Christmas concord and concensus

Experienced MLROs and other professional AML-ers will be familiar with the pattern of EU AML Directives: in essence, you get a new one every decade.  But thanks to the attacks in Paris in November 2015, and the subsequent realisation that the – at the time – shiny, brand-new MLD4 would not have done anything to prevent the movement of the funds underpinning the attacks, this pattern has accelerated.  Almost immediately a draft MLD5 was issued and trilogue discussions started, between the European Council (the authors of the draft), the European Parliament and the EU Commission.  Still, I panicked not, reasoning that such discussions usually take years.  (In fact, I’m counting on it for Brexit.)

But then came 15 December 2017.  On this date – perhaps keen to beat the festive traffic and get home to the mince pies or the stollen or the panettone – the negotiators came to an unexpected agreement.  Quite what this agreement looks like, we do not yet know, although chances are it’s stained with sherry circles.  But – thanks to the usual crisp summary by the UK Law Society – we do know what were the initial bones of contention when the three parties took their seats at the table:

  • the European Council suggested applying less stringent CDD to EU PEPs (domestic PEPs) than to non-EU PEPs (third country PEPs) – this was strongly opposed by the European Parliament
  • the European Data Protection Supervisor expressed concern about the conflict between beneficial ownership registers and people’s rights to privacy and data protection
  • the European Parliament suggested lowering the definition of beneficial ownership of a corporate entity from 25% to 10% – this was opposed by the European Council
  • the European Parliament said that the European Commission should consider a wider range of factors than heretofore in determining whether a country is a ‘high risk third country’.

We now wait to see how these matters have been resolved.  Although if it’s anything like the spirited scoring arguments we had during our family Christmas charades tournament, it may be some time before anyone suggests another Directive…

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The money laundering Sisters of Mercy

For my last blog post before Christmas (this blog will now go silent until 3 January 2018), I’d like to share with you a heart-warming tale of financial crime and fatal disease.  Honestly, it’s more cheerful than it sounds, as explained by Sister Angela Mary Doyle in her speech to TEDxBrisbane at the beginning of this month.

In the 1980s, Queensland in Australia – like much of the world – was in the grip of an AIDS epidemic.  Then-premier Joh Bjelke-Peterson refused to commit public money to curb the spread of the virus among indigenous Australians because he believed it was a (deserved) punishment from God.  Sister Angela and her fellow Sisters of Mercy felt that this presented a “serious and divisive community question” to Queensland, and – as she said to her audience – “we Sisters waited, as did many others, for the medical profession, the churches or anyone to speak out against this stance of the government – but nothing happened”.  In the face of state government inaction and a growing number of sick people desperate for resources, the Queensland AIDS Council put out a call for help.

At the time, Sister Angela was the administrator of Mater Hospital, and she offered to create a link between the Queensland AIDS Council, the Sisters of Mercy and her hospital.  The Mater Hospital provided the Queensland AIDS Council with office space and three houses in South Brisbane where AIDS sufferers could stay free of charge.  Sister Angela also arranged to funnel funding from the federal government through the Mater Hospital and on to the Queensland AIDS Council, to conceal the support from Bjelke-Peterson.  Sister Angela continued to work in this clandestine fashion with AIDS sufferers for seven years, until a change of government allowed them to deal directly with the government and community.  As a result of their secret funding arrangement, the federal health minister at the time, Dr Neal Blewett, later described the Sisters of Mercy as “the most altruistic of money launderers”.  Merry Christmas, one and all.

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Training across the Board

At the end of each year I do a review of what I have done during that year.  Each time I issue an invoice I categorise it by jurisdiction, by sector and by activity type, and this enables me to see where and how I spend my time.  And this year, for the fourth year in a row, I am doing more “senior training” (i.e. for compliance teams and Boards) than before.  This is pleasing, as I really enjoy this type of training; these audiences are generally more AML-aware and more demanding, and that keeps me on my toes.  (It also means that I don’t have to explain the objective test of suspicion.  I swear that even as my coffin is being lowered into the ground, you will hear me intoning “The prosecutor will not have to demonstrate that you did know or suspect it was the proceeds of crime, only that you should have done”.)

I was therefore delighted to read in the “Guernsey Press” last week (what? you don’t subscribe?) that the local regulator is highlighting corporate governance as a key area of concern.  Anything that the regulator underlines is grist to my training mill, and according to the chief chap William Mason they will be on the lookout for “lack of understanding about a firm’s risk appetite…; weak non-executive directors and a lack of independent challenge in the boardroom; [and] inappropriate direction from group boards towards Guernsey subsidiaries, including instructions counter to local law”.  Hurrah, say I, for here we have the mainstays of my Board-level AML training: understanding of, and adjusting, the risk appetite; standing your AML ground as a director, and demanding more information so that you can challenge with gusto; and making sure that all AML decisions are localised to your own jurisdiction and not visited upon you by head office.  The more regulators who point out that AML responsibility starts at the top, and the more Boards who heed that warning, the happier I am.

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Do unto others

The Guernsey Financial Services Commission has been rather busy recently, what with working away on revised AML/CFT legislation and guidance, and now putting out a pair of publications to explain why and how they regulate the Bailiwick’s financial services sector.  In reading one of these – the one entitled “Regulatory Framework: A guide to financial services regulation in the Bailiwick” – I was heartened to come across this paragraph, which I will quote in almost its entirety: “Financial services regulation in the liberal democracies does not seek to produce an outcome where no institutions ever fail.  This is because to do so would result in such intense regulation, both in terms of standards and supervision that the cost to the customer would be unacceptable both in direct cost terms and through reduction in choice and availability.  In consequence, market participants, including customers, must accept that there is some risk of failure.  They should exercise prudence accordingly.”

Now indulge me if you will, and let’s make a few word changes: “AML in the liberal democracies does not seek to produce an outcome where no money launderers are ever taken on as clients.  This is because to do so would result in such intense CDD and monitoring, both in terms of standards and supervision that the cost to the customer would be unacceptable both in direct cost terms and through reduction in choice and availability.  In consequence, market participants, including customers, regulated entities and regulators must accept that there is some risk of failure.”

You see what I did there?  Yes, we could eliminate money laundering from the financial system by doing super-über-ultra-enhanced due diligence on everything, but that would make the system unusable.  And so, if we admit that choices have to be made and compromises struck, then everyone – regulators included – has to accept that sometimes even the best-intentioned, most AML-committed firm will get it wrong.  I hope that regulators are as understanding of those whom they regulate as they ask us to be of them.

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Nipping crime in the (Jersey lily) bud

Following on from my post a few days ago about the LIBOR fines being used as a force for good, I have been interested to read about the allocations made over the past decade in Jersey.  In response to a Freedom of Information request, the States of Jersey has detailed the amounts received by their Criminal Offences Confiscation Fund, and what they have done with that money.  The COCF was created in 1999, and statistics are available from 2004.  From 2004 to date, the Jersey authorities confiscated £16,520,435, and received a further £46,350,104 through asset sharing arrangements – making a grand total of £62,870,539.  There seems to be no pattern to the figures; they go up and down randomly.

When it comes to disbursements, however, there is a discernible shift in emphasis.  If you look at the grants paid from the COCF in the early years, nearly everything went back into the legal side of things, in the form of money paid to law officers, courts and the like.  In recent years, however, they have received much less, and instead grants are made to government departments for projects concerned with crime prevention – such as producing a guide for parents about drugs, and investing in bodycams for the police.  I find this fascinating, not least because it supports my position that crime prevention is the way to go – after all, that’s what AML is all about.  Of course we can to catch money launderers when we can, but the real aim is to make it such an unattractive option that they don’t even bother to try.

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House of horrors?

With the acres of newsprint devoted in recent months to the topic of registration of beneficial ownership, it is interesting to consider the role of the registrars.  Companies – and other structures – are required to submit returns, and to update them regularly, and to make changes promptly to their details, but is any of that information being verified, or even checked?  Before the advent of the PSC register here in the UK, Companies House was a simple register of companies – in essence, a giant filing cabinet.  I send in my annual return to them, along with the appropriate fee, and anyone looking up my company on the CH system will find the information that I have submitted.  My suspicion has always been that you can send in whatever details you want, as long as you don’t mind signing a false declaration.

And it seems that I am not alone in thinking that.  In February 2016, an S Prichard made a Freedom of Information request to CH, containing several questions, including “Is it illegal to knowingly provide wrong information for registration to Companies House (i.e. false names, variations of names, false address, false DOB)?” and “What safeguarding measures do Companies House take to ensure the public are safeguarded from criminal activity such as fraud when viewing or obtaining information about a company on the Companies House website?”.  In response to the first question, CH explained that “it is an offence under the Companies Act to submit a false filing” – so that’s clear.  It’s the second question that really interests me, as the CH answer is this: “Companies House acts primarily as a registry of company information.  We must accept all documents sent to us in ‘good faith’, we do not have any powers to verify or validate the information contained on them.  We can only act within the parameters of the Companies Act as we have no investigatory powers.”

Now that CH is the home of the PSC register as well, I wonder whether things have changed?  And some Italian journalists wondered the same thing…  A fortnight ago, Italian newspaper Il Sole 24 Ore reported that some of its staff had gone through the motions to set up a company in the name of Matteo Messina Denaro (a notorious mafia boss currently on the run) and giving 10 Downing Street as the company address.  According to the Italians, their aim was to show that the UK company formation regime is too liberal and that “there is nothing easier than creating ghost companies that can hide illegal activities or recycle money”.  They stopped short of actually paying the £12 to form the company – so as not to break the law – and CH said that “had the application been submitted our systems would have picked up the false information and the incorporation would have been denied”.  To be fair, I can imagine that their systems might have spotted the address…  But perhaps a more subtle attempt might have succeeded, if the CH powers are indeed still the same – i.e. no power to verify or validate.

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Turned out fine again

The UK Chancellor’s budget is rarely a cause for much celebration, while the obligatory leaks in the days beforehand suck every element of surprise out of his announcements, but one little gem might have passed you by on 22 November (as it appears in the documents only and not in the speech).  In the old days, the Financial Services Authority kept all income from penalties levied on banks and used that income to subsidise the cost of its fees to banks.  But in 2012, the then-Chancellor George Osborne announced that “the multi-million pound fines paid by banks and others who break the rules will go to the benefit of the public and not to other banks”.  And so, under the Financial Services Act 2012, the Financial Conduct Authority committed to returning all income from “penalty receipts” (i.e. banking fines) above its enforcement costs to the Exchequer.

In the same year – 2012 – HM Treasury announced that the proceeds from LIBOR fines specifically would be used to support armed forces and emergency services charities, and “other related good causes that represent those that demonstrate the very best of values”.  (You see the point being made, that the LIBOR lot did not demonstrate these…)  And as part of his Autumn Budget 2017, current Chancellor Philip Hammond committed the final £36 million gathered in such fines to be paid over the next three years to eighty-two charities, including the Royal British Legion (to receive £1,500,000), Help for Heroes (£1,441,370) and the Army Benevolent Fund (£1,225,444).  This brings the total LIBOR lolly committed to charities since 2012 to £773 million.  And a further £200 million collected in LIBOR fines has been given to the Department for Education to spend on 50,000 apprenticeships.  Hurrah!

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Salvator emptor

The recent record-breaking sale of “Salvator Mundi” highlighted two things – one a surprise, and the other not.  The surprise was that this is the most expensive painting by Leonardo DiCaprio that has ever been sold.  I kid you not: that’s what the announcer on BBC’s breakfast news sofa said.  The not-surprise is that the sale has demonstrated, once again, how easy it is to move enormous – breath-taking, gargantuan – sums of money through the art sector without giving too many of your details.  You know, tricky stuff like where you got the money.

We don’t know who bought the (to my eye, rather creepy) portrait of Jesus for US$450,312,500, although we assume that Christie’s, the auction house running the sale, has some idea.  We do know that the seller was the family trust of Russian billionaire Dmitry Rybolovlev, who bought “Salvator Mundi” in 2013 for US$127.5 million from Swiss art dealer Yves Bouvier.  Rybolovlev and Bouvier have history: the Russian previously claimed that the Frenchman had overcharged him for various pieces of art, although this latest profit somewhat undermines his case…  And Rybolovlev is a rather unexpected champion of transparency.  In 2015 Yves Bouvier consigned for sale at Sotheby’s in London a painting by Henri Toulouse-Lautrec called “Au Lit: Le Baiser”.  He signed the standard paperwork which requires the consignor to indicate that he owns the piece or is authorised to sell it.  And after the sale – the painting made £10.8 million – the money was handed to Bouvier.  However, the real owner was – you’ve guessed it – Dmitry Rybolovlev, who says that he authorised the sale but that Sotheby’s should have checked who the real owner was before turning over the money.  His lawyer Tetiana Bersheda was flabbergasted: “It is extraordinary that such a rare and high-value work could have been sold at auction without the auction house knowing the identity of the true owner.”

Perhaps the “Salvator Mundi” profit of $322,812,500 will mollify Mr Rybolovlev and soothe his relationship with Mr Bouvier.  But whatever happens between those two gentlemen, repeated calls for more transparency in the art market – when such enormous sums are at stake – must surely begin to bear fruit.

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Paradise polluted

Last week I went to a new gathering of people (oh, go on, you forced it out of me: I’ve joined the Women’s Institute) and when they asked what I do and I gave the potted description, several of them said, “Oh, so you’re part of the Paradise Papers”.  Those exact words – and as with earlier incarnations (the Papers that were Panamanian), I simply nodded and said, ”Something like that”.

I am not going to write about the Paradise Papers themselves because, contrary to popular opinion, I am not part of them and I cannot shed any more light on them than that nice man from “Panorama”.  What I have been disappointed by, however, is the official response to them.  Every government whose jurisdiction has been named in the papers has said two things: “let’s concentrate on the real crime here – the hacking” and “at least we’re not as bad/complicit/corrupt as that jurisdiction over there [insert name as appropriate]”.  Although I appreciate that politicians are concerned primarily with keeping their jobs, I find this short-term and un-cooperative stance depressing.  Wouldn’t it be refreshing if someone said, yes, we’re a bit concerned about the manner in which the information has come to light, but we do encourage whistleblowing for the public good.  And now that we know how widespread are these practices – to the detriment of all our public purses – let’s concentrate on how we can work together to harmonise our tax legislation and close the loopholes.  After all, saying “we’re slightly less dreadful than our neighbours” is not really a glowing endorsement, is it?  We’ve been through a similar process with AML, and thankfully – at least in the jurisdictions where I choose to work – the emphasis is now on improving global AML standards, rather than finding clever ways to get around them.

Posted in AML, Legislation, Tax | Tagged , , , , , , , , | 9 Comments

Big worries about small accounts

The news has been full in recent days of the financial activities of the “super-rich” and fiscally sophisticated.  (That’s my phrase, that last bit, but I can imagine it catching on.  Who knows: we might even start talking about the “sophiscallated” – you heard it here first.)  But at the November 2017 plenary meeting of the FATF in Buenos Aires, attention was fixed more on the other end of the spectrum: the financially excluded.  Life is full of contradictions, of course (why is anything delicious bad for us, while wholesome home-knitted yoghurt tastes disgusting?), and in the financial sector we wrestle with this one: how can you make rational, profitable, risk-based decisions about which clients to acquire and retain, without shutting out those who – for entirely un-criminal reasons – cannot meet your standards of due diligence?  Yes folks: it’s the familiar de-risking versus financial exclusion dilemma.

One of the documents to come out of the FATF plenary is a supplement to – but one which, bizarrely, is put at the front of – their 2013 guidance on financial exclusion.  This supplement examines the knotty problem of CDD and financial inclusion, given that “18% of all adults without an account cited documentation requirements to establish proof of identity as an important barrier to account ownership”.  All sorts of people find it hard to attain modern standards of due diligence documentation, from those who are paid cash in hand to asylum seekers and refugees.  That said, it has to be recognised that financial service businesses are, well, businesses and therefore need to make a profit, and having their staff spend hours thinking imaginatively about how to facilitate financial inclusion for clients who are never going to bring in much profit does not make commercial sense.  However, it makes both moral sense (these people are as deserving of financial provision as the wealthy, particularly in a world where those who pay cash rather than by bank transfer are penalised for it and end up paying more, e.g. having an electricity meter fed with coins is much more expensive than paying a monthly bill by direct debit) and AML sense (if people are using financial services we can check and monitor them, but if they’re not, we can’t).

So what practical solutions does the FATF offer?  The supplement reveals that many countries have tried all sorts of things, and a popular idea is the tiered bank account, where minimal – if any – due diligence is done on applicants for a most basic account, offering limited services and small transactions only, albeit enough to pay an electricity bill.  I like the plain-speaking Indian approach, which is to call these “small accounts”.  Fiji is happy to accept identification letters from referees (no, not Pierluigi Collina, but including schoolteachers and village headmen).  Many countries are sensitive to the need to relax requirements after a disaster, as when typhoon Haiyan swept through the Philippines in 2013, carrying away many people’s belongings including their identity papers.  And the development of more sophisticated ID systems – often relying on biometric data – is of great help.  I welcome all of this, as I think it puts the financial inclusion responsibility back where it belongs: with governments, and not with individual banks.

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