Hold your Criminal Finance horses

Well, it’s here: the Criminal Finances Act 2017 has received Royal Assent.  And it has been quite an education in legislative procedure for me at least.  For instance, did you know that the progress of a Bill (before an Act is approved as an Act, it is known as a Bill) can be tracked through the two houses via its own little “thermometer”?  The one for the Criminal Finances Act is now completed (a bit like those fundraising thermometers) and you can see it here.  If a Bill starts in the Commons (as the majority do) it goes through three readings there, with amendments along the way, before being sent to the Lords for another three readings with amendments.  The final Lords amendments are then sent back to the Commons for approval; if they disagree, back it comes – this to-ing and fro-ing can carry on for some time, and is charmingly known as “Ping Pong”.  If there’s a stalemate, the Bill will die (or “fall”, in the correct parlance).  And some Bills are timed out – in other words, no final decision is reached by the end of the Parliamentary session (which is called prorogation).  This was a real concern with the Criminal Finances Bill, as it then was, as it was still being debated right up to the wire, being sent back to the Commons with some Lords amendments on 26 April 2017, with the prorogation announcement expected on 27 April.  It does, as they say, concentrate the mind, and I even had a little email conversation with a nice lady in the Lords Government Whips’ Office about when it might all happen.

Of course, the passing of a Bill into Act-dom is not the end of the story.  If you look at the (final-ish) text of the CFA 2017 (as I write this it has not yet been published on the legislation.gov.uk website, but I am using the draft printed on 25 April and sent to the Lords for final amendments, which did not affect the point I am trying to make – phew!)… if you look at that final-ish text, right at the end, in the section entitled Commencement, is this little sentence: “This Act comes into force on whatever day or days the Secretary of State appoints by regulations made by statutory instrument.”  Yes: the Act is in existence but not yet in force.  We now have to wait for a Commencement Order to be made to bring the CFA 2017 into effect.  And heaven only knows when that will be, as – what with the General Election and Brexit – the eighteen Secretaries of State may have other things on their minds.

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Conspiring against criminal cash

I have written a few times before about the interesting stage that all countries go through as their criminals (alongside ordinary people, but I’m less interested in them) transition from cash to non-cash working patterns.  As a jurisdiction’s AML regime beds in, matures and becomes more effective, criminals find it harder and harder to get rid of their cash.  The most recent high-profile example was India – and now it is being noticed in Nigeria.  On 3 February 2017 US$9,772,800 and £74,000 was found in a fire-proof safe in a property in Kaduna (in north-west Nigeria) belonging to Andrew Yakubu, a former director of the national oil company, NNPC.  On 15 March 2017 sacks containing bundles of banknotes totalling US$155,000 were found at Kaduna airport.  And on 13 April 2017 US$43.4 million, £27,800 and 23.2 million naira [about £60,000] were recovered from a deserted Lagos apartment – a haul the local Economic and Financial Crimes Commission (EFCC) described as “humongous”.

EFCC Executive Chairman Ibrahim Magu credits the cash discoveries the whistle-blowing policy put in place by the Nigerian government in December 2016.  As part of this policy, “a whistle-blower responsible for providing the government with information that directly leads to the voluntary return of stolen or concealed funds or assets may be entitled to anywhere between 2.5-5% of amount recovered”.  Perhaps unsurprisingly, within the first three months of the policy being in place, 2,351 reports had been made.  So why have Nigerian criminals been stockpiling cash, rather than paying it into banks as they used to?

Well, in 2012 the Central Bank of Nigeria (CBN) introduced a cash-less policy, taking the view that “high cash usage enables corruption, leakages and money laundering, amongst other cash-related fraudulent activities”.  And on top of that, in February 2014 the CBN implemented the Bank Verification Number scheme.  This is a biometric identification scheme whereby every bank customer in Nigeria is required to turn up at their bank in person and have their biometric details captured and linked to a unique number that can be verified across every account they hold and every transaction they make through any Nigerian bank.  Holders of dodgy accounts used for laundering and the like have been, understandably, reluctant to turn up – which means, in effect, that their accounts are frozen.  Boo hoo.

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The AML rank and file

So here we are, with the final piece of analysis of our AML survey.  The last question was the most complicated: I asked “There are various things that could be done to change the way we approach AML (in principle, rather than in any specific jurisdiction or organisation).  Please select as many changes as you would like to see from the following list, and put them in order of preference, with the first slot showing the thing you would like most to see.”  And then I offered ten options.

When I “programmed” the survey, I used a light touch: I did not insist that all questions were answered, and for this final question, I did not require a complete ranking from one to ten – so some people did rank all ten, while others chose anything from one to nine.  Now that’s fine, until it comes to analysis.  Thankfully my husband is a maths whiz who enjoys a statistical challenge (as long as it comes with a cafetière of fresh ground coffee and a large piece of cake – cheap at twice the price) and he took this ragbag of responses, added some mathematical weighting, and returned an overall ranking for us.

So now – drum roll please – of the ten options I offered, the most favoured was “Oblige regulators/supervisors to publish more specific AML guidance, with government approval – i.e. so that you can point to it as a defence”.  Regulators/supervisors, please take note: remember that you are dealing with compliance people, and the clue is in the name.  People who work in compliance like to get it right, and in order to get it right, they need to know what is considered right.  If you need further convincing, the flip side option – “Oblige regulators/supervisors to publish less specific AML guidance, so that you have more latitude in your AML decisions” – was jolly unpopular, coming in at position eight.

Second most favoured option was “Reduce the legal burden on the MLRO”, followed by (quite a technical point, this one, in third position) “Give the consent regime more teeth, e.g. give FIUs the power to insist that accounts are closed/kept open”.  Again, I offered the opposite as well – “Get rid of the consent regime” – and this was the lanterne rouge of options, right down at position ten, so you really didn’t like that.

Penalties were of middling interest: “Increase the penalties that are levied on organisations for AML failings” was the fourth most popular option, and “’Personalise’ the penalties that are levied on organisations for AML failings – i.e. penalise individuals rather than organisations” was the fifth.  “Reduce the penalties that are levied on organisations for AML failings” came lower down, at position nine.  (For this set of solutions perhaps more than any other, I daresay the answers you gave depend on your own role; as the introductory questions showed, we had respondents who are regulators, legislators and law enforcement officers as well as MLRO/compliance people.)

And I will admit to being surprised at the order of options chosen at positions six and seven: “Increase the amount of due diligence information that must be gathered” was (one ranking position) more popular than “Reduce the amount of due diligence information that must be gathered”.  It’s not something I hear very often from MLROs – a desire to be required to gather more CDD.

So that’s your lot: we’ve sucked all the goodness we can from the bare statistics of our AML survey.  But I for one will be mulling over what I have learned, hoping to use it to improve my own efforts.  And I’d be very interested to hear your interpretation of it all.

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Cloudy, with a chance of optimism

I’m not an early adopter, as you probably know: my blog came late to the game (started in 2011, although I hope I have made up for it since then with my doggedness), and my website is rather old-fashioned (I’m a one-person business, and if I have a spare ten minutes I’d rather sweep the garden and inhale a Jaffa Cake than redesign my website).  But I am quite taken with this word cloud malarkey.  And so, to illustrate the responses I received to the next question in our AML survey – “How do you feel when you think about the AML efforts in your organisation and jurisdiction?” (with twelve positive words, twelve negative words and an “other” option) – may I present our AML emotion word cloud:

Is it not a thing of beauty?  As you can see, the six most popular words were all positive: “supportive” was selected by 120 of the 215 respondents, “determined” by 100, “optimistic” by 66, “reassured” by 64, “proud” by 61 and “enthusiastic” by 56.  (I should reiterate that this was a AML survey taken mainly by people with an AML-ish role in life, so generally more pro-AML than anti-.)  But then we do get a bit sad: 32 admit to being “confused”, while the same number are “disappointed”.  28 are “fearful”, and the same number are “resigned” (not literally, I hope – although one has, as he points out: “Defeated – see answer to Q6!”).  Nine of you are “angry”, and six are “resentful”.  And turning to the freeformers, you declare yourselves “frustrated”, “worried”, “stretched”, “nervous”, “challenged” and “overwhelmed” – with one little “hopeful” in there for balance.

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The law is just the law

For my next survey question, I moved into the realms of fantasy (or at least, I hope it’s fantasy – with Brexit, nothing’s certain any more): “If all the AML obligations were removed from legislation and regulation, what would you do?”  Again, I offered various options – six, this time – plus a space to suggest your “other” answers.

Bearing in mind that this was a survey of people reading an AML blog – the vast majority of them performing an AML-ish role at work (as revealed in the early questions) – it is perhaps not surprising that the most-chosen option (picked by 178 out of 215 respondents) was “I would still want to conduct due diligence and look out for possible criminality”.  In second place – 112 out of 215 – came “I would campaign for AML obligations to be reinstated”.  I did not think this would be such a popular choice; I know I’d be out there with my placards (carefully punctuated and grammatically accurate, of course), but it’s good to know that I wouldn’t be marching alone.

The remaining three broadly “pro-AML” options were much less popular, and quite evenly split: 32 respondents said “I would seek a role in a jurisdiction that has retained AML obligations”; 22 said “I would leave the formerly-regulated sector”; and 18 declared that “I would do what is required by my organisation’s client take-on and monitoring procedures, but no more”.  Four people confessed that “I would think it [the removal of AML obligations] a great improvement”.  (Rest easy, you four: only SurveyMonkey knows who you are, and I don’t think he’s that bothered about AML.)

As ever, the “other” suggestions are fascinating.  Some were rather depressing: “Leave the business, which is what I am doing because, despite the legal obligations placed on the business, there is scant regard for them in some quarters”.  (Oh dear – we’re sorry to see you go.)  “My role would be redundant.  It only exists because the law requires it.  There is no appetite for AML whatsoever in my business, but I’m still passionate about it.”  (Hurrah!)  Others see it as a natural end: “I would consider retiring after having had a decent innings in the industry.”  Several people want to retain something of their role, by opting to move into risk, or general compliance.  And some have entirely alternative careers in mind: “Become a lorry driver” and “I would start baking instead :)”.

Other respondents are AML to their cores: “I would still want to know with whom I work and what the deal was, what the risk was.  You know, the law is just the law: it’s a political statement not necessarily in line with my morality.  I think we may be nearing the time when people, the masses, the proletariat rise up against capital as Marx predicted.”  And “I would push for an internal policy which reflects the corporate and social responsibility values of my organisation.”  And “It would be a case of identifying the type of  firm you wanted to be.  White listed with high quality of clients and a positive reputation, or another secretive shady firm?  Once you go down the second path it will only get darker and more grim, and could you look yourself in the mirror in the mornings knowing how the people have generated their money and who will have been exploited?”

It seems that for many respondents (and again I stress: this was a survey of AML-ish people reading an AML blog) the legal AML obligations are only part of the picture.  The basics of AML – knowing who your client is and where his money is from, so that you are satisfied that neither is criminal – are part of a moral code and not done just because the law says so.  Taking those laws away would be problematic (and thankfully, as several respondents commented, extremely unlikely to happen), but it would not mean the disappearance of all efforts to keep criminal money out of the system.

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Power to the AML people

Now that I have whetted your appetites with that first course of participants in my little AML survey, let’s move on to the first meat course: why you do what you do.  The survey question was: “Being totally honest, please (remember, this is anonymous!): what drives you personally to comply with the AML regime of your organisation?”  I then gave eight options and space for people to suggest “other” drivers.

The most popular driver – by a whisker, with 173 of 215 respondents selecting it – was “I think that criminals should not be able to profit from their crimes, and AML is one weapon we can use against them”.  I should confess that this is my own personal top choice, which means either that I am less of a freak than I had thought, or that I draw like-minded people to myself and to my blog.  Either way, I’m delighted to hear it.  In second place – with 166 of the 215 choosing it – was “I want to protect my organisation from infiltration by criminal money in order to protect its reputation”.  Interestingly, protecting their organisation’s reputation was more important to respondents than preserving its licence (which garnered only 140 selections) .  And indeed reputational concern was wider than that: 159 of the 215 chose “I want to protect my own reputation”.  In today’s more connected world, and with many respondents working in smaller jurisdictions (as revealed last time), it is clear that they realise that being associated with money laundering is a definite brake on the career.

The legal drivers were much less scary than I thought they might be: only 53 people chose “It is a contractual obligation of my job”, and only 25 went for “I do it only because I have to – it is a legal requirement”.  It seems that when it comes to the AML-devoted, the carrot is very much more effective than the stick.

And what of the freeform “others”?  When given licence to vent, what did people confess made them do their AML duty?  I’m glad to read that I am not the only AML-obsessive in town: “AML/CTF is very interesting and helps to stop global crime”; “AML and criminality go hand in hand: convict them of a lifestyle offence, then take their assets away from them – it hurts them more than any sentence”; “It’s my vocation and I love it”; and “I love AML/CFT – simple as that!”

Recognition that AML is part of a bigger picture was also revealed: “I believe in the social responsibility of the role”; “My own moral code”; “It’s the right thing to do: just as I would intervene if I saw a burglary in progress, I do the same when I see a client with no source of wealth explanation and unusual transactions”; “I protect the financial services system”.  Two respondents were particularly outraged (and I mean that in a complimentary sense – I’m all for outrage when it comes to money laundering): “I like to know who I work with/who the customer is – I don’t like being fooled, taken advantage of.  And I don’t like anyone whose main purpose is to f**k others, especially poor desperate people – that goes for some commercial legitimate business too.”  And “Because of the human cost of money laundering and terrorist financing.  I want to fight against children being abused, families ripped apart and for freedom of belief.  I look through all we have to do to try and understand what I could be potentially stopping at the coal face.  I find it much easier to get colleagues on board when I make them think about what regulation is working to prevent, and that is criminals exploiting other human beings whether they be white collar criminals or people traffickers.”

From my perspective as a trainer, it helps me enormously to know what influences, encourages and alienates you when it comes to AML, so that I can pitch my approach correctly – and indeed look for examples of where our efforts have been effective against the things that upset you.  I can only hope that any regulators, legislators or investigators who may be reading will think the same.  And from a personal standpoint, I am delighted to know that I have found my people – I salute you all.

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So that’s who you are!

Well, that was quite an adventure!  My first ever SurveyMonkey survey – and how generous you all were with your time.  I ran my little survey for only two weeks, and in that time 215 – 215! – of you responded.  I asked eight questions only, and said that it would take less than five minutes.  So here’s survey finding number one: after removing two “outliers” who took more than six hours (I assume they went away to make a cup of tea, or just fell asleep at their desks), on average you took 6 minutes and 39 seconds to complete the survey.  The Usain Bolt of responders took a mere 2 minutes and 3 seconds.

Survey finding number two concerns your locations.  I offered “my” six familiar jurisdictions (UK, Guernsey, Jersey, the Isle of Man, Alderney and Gibraltar) plus “other”, and said that you could be in more than one place at once (in terms of your AML responsibilities).  The majority – 94 of you – are in Guernsey.  62 of you are in the UK, and 43 in Jersey.  18 are in the Isle of Man, 13 in Gibraltar and 5 in Alderney.  The “other” locations given include the US, various European countries, Dubai, Hong Kong, Cayman Islands, St Lucia, BVI, Australia – and the Duchy of Cornwall.  (Your replies are anonymous, but I think I know who that is… and no, it’s not Prince Charles.)

Next I asked about the sector in which you mainly work and – cruelly – I forced you to pick just one.  Here’s the pretty pie chart showing the results (the sectors are shown alphabetically, reading clockwise from 12 o’clock):

The big sectors for responses are fiduciary (26.5% of responses) and banking (22.8%).  My shyest sectors are legal (2.8%) and law enforcement (0.9%).  But I am most interested to see that I have no responses at all (that’s 0.0% – diddly squat, in technical terms) from the estate agency sector.  See how they are missing between “banking” and “fiduciary”.  That means that not one estate agent MLRO anywhere in the world reads my blog – or at least, reads it and wants to take part.  I’m saddened, but not surprised.

And as for your AML-ish roles (you could pick more than one), 111 of you admit to being an MLRO or deputy MLRO, while a further 73 hold non-MLRO compliance roles and 36 are directors.  In the “other” category, we have partners, managers, analysts, administrators, regulators, investigators, trainers and one “total peasant” who obviously knows his/her place in the AML community.

So that’s the scene set: tune in next time for the really meaty questions and their responses.

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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.

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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!

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