Sliding into EDD

And here is my third and (for the moment) final post on the UK’s draft new money laundering regulations.  One little phrase jumped out at me in the consultation document: “EDD is a sliding scale”.  The point is made in reference to PEPs (which I discussed last time), but it struck me that this aspect of EDD is often overlooked: people think that there is one level of EDD that comes into play the moment a client falls into a high risk category.

The best analogy is perhaps with the speeding offence.  Looking at the speeding sentencing guidelines here in the UK, you will see that there are degrees of driving exuberance.  If you’re in a 30mph zone and you do more than 30 but less than 40, it’s one band, then from 41 to 50 it’s another and so on.  So if your client is only mildly high risk – say he is a citizen of a high risk jurisdiction, but everything else about him is completely standard – then you can apply a lower level of EDD than you would to a client who is a PEP in a high risk jurisdiction, wanting to set up a convoluted corporate structure in order to service his new Bitcoin and arms dealing empire.

Indeed, this idea of varying levels of EDD is supported by the JMLSG Guidance Notes for the UK financial sector, in a paragraph (4.51) that is unchanged in the revised version of the GN that has recently been put out for consultation (there’s a few more blog posts in the making): “Where the risks of ML/TF are higher, firms must conduct enhanced due diligence measures consistent with the risks identified…  Examples of EDD measures that could be applied for higher risk business relationships include…” and then a menu of options (not a prescriptive list) is given.  It may be tempting to have one category of EDD, but this is neither a proportionate reaction to risk, nor required by legislation.

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PEP promises

My short AML survey is still live (until 31 March 2017) so please do have a go if you haven’t yet: https://www.surveymonkey.co.uk/r/VM62T6K

A few days ago I mentioned that I have responded to a consultation on draft new money laundering regulations here in the UK.  One of the innovations proposed by the new regs is described thus in the consultation document: “The Financial Conduct Authority [supervisor for the financial sector only] will publish specific guidance on the treatment of domestic and foreign PEPs, their family members and their known close associates.  The FCA will begin a public consultation on this guidance shortly.”

And when you turn to the draft regs, the whole of section 47 is devoted to this spiffy new guidance (I’ve shortened as necessary for readability): “The FCA must give guidance… to relevant persons… in relation to the enhanced due diligence measures required… in respect of politically exposed persons (PEPs), their family members and known close associates.  The guidance… must include—

  • … what functions are, and are not, to be taken to be “prominent public functions” for the purposes of determining whether an individual is a PEP;
  • who should be treated as coming within the definitions of (i) a family member of a PEP; or (ii) a known close associate of a PEP;
  • what constitutes “appropriate risk-management systems and procedures”;
  • what account is to be taken of the jurisdiction in which the prominent public function arises;
  • how the level of risk associated with a particular individual is to be assessed…, and what approach is to be taken in relation to a PEP, or a family member or known close associate of a PEP, if the PEP, family member or close associate is assessed as presenting a low level of risk;
  • who should be treated as coming within the definition of “senior management” for the purposes of [approving the PEP relationship];
  • what constitutes “adequate measures” [to establish source of wealth and source of funds];
  • what sort of monitoring and scrutiny is required for the purposes of [keeping an eye on PEP relationships].”

I have to say that I don’t envy the FCA-er who is given this task – we’ve wrestled with it for years, haven’t we?  I suspect they will cling grimly to the word “shortly”, and hope that we take a generously long-term view of the consultation process.

Posted in AML, Legislation, Money laundering | Tagged , , , , , , , | 6 Comments

The magical disappearing regulations

My short AML survey is still live (until 31 March 2017) so please do have a go if you haven’t yet: https://www.surveymonkey.co.uk/r/VM62T6K

Oooo, you know how a love a good consultation, and this week I’ve been enjoying one close to home: the UK government’s call for thoughts on the draft (wait for it – it’s a biggie) Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.  Yes, that’s inflation for you: we’ve gone from the snappily-named Money Laundering Regulations 2007 to that.  I’ll talk more about other aspects of the consultation in later posts, I’m sure, but right up front I have told them how much I dislike that title.

It’s not just on aesthetic grounds, although it is plug-ugly.  What they have done is meld together two only slightly related sets of obligations.  Of course we need AML/CFT regs, and of course we need TOF regs, but not in the same document.  I’ll tell you what I’ve said in my response to the consultation:  “This now sounds like a piece of technical legislation rather than an expression of high-level anti-crime principles.  Although the two subjects – AML and identification of payer – are related, they are no more related than AML and any other aspect of due diligence, and pushing them together like this is misleading, and suggests (incorrectly) that identification of payer is the most important part of due diligence.  Plus, there is so little on Transfer of Funds in the legislation, and yet it hijacks the title and is given equal (and mealy-mouthed) billing.”

So what are they playing at?  Well, in recent times the UK government has talked big about reducing regulation in all sorts of areas; indeed, it was one of the key selling points of the Brexit argument that we could ditch shedloads of EU-derived regulation.  And what better way – on paper at least – to reduce the number of regulations than by stuffing two sets of them into one piece of legislation?  Of course, it does not reduce the regulatory burden – but it halves the number of regulations.  Magic!

Posted in AML, Legislation, Money laundering | Tagged , , , , , , , | 5 Comments

Queen of all I survey

I’ve been doing this AML malarkey now for a quarter of a century.  It was never the grand plan, but it seems that I have devoted my working life to keeping criminal money out of the financial and related systems.  And I wouldn’t have it any other way: personally (equipped as I am with great physical cowardice) it is my contribution to the fight against the baddies.  But there is no denying that AML can sometimes seem rather bleak, rather hopeless, rather Sisyphean – and rather lonely.

During one of my dark nights of AML soul, I thought it might be comforting to know how you lot feel about it, and so I have devised a little survey.  Its aim is to uncover your reasons for doing AML, in the hope that I will find that my own motivation is not all that rare and that lots of you feel as I do.  Or not.

Of course, I am also thinking that I might be able to draw some interesting and useful conclusions about the state of AML endeavours at the moment, and so the questionnaire starts with three questions to find out a little bit about you (in the professional sense, I should say).  But I must stress that it is all anonymous: I’ve used SurveyMonkey to create it, and so all I get is a summary of the responses – I will have no idea who replied, no email addresses passed on, nothing.  And because I know how busy you all are, it’s only eight questions in total – it won’t take more than five minutes (unless it awakens deep existential angst within you, in which case, sorry about that).  I’ll keep the survey live for about a fortnight, and I will share the conclusions with you after that.

Oh yes, I nearly forgot – here’s the link:  https://www.surveymonkey.co.uk/r/VM62T6K  Please feel free to pass it on if you have AML-ish friends.  And thank you.

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A spotless reputation

Recently I had a fog-induced flight delay at one of the Channel Island airports [I’m not being coy for no purpose; I am trying to relate an event without identifying the individual concerned].  It was tedious beyond belief, but the one bright spot was that when I did eventually get a seat on a flight – through a mixture of being nice to the flight dispatchers and weeping piteously – I found myself sitting next to someone very senior in a financial institution.

In the way of people thrown together in adversity we started to chat, and quickly found our common ground – and also shared my emergency bag of Jelly Babies.  This person was both interesting and interested, and of course we fell to discussing money laundering.  They revealed that, having been delayed at the airport, they had taken the opportunity to do their own institution’s annual online AML training, as required of all staff at all levels in their firm.  I expected to hear a complaint about this – after all, few people relish this particular task.  But no.  Here is what I was told: “Sometimes my colleagues moan about having to do this training, but then I point out to them that almost all of our competitors have had large AML penalties in recent years, splashed all over the newspapers, and we haven’t.  That’s a situation we should work to preserve.”

It was heartening to hear, but it has put me to thinking about why we do our AML tasks, and it is something I am going to return to soon – watch this space.

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Wishing you a speedy recovery

I have been working in Jersey this week, and at the start of the week it was announced that Jersey has undertaken to return to Kenya over £3 million of stolen assets, in an agreement signed by the Jersey Chief Minister on a visit to Kenya.  The money was pilfered by Kenyan Samuel Gichuru, who was Chief Executive of the state-owned Kenya Power and Lighting Company and, in that capacity, accepted backhanders from people in exchange for awarding lucrative contracts to various engineering and energy companies around the world.  The bribes were paid by them to a Jersey company called Windward Trading Limited, of which Gichuru was the beneficial owner.  On 26 February 2016, Windward Trading Limited pleaded guilty in Jersey to laundering the proceeds of corruption between 29 July 1999 and 19 October 2001; the Royal Court imposed a confiscation order of £3,281,897.40 and US$540,330.69, thereby stripping Windward of all its assets – and set about thinking how to get this money back to Kenya, while safeguarding it from future pilfering by other corrupt PEPs.  The recent agreement paves the way for this – and also makes it more likely that Kenya will co-operate in the extradition of Gichuru and co-accused Chrysanthus Okemo (the former Kenyan Energy Minister) from Kenya to face money laundering charges in Jersey.

Asset recovery is – as explained in the States of Jersey press release – often slowed by “the legal complexities of confiscation and asset sharing”.  Indeed, it is generally recognised that asset recovery costs more – much more – than the assets that are recovered.  But it is the look of the thing, and the principle of the thing.  Criminals must know that, no matter how distant in time and space they may be from their criminal activities, they will be pursued and their criminal proceeds confiscated.  And the public must know that criminal assets are not simply overlooked and allowed to stay with criminals because it’s rather a pain to get them back.

I have written before about what happens to confiscated criminal proceeds: in essence, all efforts are made to return them to victims.  But if victims cannot be found, or if the money was spent on illegal activities in the first place (e.g. drug proceeds), then a palatable and – if possible – socially beneficial alternative has to be found.  And in Jersey, they have played a blinder: their top-notch new police HQ, which opened this week, has been partially funded, to the tune of £15 million, by the confiscated proceeds of crime.  I find that extremely pleasing, and hope that future criminals appreciate the irony as they are remanded and interviewed in premises “sponsored” by their criminal confrères.

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Prize porkers

As visitors to my website and this blog cannot help but notice, I have written a few books about AML.  There are two series of the “piggy” books – one for directors (with their AML oversight responsibilities) and one for staff working at the AML coal-face.  (For MLROs themselves, I have written an altogether more detailed, weighty and piggy-free tome, the “Money Laundering Officer’s Practical Handbook”.  Although, as with the FCA’s Handbook and the GFSC’s Handbook and so on, you would have to have monster hands to hold it – which makes me wonder what distinguishes a handbook from just a book.  Is it a book you should keep always to hand?  But I digress.)

To return to the piggies.  In one series there are five editions, and in the other there are sixteen, giving a grand total of twenty-one piggies – a sty-full, to be sure.  As all self-respecting, self-published authors should, I keep careful records of the sales of these books, to track demand and see whether, when it comes to update time, all should be maintained or some should be allowed to slope off quietly into the sunset.  And I can report that one piggy of the twenty-one outsells all the others by quite some way: “AML: What You Need to Know – UK banking edition” sells four times as many copies as (in second place) “AML for NEDs – Guernsey edition”.

Now I appreciate that the UK is my largest jurisdiction, and within that jurisdiction banking is the largest sector that I target.  But still I am surprised every month by the number of UK banking piggies that are rehomed.  Or at least I was, until a nice chap contacted me via LinkedIn and uploaded a photo of his newly-acquired banking piggy – which he had been given as a prize for participating in “an excellent team performance”.  Now this is lovely news.  I often distribute prizes myself during training; I love using AML games (such as bingo, word games, money laundering simulations, and snakes and ladders) and I regularly stock up on money-themed prizes (such as chocolate coins, banknote erasers and piggy-banks) as rewards for the winners.  I have always been a bit shy of handing out my own books as prizes – it seems rather self-congratulatory – but it is heartening to know that people are pleased to get them, and it does solve the Mystery of the Unexplained Sales.

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Hypocrisy and heavy-handedness

Since I left Sunday school with nary a backward glance when I was about eight, I have had little to do with organised religion.  I enjoyed daydreams about unattainable priests as much as the next teenage girls, but realised quite quickly that when it comes to men of the cloth, more look like Father Jack Hackett from “Father Ted” than like Cardinal Ralph de Bricassart from “The Thorn Birds”.  But a couple of announcements in recent weeks have brought my attention back to the church.

Speaking during morning mass, and then reported on Vatican Radio on 23 February 2017, Pope Francis had harsh words for those who live a “double life”: “Scandal is saying one thing and doing another; it is a totally double life: ‘I am very Catholic, I always go to Mass, I belong to this association and that one; but my life is not Christian, I don’t pay my workers a just wage, I exploit people, I am dirty in my business, I launder money.’  A double life.”  He then went further and said that “it is better to be an atheist” than to bring scandal to the church: “[With] scandal, you destroy.  You beat down.  And this happens every day, it’s enough to see the news on TV, or to read the papers.  In the papers there are so many scandals, and there is also the great publicity of the scandals.  And with the scandals there is destruction.”  I trust that the self-avowed good Catholic members of organised crime groups from Italy to Albania, from Colombia to New York, are squirming in their pews.

And in a handy follow-up to my last post but one – about banks and others applying AML obligations thoughtlessly and inflexibly – we have the story of Saint Nicholas Church in Harpenden in Hertfordshire, whose account at HSBC was closed for a fortnight after the bank “accused church staff of repeatedly failing to provide up-to-date details of individuals involved in the church’s finances, which it said was vital to fight money laundering and fraud”.  As a result, standing orders bounced and parishioners whose money was returned were confused.  According to the BBC story, “details demanded were part of HSBC’s controversial Safeguard programme [which was] set up in response to the bank being fined £1.2 billion in 2012, over money laundering and sanctions busting”.  Church treasurer Peter Timms seems to have a deal more commonsense than his bankers: “This was very heavy-handed treatment, particularly for a charity run by volunteers.  Banks should know their customers, and exercise a bit of common sense. If they’re concerned, they should speak to us properly.”  Amen to that.

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Idling in neutral

One of the difficulties of running a specialist, one-person business is providing relevant training for the staff – i.e. me.  If an AML conference looks particularly ground-breaking I will sign up, but many of them go over (what is to me) familiar ground, often with speakers who are trying to sell products and services to MLROs.  (And this is fine if you are an MLRO – you get information and in exchange you listen to a sales pitch – but is rather pointless for me.)  In a bid to keep my own knowledge current, and to exercise the little grey cells, I have recently signed up for my very first course with FutureLearn, an online distributor of free (yes, free) training courses in a wide range of subjects.  I’m not sure how they make their money – although you can pay for a certificate at the end of the course, if you want one – but the quality of the training I have seen so far is excellent.

My course is called “Antiquities Trafficking and Art Crime” (come on: you knew there would be a money laundering angle somewhere – although, with my fondness for their magnificent cycle routes, I was quite tempted by the “Introduction to Dutch” course).  And it’s been a while since I read any criminology, so I have been particularly enjoying making links in my mind between the money side of the illicit trade in art and antiquities, and the more familiar money laundering of my day job.

For instance, we have just been learning about “techniques of neutralisation” – ways in which criminals justify to themselves what they are doing, in an attempt to neutralise their criminality.  The FutureLearn course looked at the motives of dealers in looted antiquities, but in my own work I am aware of similar techniques being used by both money launderers and those in the regulated sector who choose to ignore AML procedures.  The five techniques of neutralisation initially postulated by American criminologists David Matza and Gresham Sykes in the 19502 are these:

  • Denial of responsibility: the offender proposes that he was a victim of circumstance or forced into situations beyond his control (“It wasn’t my fault”)
  • Denial of injury: the offender insists that his actions did not cause any harm or damage (“It wasn’t a big deal – they could afford the loss”)
  • Denial of the victim: the offender believes that the victim deserved whatever action the offender committed (“They had it coming”)
  • Condemnation of the condemners: the offender maintains that those who condemn his offence are doing so purely out of spite, or are shifting the blame from themselves unfairly (“You were just as bad in your day”)
  • Appeal to higher loyalties: the offender suggests that his offence was for the greater good, with long term consequences that would justify his actions (“My friends needed me – what was I supposed to do?”).

It is not unusual to hear similar justifications today: all they did was make an inflated insurance claim, and heaven knows the insurance company can afford it; why should I spend hours on EDD when my boss takes on clients without thinking about it; if the government is going to waste money on defence, who can blame me for not paying tax; I would have reported the client but I was too busy; if I had turned down that business my team would have missed its sales target, and my colleagues needed their bonuses.  And now I know what to call them: techniques of neutralisation.

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Do as I say

I’m going to do to you what is often done to me: I am going to tell you my own anti AML story.  Actually, it’s an anti anti AML story – you’ll see.

In deference to the diktats of the Financial Services Compensation Scheme (spread that money around) and in an attempt to earn some interest, I put my company money into a variety of one-year fixed interest savings bonds.  One, at Financial Institution 1, matured the week before last.  Their interest rate has plummeted, so I decided to move it over to a similar bond account that I have at Financial Institution 2.  When FI1 asked me to nominate the account for the transfer of the closing balance, I gave the details of FI2.  I received a closing statement from FI1 – and a phone call from FI2.  We can’t take this money, they said, because FI1 is not the account you used to fund the bond initially [that was my general business current account at Financial Institution 3].  Ah, thought I: a source of funds enquiry – how appropriate and, to be honest, rather exciting.  And so I explained all of the above, using all the key words I know MLROs like, and offering to scan and email the closing statement from FI1.  But to no avail: FI2 said that they had to return the money whence it had come.  But you can’t, I explained, as the account at FI1 is now closed – hence the “closing” statement.  Ah, said the chap.  In that case, we’ll have to send you a cheque.  Wouldn’t a bank transfer be safer, I asked, and slightly less likely to lead to money laundering, as I could take your cheque anywhere…?  Silence.  I imagined frantic riffling through the pages of the AML manual.  No, came the answer: only a cheque can be done.  Harrumph.

Anticipating trouble, on Saturday I called into my local branch of FI3.  I told them the story.  Soon, I explained, I will be paying in a large cheque from FI2, which is bound to trigger questions, but as proof of source of funds I will have only a closing statement from FI1.  Please could you note on my file that I have warned you about this, and perhaps we can short-circuit any alerts.  No need to worry, said the manager of the branch: our cheque people will look only to see that the payee name matches, and our fraud people won’t care as long as the cheque comes for a UK-regulated institution.

*head in hands*  You can see why I have anonymised the names.  It makes me despair, this unthinking, illogical application of AML legislation.  FI2 is required to ascertain source of funds and, if they are happy with the explanation, proceed.  They were happy with the explanation, but “computer says no” and only one account can be recognised for money in and out.  FI3 is required to do source of funds checks, and instead seems to be applying an outdated and frankly dangerous (for them) reliance on cheques from regulated institutions.  I have yet to receive the cheque and try to pay it in: I’ll let you know.

Posted in AML, Due diligence, Money laundering | Tagged , , , , , | 7 Comments