Wimples and wagers

In recent AML training I have found myself talking more and more about the “CDD jigsaw”.  As with all jigsaws, the CDD version involves gathering lots of little bits of information – some of which might seem indecipherable or unrelated – and assembling them into a recognisable picture.  It has been on my mind partly because I have been working with casinos, and several penalties levied by the Gambling Commission (the AML supervisory body for the UK’s gambling sector) this year have pinpointed the absence of the assembly stage of the CDD jigsaw.

For instance, in the Regulatory Settlement that they published in February 2018 concerning William Hill, the GC found that: “A customer was allowed to deposit £654,000 over nine months without source of funds checks being carried out.  The customer lived in rented accommodation and was employed within the accounts department of a business earning around £30,000 per annum.”  In other words, William Hill staff were aware of their customer’s housing situation and of his salary and of his level of gambling, but did not assemble these pieces into a picture that would have shown a mismatch.

An unnamed bank in California must be reaching the same conclusion right about now.  Among its customers were two nuns, Sister Mary Kreuper and Sister Lana Chang – respectively principal and teacher at St James’ Catholic School in the city of Torrance, near Los Angeles.  Into their account they paid cheques made out to their school for tuition and other fees.  Over a decade, they siphoned off about half a million dollars and – I kid you not – used it to gamble in Las Vegas.  On 10 December 2018 their order – the Sisters of St Joseph of Carondelet – confirmed what had happened and said that the sisters would be facing criminal charges.  Apart from delivering a welcome crop of puns (gambling habit, put it all on black, hail Mary full of ace…) this story reminds us that (a) source of funds questions are crucial, and (b) listening to (and understanding the implications of) the answers to those questions is twice as crucial.

On that note I shall head off on my festive break.  I wish you all a very merry Christmas and a happy new year, and this blog will leap back into life again on Tuesday 2 January 2019.

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Just do the math

I am currently reading “How Not to Be Wrong” by American mathematician Jordan Ellenberg.  Not that I am wrong very often, of course, but it pays to protect one’s elevated position.  In truth, I scraped by in my maths A-level, which I took simply to please my mathematician father, and have since taken the precaution of marrying an engineer (who is therefore very numerate) so that never again will I have to work out the tip on a restaurant bill in my head.  As my grandma used to say, why keep a dog and bark yourself?

And yet – here’s irony for you – I find myself working, albeit tangentially, in the financial sector.  With numbers.  And risk calculations.  And – my personal bête noir – probability.  To be honest, I like AML in part because I can take an extreme position: if it seems too good to be true it probably is and you should STEER CLEAR – sound the klaxons and back away from that dodgy deal!  My cowardice and financial timidity protect me but every day people who are smarter than I am fall for frauds and scams.  I had always assumed that it was their vanity or inattention or overweening greed that was their undoing, but my new pal Jordan has shed some light for me on what might be happening, with his parable of the Baltimore stockbroker.  Forgive me if I am late to the party with this one, but it’s been a revelation to my mathematically-challenged brain.

Imagine you get an unsolicited email from a stockbroker in Baltimore.  (I daresay he could be anywhere, but maybe his Baltimore-ishness is important.)  You scan the email out of idle curiosity and it predicts that a certain share will rise in value this week – and you happen to hear that it does indeed gain quite a bit.  The next week another email arrives from our Baltimore friend, this time predicting that another share will tank – and again it does.  This goes on for ten weeks, and you have now amassed ten accurate share tips.  In week eleven, the stockbroker offers you the chance to invest via his service – for a generous fee, of course, and with all the usual warnings about shares going down as well as up, but reminding you about his unbroken run of ten top tips.  You do the maths to be sure: each week he could have been right or wrong with his tip, and the chances of being randomly right for ten weeks in a row are ½ x ½ x ½ x ½ x ½ x ½ x ½ x ½ x ½ x ½ = 1/1,024.  That’s just so unlikely – he must have a system – and so you’re hooked.

But, counsels Jordan, it can all be explained.   In week one, the stockbroker – who knows his maths, the fiend – sends out 10,240 emails: half predict a share price increase and the other half a share price fall.  The 5,120 people whose emails turn out to be wrong never hear from Baltimore again.  The 5,120 with the correct predictions are contacted in week two – again, half are told of a price rise and half of a price fall.  The stockbroker checks what happens and in week three contacts only the 2,560 people whose second week emails were correct.  And so on.  By the end of week ten, he will have whittled it down to ten people who have had ten correct emails – and the chances of them signing up in week eleven are very good indeed.

Now my brain hurts and I am going to have a biscuit break.

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New Guernsey piggies in the sty

A very quick post specifically for my Guernsey readers.  Just for you, I have:

  • Read the new Schedule 3 and Handbook cover to cover
  • Updated all five of my piggy books – for NEDs, and for the accountancy, banking, fiduciary and insurance sectors – to reflect the new legislation and guidance
  • Listened in – yes, honestly – via BBC Radio Guernsey to the States meeting yesterday, when aforesaid legislation was put forward for approval
  • Tweeted the States just to make sure that I had heard correctly that it had been approved
  • Stayed up late last night and risen early this morning to get the five piggies released from their Amazon stable.

In short, the Guernsey piggies are now all completely up to date and reflect Schedule 3 and the new Handbook – including enhanced measures, the MLCO and the new PEP categories.  Jaffa Cakes were eaten, I can assure you.

Search “susan grossey guernsey” on Amazon, or go to the Publications page of my website for the direct links.

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The concept of anonymous publication

We all have a talent, and mine is words.  I love reading and writing them, my spelling is pretty crash-hot, and if I am trying to remember something, I tend to see it as a word, e.g. “I’ve forgotten his name, but it’s seven letters long with a double letter in the middle and a y at the end”.  So when I see a phrase like “anonymous publication”, my antennae twitch.  Because it’s contradictory nonsense.  But apparently not if you’re HMRC.

I have written before about how different AML supervisors are when it comes to sharing information about their AML activities.  Some – take a bow, please, FCA, Gambling Commission and Guernsey Financial Services Commission – are excellent at putting out detailed information whenever they levy an AML penalty.  The GC even adds a little section of “good practice” to each notice, drawing the attention of MLROs to the lessons that must be learned.  Sadly, HMRC – which is the AML supervisor for estate agents, high value dealers and various other businesses and professions that are not supervised elsewhere – is rather more parsimonious with its information.  I was therefore pleased to see in the recent update to the UK’s AML Regs that “where the Commissioners [of HMRC] give a notice under regulation 83 [disciplinary measures], they must, without undue delay, publish on their official website information on the type and nature of the breach and the identity of the person on whom the sanction or measure is imposed” (it’s section 85, to save you hunting).

Breath bated, I waited.  (Sheer poetry.)  And patience was rewarded on 4 October 2018 with this cheese-paring revelation:

  • Between 26 June 2017 and 31 July 2018, HMRC levied penalties totalling £13.396.39 on four named businesses
  • It also levied two “minor penalties” totalling £466.50.

And then there is this gnomic paragraph, under the heading “Anonymous publication”: “HMRC has decided that publishing the full identity of the business or individual would be disproportionate and is publishing anonymously.  There are no details published for this period.”  Does this mean that there are details but HMRC has decided not to publish them?  Or that there are no anonymous details that would not have been published had they arisen?  Sir Humphrey would be proud.

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Keeping up with the Joneses, les Dubois and die Schmidts

I mentioned in my previous post that Guernsey is on the cusp, nay, the very brink of getting new AML legislation.  This represents the conclusion of their exercise to fall into line with the Fourth Money Laundering Directive (or as in line with it as Guernsey wants to be), as we did in the UK when we created the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.  History shows us that after the grand effort of transposing a money laundering directive into national legislation, the domestic AML supervisors should be able to relax for about a decade.  But this is no longer the case.

The first Money Laundering Directive was adopted in June 1991, MLD2 in December 2001, MLD3 in October 2005 (this was rather quick, in order to bring terrorist financing into the mix) and then MLD4 in June 2015.  But then someone found the accelerator pedal: MLD5 was published in draft form in July 2016 and adopted in July 2018, with a transposition deadline for EU Member States of 10 January 2020.  This is only 2½ years after the MLD4 transposition deadline of 26 June 2017.  And now we have MLD6 – which, admittedly, is more of a companion piece to MLD5 as it deals specifically with the criminalisation of money laundering rather than with the practice of anti-money laundering, but nonetheless it too has a transposition deadline that is worryingly close, at 3 December 2020.

I’m not saying for one moment that MLDs 5 and 6 don’t contain interesting developments and initiatives – there are some crackers in there (centralised register of bank accounts, anyone?) – but I am concerned about the speed at which things are changing.  With the best will in the world, is any Member State going to be able to write new AML legislation for the second time in three years and put it out to industry for comment and get any meaningful response, given that industry has only just dealt with the last lot?  Are sectoral AML supervisors going to be able to put out guidance in time, given that they’ve only just dealt with the last lot?  Are MLROs going to be able to convince their Boards and staff to implement yet another updated set of AML procedures, given that they’ve only just dealt with the last lot?  And is anyone going to believe that those tasked with writing these AML directives actually know what they’re doing, given that the shine seems to wear off a new directive with alarming haste?  If we keep changing our minds about the best way to tackle money laundering, we create nothing but confusion, disillusionment and exhaustion – and criminals can take full advantage.

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Chaos theory?

Regular readers will know that I do a lot of work in Guernsey, and that in general I am a supporter of that jurisdiction’s approach to AML.  However, one issue on which we – Guernsey and I – have long differed is dePEPping.  (For the confused, this is the point at which you can consider a Politically Exposed Person no longer to be a PEP because he has left the office which PEPped him in the first place.)  Under the last two EU Directives – MLD3 and MLD4 – dePEPping occurs twelve months after the PEP has stopped doing his PEPpish activity.  (It’s in Article 22 of MLD4.)  Now, I’m not saying that I agree with that; personally, I think it’s a bit too soon.  However, Guernsey has always gone to the other end of the spectrum and has declared (I’m paraphrasing here) “once a PEP, always a PEP”.

But now Guernsey is in the throes of updating its AML legislation.  This round of updates has been, for various reasons, a tortuous and often torturous process but – like a worn-out mare at the Grand National – I feel that I have cleared the Chair and now have only the Water Jump between me and the finish line.  Draft legislation – the Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) (Amendment) Ordinance, 2018 – has been all but agreed and is queued for rubber-stamping at the next meeting of the appropriate bit of the government, on 12 December.  And in this shiny new legislation, dePEPping looms large – and complicated.

What Guernsey has done is to create a definition of dePEPping which is – to my mind – a masterful encapsulation of the risk presented by PEPs.  There are now three categories of PEP – domestic PEPs, foreign PEPs and IOPEPs (who work for international organisations) – and they are dePEPped at different points:

  • domestic PEPs can be dePEPped five years after they leave their PEPpish role
  • foreign and IOPEPs can be dePEPped seven years after their leave their PEPpish role, unless they are a tip-top PEP (e.g. head of state or head of their international organisation) or “have the power to direct the spending of significant sums” – either of which means you can never dePEP them.

As I say, I think this is an excellent reflection of the level of risk presented by various flavours of PEP.  But pity the poor MLRO (or, as Guernsey will soon have it, ML Compliance Officer) who has to design the policies and procedures to reflect this new set-up.  The theory is excellent but I fear that the practice will prove a nightmare.  When creating an AML regime, a vision of the perfect must always be tempered by consideration of the possible.

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The tarnish on golden visas

I have mentioned before the concept of “golden visas” and passports-for-sale.  In today’s politically uncertain world they are becoming ever more popular, and last month Transparency International published a report called “European Getaway: Inside the Murky World of Golden Visas”.  Put aside, if you will, the dislike tinged with envy that is often engendered by those who flit into the country on a leather-lined private jet and select (or instruct their lackey to select) the most appropriate travel document from the sheaf at their disposal.  We’re bigger than that, AML-ers.  From a money laundering perspective the main danger is – as noted by TI in that report – the lack of due diligence: “Though most countries that trade in visas and passports assert that they uphold the highest standards, audits performed in a number of countries in recent years have identified serious deficiencies.”  In 2014 several Portuguese government officials were detained after allegations that their golden visa programme had fallen prey to “corruption, money laundering and influence peddling”, while in March 2017, “the Hungarian golden visa scheme was suspended following revelations that the right to sell residency bonds on behalf of the government was awarded to eight companies without any public procurement process – seven of the chosen companies were registered outside of Hungary, and there was little to no information about their real owners in the public domain”.

However, the country I find really interesting in all of this is Canada.  Canada’s federal Immigrant Investor Programme (launched in 1986) was once rather popular – after all, the Canadian passport is widely accepted, and it’s rather a nice country in which to live, politically stable, with good scenery, and the maple syrup is (almost literally) nectar.  It was not a cheap or easy option: applicants had to have a minimum net worth of C$1.6 million [about £750,000 in 1986] and invest $800,000 in an interest-free loan to the Canadian government (to be repaid after five years), as well as offering at least two years of managerial experience.  Despite this, it was a great success, with an estimated 100,000 Chinese millionaires settling in Vancouver alone (a city of only 600,000 at that time).  The local population had mixed views: luxury developments sprang up all over town, priced beyond the reach of many natives, and even suburban property was snapped up – and much of it was left empty, seen simply as an investment.  When Vancouver came second in a poll entitled Most Unaffordable City In The World for the fourth time, the Canadian government decided enough was enough: the IIP was halted in February 2014.  65,000 pending applications (70% of them Chinese) were cancelled and refunded – although (as the IIP website still notes) the returned application fees did not have interest added, and no refund at all was made for “language tests, financial audits, bank charges [or] representative fees”.

Announcing the thinking behind the cancellation of the scheme, the federal budget of 2014 said that “there is little evidence that immigrant investors as a class are maintaining ties to Canada or making a positive economic contribution to the country.  Overall, immigrant investors report employment and investment income below Canadian averages and pay significantly lower taxes over a lifetime than other categories of economic immigrants.”  In other words, it’s not financially worth it to the government.  And this may eventually be the death-knell for all such schemes: the money.  If a government works out that its golden visa scheme costs it more – in lost reputation, lost genuine business and lost tax revenue – than it earns from it, the doors will close.

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Something in the way she moves

A while ago I wrote about facial recognition software being used for client identification at ATMs and to apprehend scallywags out in public.  But of course technology does not stand still, and one of the shortcomings of facial recognition software is that it has to have a fairly clear view of, well, your face.  If you’re wearing sunglasses or a wintry hat/scarf combo, or maybe just looking a bit ropy after a long flight or heavy night, the system cannot identify you.  But what does not change, no matter how hot, cold or overly-refreshed you may be, is the way you walk.  And now those clever programming people have come up with “gait recognition” software.

I can see the sense in this, from personal experience.  When I was a child it was a great treat to go to the airport to collect my father after one of his business trips.  Peering from behind the barriers I could always spot him a mile away because of his stiff-legged walking style – rather like Mister Benn, for those of you of a certain vintage – and the “teapot” way in which he leaned over to one side (straight-legged all the while, with the other arm out for balance) to pick up his suitcase.  Absolutely unmistakable.  And I have been told that I have a distinctive gait myself, thanks in part to a badly-mended broken foot (larking about at school and didn’t dare confess the injury) that makes one leg turn out a bit.  You’ll all be staring if you ever meet me.

Talking note of this (no, not my leg specifically) Chinese firm Watrix has developed a gait recognition system that, it says, fills a gap in biometric identification, as it can work at a distance of up to 50 metres with an average recognition rate of 94% – and it doesn’t care whether you are walking towards the camera or away from it, and whether you have your face on show or not.  It can also work in low lighting and – it’s hard to see how this might concern the financial sector but you never know – can identify animals other than humans.  Of course, quite how it would cope with the men from the Ministry, I am not sure.

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Interesting times

I like AML legislation as much as the next person – perhaps more, unless that person is an MLRO.  If there’s updated AML legislation on the horizon I really look forward to it, and I’ve been on tenterhooks for about eighteen months ever since hearing about changes being proposed in Guernsey.  Not just new legislation but also a whole new Handbook of guidance – riches indeed!  But timing is all.

Twice a year I run a full-day MLRO workshop in Guernsey – and the second one of 2018 was last Thursday.  Of course I have to prepare my material weeks ahead of time, to allow for print-outs to be duplicated, put into folders (that’s a fun morning chez Grossey) and then posted to Guernsey.  Plus – perhaps more importantly – I have to know what I’m talking about at the workshop.  So you can imagine my delight when the new legislation (in draft-but-fairly-final form) was released on the Friday before the workshop.  Worse, it turned out to be only the opening salvo of the week from hell.  Let me elaborate:

  • Friday 9 November: Guernsey releases significant new AML legislation
  • Monday 12 November: I fly to Guernsey and – while I am in the air – the Guernsey Financial Services Commission publishes its new (311-page) Handbook
  • Monday 12 November: the Sixth Money Laundering Directive is published in the Official Journal, thereby setting its own transposition deadline
  • Tuesday 13 November: the UK government publishes draft legislation outlining what will happen to our AML legislation on what is apparently being called “exit day” (spoiler: nothing, except the global removal of all preferences to the EU, because they will be Dead To Us)
  • Thursday 15 November: the husk of a woman formerly known as me presents a workshop covering all of the above material, having had about six hours of sleep each night in order to make time for reading new legislation, etc.

But how kind people are: friends in Guernsey rallied to my aid and made sure that I had a printed copy of the Handbook and handouts containing the updated information.  And now I need a lie-down in a darkened room.

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‘Dammed if you do

In a rather handy follow-on to my last blog post, which discussed my reasons for supporting the inclusion in the AML family of businesses that sell services for cash, Amsterdam’s administrative court has taken an interesting step.  A team of experts from, among others, the city authorities, the Public Prosecution Service and the police has decided to reverse the burden of proof for restaurants, bars, pubs and cafés applying for licences to trade in Amsterdam.  In short, applicants will now have to prove that their source of funds is non-criminal before a licence will be considered.  Previously the burden of proof was on the municipality: the city licensing authorities could refuse or revoke a permit to trade only if it could prove that the establishment’s money was the proceeds of crime.  Now, if the source of funds is not clearly legitimate, the permit application will not be processed.  And the system is already taking effect: the municipality recently refused a permit for a restaurant on the banks of Sloterplas – an artificial lake in Amsterdam popular for water-sports – because the entrepreneur could not sufficiently demonstrate that the investment money was clean.

The aim is to ensure that dodgy money is not used to bankroll businesses in Amsterdam, particularly as such cash-intensive businesses – once established – are often used for future laundering.  The city has tried other ways to tackle the problem.  In June 2003 the BIBOB (Wet Bevordering Integriteitsbeoordelingen door het Openbaar Bestuur – or Public Administration Probity in Decision-Making Act) Law came into effect, giving Dutch administrative authorities the power to refuse contracts, subsidies or permits for organisations and companies if they have serious doubts about the integrity of the applicant.  And in April 2009 the Amsterdam authorities withdrew the operating permits of the Delta Hotel, the Hotel De Korenaer, the Hotel Keizerhof and an Intalian restaurant called Silicio – all were in the touristy Damrak area, and all belonged to the controversial Barazani family.  Asaf Barazani had made clear his opposition to plans to clean up the area; as Damrak is the street that runs from Central Station to Dam Square, it is usually the first street tourists see when they enter the city, and there were hopes to turn it into a “red carpet” entrance to the city.  Referred to by locals as the “Kosher mafia”, the Israeli Barazani family owned some fifteen buildings along Damrak.  In 2004 the family was investigated on suspicion of money laundering, and after those licences were withdrawn in 2009 some of their properties were sold to the municipality for forty million euros.  Members of the Barazani family were later convicted of tax evasion.

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