the appointed keeper and distributor of LEIs is the London Stock Exchange, and for this service they charge £115 + VAT to issue the LEI and then an annual maintenance fee of £70 + VAT.  (That’s another thirty-two triple packs a year.)  This is, according to the LSE website, charged simply on a “cost recovery basis”.

In principle, of course, I can see the point: how could I not, after decades of promoting the joys of due diligence and client identification?  But I do find it interesting that in this instance the cost of compliance is being passed directly to the client.  I realise that in a roundabout way, the cost of much compliance eventually ends up being shared between the service provider and its clients.  And in some cases it is more overt: I know of institutions that charge higher fees to PEP clients, to cover the additional costs of the enhanced due diligence and monitoring that such clients entail.  But that is a commercial decision: the law of the land does not mandate the passing on of due diligence costs to the subject of that due diligence.

It occurs to me that there might be a reason for that.  LEIs are, by definition, issued only to companies, trusts, charities and unincorporated bodies.  Individuals are not required to have them.  And when it comes to election time, only individuals have votes.  Demanding that individuals pay for their own due diligence checks would soon have a negative impact on the ballot box.  So perhaps the risk-based approach is not as objective as it might appear; political expediency also plays its part when deciding who will accept what level of intrusion and expense.  And loss of Jaffa Cakes.

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Regime change for the better

The UK Financial Conduct Authority’s Senior Managers and Certification Regime is now two years old.  Under the regime (which currently applies to UK banks, building societies, credit unions, branches of foreign banks operating in the UK and the largest investment firms regulated by the PRA and the FCA), there are three strands:

  • Under the Senior Managers Regime (and yes, the lack of an apostrophe pains me every time, but that’s how the FCA writes it), the most senior people performing key roles need FCA approval before starting their roles
  • Under the Certification Regime, firms need to certify on an annual basis that employees who aren’t senior managers but whose role means it’s possible for them to cause significant harm to the firm or customers are fit and proper
  • Firms need to ensure that staff are trained in the Conduct Rules (high-level standards of behaviour) that apply to them, and that the FCA is notified if the Conduct Rules are breached.

The FCA is currently consulting on extending the SM&CR to insurers, and to solo-regulated firms (i.e. firms regulated only by the FCA and not by the PRA).  If you want to express a view, get it in by 3 November 2017.

You might think that all of this would be most unwelcome – simply another layer of admin, with job descriptions to be written and agreed and monitored.  But the results of a survey published at the start of August 2017 by LexisNexis Risk Solutions has found the opposite.  Nearly 200 respondents from businesses already affected by the SM&CR were overwhelmingly in favour of it, with 71% of them saying that it has had a positive effect on their industry.  75% of respondents believe the SMR has had a positive impact on their firms’ appetite for risk, and 63% agree it has improved collaboration between business and compliance units.  On this last point, LexisNexis MD Dean Curtis said: “Financial crime professionals have always been highly accountable, but by making other ‘front line’ senior individuals just as accountable, the SMR has enhanced the compliance culture and improved communication and collaboration across different service lines.  As a result, issues raised by MLROs that impact compliance fall on more sympathetic ears.”

As the UK considers – let’s be honest, intends – extending the SM&CR, and as other jurisdictions mull their own versions, this must be welcome news for MLROs.

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Outside the tent

Regulation has been on my mind lately – and doubly so since the decision last Friday by Transport for London not to renew the private hire licence for “ride-hailing app firm” Uber.  Not that I’m affected personally – I’ve never Ubed in my life.  (I tend to avoid UK taxis, as they are not nice to cyclists, and I’m more often on two wheels than four.)  But it does make me think about whether shunning a service that is being used – and, more importantly, will almost certainly find a way to continue being used – is the best approach.

Similar debates are raging about virtual currencies.  These currencies are here.  They work (even if the majority of people, and I count myself in that group, don’t quite understand how).  And therefore, of course, criminals are already taking advantage of them.  Rather than turning up our noses and saying (as I have heard on many occasions), “they’re not proper financial instruments” and “sensible people don’t bother with all of that”, surely we have to find a way to bring them into the regulated fold – including for AML purposes.  Some jurisdictions have already taken steps in this direction; in September 2016 the Proceeds of Crime (Miscellaneous Amendments) (Jersey) Regulations 2016 came into effect in Jersey and brought virtual currency exchange services into the AML family.

I’m not saying it’s simple.  You need people who understand how these things work, in order to write the legislation.  You need a regulator capable of overseeing such services, and assessing their activity and probity, and also capable of producing guidance for this new sector.  But I don’t see that we have any choice.  If we simply shove it onto the “too difficult” pile and pretend it isn’t happening, we are creating a window of opportunity through which criminals will vault with great delight – whether that is money launderers using unregulated currencies, or unregulated drivers cruising the streets for fares.

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A call to arms

I’ve been in two minds whether or not to do this blog post, as I don’t want to upset anyone, and I can’t think of a particularly clever way to disguise who I am talking about.  Let’s just say that recently I have visited a jurisdiction where changes are being contemplated to their domestic AML legislation.  This jurisdiction is not in the EU, so there’s no obligation for them to implement MLD4, but they do take AML very seriously and have always striven to meet the highest international standards in this arena.  In preparation for the update, the local regulator and legislators – as in all reputable places – put together a draft of the proposed new legislation, and its accompanying guidance in the form of a draft new handbook, and issued them for consultation.  I replied – but then that won’t surprise you.  And I was rather uneasy about doing so, as I really didn’t like many of the changes they were proposing.  It’s not that I expect everyone to agree with me: it’s more that I go to this jurisdiction regularly, and I had rather prided myself on having my finger on the regulatory pulse of the place and some of their proposals seemed to me to be out of step with local risk.  But – as with the Brexit vote – I had to consider that perhaps I had misjudged the mood.

I was therefore relieved (but perturbed for different reasons) to find, on my recent visit to this jurisdiction, that I had not got it wrong.  In fact, every single MLRO I met said how disappointed they were with the draft legislation and handbook, and how concerned they felt that the regulator had really not listened to MLROs’ views on how best to beef up local AML efforts.  Most of the changes the regulator has proposed will involve MLROs and their staff in huge amounts of work with – and this is the bit that irritates those involved – very little discernible benefit.  Their proposals seem to be addressing areas that have not been highlighted as weak, while ignoring those that everyone agrees could do with improvement.

MLROs are, for the most part, dedicated and determined people.  You do not go into compliance without a broad streak of idealism in your character, tempered with a recognition that doing the right thing does not always make you very popular.  If hard work needs to be done to make things better, then your MLRO is the chap to do it.  But change for its own sake?  Change that does not improve?  Change that is hard to justify in terms of reducing proven risk?  Change that make compliance look like it doesn’t really know what it’s doing, when AML is a hard enough sell anyway?  No thank you.

For the first time ever, I was present at a meeting where – after I had spoken – someone stood up and made an AML call to arms.  The MLROs are massing to make their representations to the regulator, and it was a stirring sight (albeit very polite, and with no songs).  I hope fervently that they will be heard, as this jurisdiction’s history of co-operation between the regulator and the regulated has always been enviable.  If they lose that, and along with it the goodwill of their defensive ranks of MLROs, their very reputation will be on the line.

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EU, FIUs, STRs and AML

Last week Europol – or, more fully, the European Union Agency for Law Enforcement Cooperation – published a report entitled “From Suspicion to Action – Converting financial intelligence into greater operational impact”.  The report examines the AML framework within the EU, and looks at the extent – and outcome – of suspicious transaction reporting in the EU.  The headline stats are sobering:

  • In 2014 – the most recent year for which full statistics are available for analysis – FIUs across the EU received a total of a million reports
  • Of those, 65% were received by the FIUs of the UK and the Netherlands
  • 10% of reports are investigated further – a proportion that has not changed since 2006
  • In 2013/14, reports on terrorist financing accounted for less than 1% of reports made
  • The sectors that make the most reports are banks and money service businesses; those that make the fewest are bureaux de change and high value dealers
  • “Between 0.7-1.28% of annual EU GDP is detected as being involved in suspect financial activity”, which is – as admitted in the report – “far short of [accepted] estimates around the amount of money laundered through the financial system”.

Europol Executive Director Rob Wainwright is aware that this final finding is the one that will concern people – why is such a small proportion of criminal proceeds being identified and therefore made available for possible confiscation?  And his explanation is a sensible one: “The anti-money laundering regime still operates at a domestic level, and has not yet fully adjusted to the reality of a problem that is defined by its international nature.  While structures exist to facilitate cross-border cooperation between national units, significant barriers in international cooperation and information exchange remain, revealing the urgent need for supranational overview in increasingly global markets.”

As ever, we are a step behind the criminals.  Unshackled by laws or morals, they are infinitely adaptable and will co-operate with anyone, anywhere in the world, for as long as it suits their purpose.  We need to learn to do the same: the risks of sharing information and expertise are far outweighed by the benefits, and we do, after all, now operate in a risk-based AML environment.

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In the penalty box

What is it about football and money laundering?  I don’t mean the obvious sort – buying football clubs and trading players as a front for moving criminal money around – but rather what makes footballers and manager so susceptible to money laundering?  The big story, of course, was Pele’s son Edson “Edinho” Cholbi do Nascimento: in 2014 he was found guilty of drug trafficking and money laundering and sentenced to 33 years in prison – with that term reduced to 13 years in February 2017.  But in the past week I have read about retired Bury and Macclesfield Town defender Efe Sodje and his two brothers – also footballers – going on trial for laundering the proceeds of frauds perpetrated on companies in Columbia, India, Italy and Abu Dhabi.  In April this year, Boreham Wood winger (and youth international player) Blair Turbott was charged with fraud and money laundering.  In December 2016 Southend United striker Nile Ranger (great name!) was charged with online banking fraud and money laundering; in May 2017 he was jailed for eight months.  Even retirement from the beautiful game is no protection: in September 2016 the Swiss authorities launched an investigation into suspected fraud and money laundering by German footballing legend Franz Beckenbauer.

Is it that these lads are taken away from normal family and school life too early, and put into the hothouse atmosphere of a football academy where what is right and what is wrong is less important than winning?  Or perhaps they are sheltered from financial realities and never learn to manage money, making them easy targets for more savvy launderers looking for accomplices.  Or perhaps, having been cheered by crowds wherever they go, they think they are above the law.  Or maybe – whisper it – their brains are in their boots.  Whatever the reason, it’s an interesting trend.

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I’ll tell you what I want, what I really, really want

Regular readers will know that when it comes to consultations, I am Pavlov’s respondent: tell me you want my opinion and I’m slavering to give it.  Indeed, so regular is my participation that I have a whole email folder entitled “Consultations”.  (I also have one called “Alliances” and another called “Confrontations”, which reveals pretty much how I categorise my interactions with other providers of AML training and advice.)  But my husband works in a very tangential fashion for the Department for Transport and – apart from commenting on an almost monthly basis that “Yes, Minister” was more documentary than comedy – his most frequent observation about the public sector is that consultations are issued in order to be seen asking questions rather than through any desire at all to receive answers.

Thus is my trusting nature abused.  Looking at that “Consultations” email folder, I can see that so far in 2017 I have responded to eight consultations: two for HM Treasury, three for the Joint Money Laundering Steering Group, one for the FCA, one for the Guernsey Financial Services Commission and one for the Gambling Commission.  Each takes time, of course – some of them a great deal of time – and I do try to be as open and helpful as I can.  To think that my responses are just going into a black hole, just a number to be counted rather than a view to be considered, is rather depressing.

But perhaps things are not that bleak.  I’ve been away for a month, and on my return I contacted a few people to catch up with the latest news in “my” jurisdictions.  In Guernsey, for instance, we are on tenterhooks waiting for updated AML legislation along the lines of MLD4.  (I’m off to Guernsey in a week’s time, and live in dread of them updating their legislation two minutes before I arrive, necessitating speedy adjustment of both training material and mindset.)  But never fear, said my Guernsey mole: the GFSC received so many responses to their consultation – over sixty, apparently – that they won’t be able to approve updated legislation and guidance any time soon, and perhaps not even before the end of the year.  This surely means that those responses are being read and considered, not merely counted.  I feel enthused and invigorated, so if you’ve been thinking of issuing an AML consultation of any sort, do it now while I’m all optimistic again.

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