The smile on the crocodile

As regular readers will know, last month I spent two weeks in Botswana, on safari.  We saw all the usual amazing beasts (elephants using their trunks as snorkels!), but perhaps the most alarming were the crocodiles – enormous, prehistoric and terrifying.  At the same time as we were making sure not to dangle any body parts in the croc-infested waters, the Most Serene Republic of San Marino (yes, that’s its real name) announced that it had confiscated €19 million that had allegedly been deposited in local bank accounts by Denis Sassou Nguesso – president of the Republic of Congo since 1997.  The Sassou Nguesso family is not known for its poverty, nor for its open manner of doing business: Global Witness reckons that the president, his son Denis Christel and his daughter Claudia have all had their hand in the state’s till.

San Marino has been running a money laundering investigation and the €19 million is only part of the €69 million deposited in thirty-six accounts in San Marino’s banks by the president and his relatives and cronies between 2006 and 2011.  Not all the money was socked away for future use: investigators’ notes reveal that, alongside the usual blingy watches and luxurious hotel stays, Sassou Nguesso spent €114,000 on crocodile skin shoes.  It’s hard to know which reptiles are more scary: the ones in the rivers, or the ones in power who wear them.

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An officer and a target

I’m very familiar with the work of Money Laundering Reporting Officers, Money Laundering Compliance Officers, general compliance officers and police officers.  But I had never heard of Section 151 officers until a money laundering story of relevance to them popped up on one of the news feeds that I follow.  Section 151 refers to a part of the UK’s Local Government Act 1972 (now don’t all rush that link at once and crash the government website), and this section requires every local authority to appoint a suitably qualified officer responsible for the proper administration of its financial affairs – hence the Section 151 officer.  These people have their own dedicated online news and discussion forum called Room151, and it was here that a warning appeared in August (traditionally the silly season for government, but this warning is deadly serious).  In the wake of the NCA’s recent annual report, the Chartered Institute of Public Finance and Accountancy has been reminding its members that money laundering is a big deal, and that with the new powers introduced by the Criminal Finances Act 2017 (I assume here they are talking about UWOs), Section 151 officers should be vigilant.  As Marc McAuley, head of counter fraud services at CIPFA, put it: “Councils should put in place appropriate and proportionate AML safeguards.  Anyone who has enabled a transaction linked to money laundering could be liable – especially if the person behind the crime has been designated as a PEP.”

So, for those of us unfamiliar with the ways of local government, how could they be at risk?  Two suggestions offered by CIPFA are:

  • Signing rent contracts on housing properties where the landlord is running a front company to launder drug money
  • Organised crime groups could take on public sector contracts, thereby defrauding the government and also creating a legitimate-looking front for money laundering and other criminality (such as modern slavery offences).

Mr McAuley advises his readers: “Whilst local authorities are not directly covered by the requirements of the regulations, CIPFA would advise that councils should comply with the underlying spirit of the legislation.”

This is music to my ears.  I am more used to sectors trying to find ways out of their AML obligations – even sectors who are categorically included in those obligations.  But a sector that is not covered and still thinks it’s a good idea – well, I am delighted.  And of course it makes sense.  As we (quite correctly) make it harder for criminals to launder their money through the regulated sector, their wicked little thoughts are bound to turn to the unregulated sector.  To be frank, if you deal with money in any way, you can be sure that criminals somewhere are trying to devise a way to use you for laundering, so you might as well be ahead of the curve.

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From little acorns

Apologies for the confusion at the start of my blog post on 4 September: I was not back at all, but actually watching elephants swimming in Botswana.  I wrote a couple of posts in advance, to cover my absence, and then moved them around at the last minute without noticing the mistake.  I am now genuinely, really, honestly and totally back home.

In the spirit of sharing real-life examples and near misses, I offer this cautionary tale.  I was recently discussing a money laundering case with a financial investigator.  Underlying it all was a story as old as time: a young woman had convinced an older man that, if he really loved her in the way he professed (of which she needed to be certain before sharing her womanly favours with him), he would lend her large amounts of money to invest in her business.  When he did (both love and lend), she spent the lot on bling-y fripperies and general high living.  When denied the favours to which he felt entitled, the poor fellow had eventually taken his tale of woe to the police, who thought they might be able to bring charges of fraud and money laundering.  Central to it all were those fripperies (now that’s not a sentence you read every day).  They visited the young lady and had a snoop around her apartment, but she lived seemingly modestly, surrounded by minimal bling.  And then they asked for her bank statements.

Now, they weren’t expecting to find much, to be honest.  The lovesick swain had demonstrated his love by handing over wads of cash (she told him it was simpler), so the investigators doubted they would see much movement through the bank.  But then they spied something interesting: a monthly payment to one of these self-storage places, for three large containers.  A search warrant was obtained for the containers, et voilà – fripperies as far as the eye could see.

The monthly storage charge on the bank account is the sort of tiny detail that might escape notice.  It’s a handy example to pass on to staff, of something seemingly innocuous that could – in a due diligence exercise – raise questions.

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Family values

As I hope is clear from this blog, I work with clients from all over the regulated sector – although I will admit that I have very few law firms (because lawyers like to be trained by other lawyers) and very few estate agents (because, well, they’re estate agents and just can’t accept that they have to do all this AML stuff).  But the proportions of my client base do change: sometimes I will have more fiduciary firms, and then the banks get interested, and in the past three or four years I have taken on more clients in the gambling sector.  And one area of strong recent growth for me is family offices.

When I first heard the term, I had images of “Dallas” and JR, wheelin’ and dealin’, darlin’.  But turning to industry dictionary Investopedia, we learn that a “family offices are private wealth management advisory firms that serve ultra-high-net-worth (UHNW) investors – they are different from traditional wealth management shops in that they offer a total outsourced solution to managing the financial and investment side of an affluent individual or family”.  And I have noticed that in their elegant offices they tend to have rather superior biscuits, no doubt intended for the UHNWIs but gratefully snarfed by me.  But all is not well in the rarefied world of the family office, for money launderers – the little devils – have realised their potential.

It could be argued that we AMLers are not helping the cause: as AML obligations around PEPs (politically exposed persons) and other high-risk clients are increased, the more familiar, larger institutions may come to the conclusion that it’s all too much trouble, and decline to take them on as clients.  They then turn to more boutique firms, who need the business and might be willing to be that little bit more… accommodating when it comes to CDD.  We can’t say too much at the moment, for obvious reasons, but it seems that Jahangir Hajijev of Azerbaijan and his family (including his wife, of UWO fame) made extensive use of the family office services of Werner Capital in Belgravia – I bet their biccies are top-notch.  Although family offices could – quite rightly – say that they know their clients really well, it must be remembered that their clients will generally be really complicated, with – to put it simply – lots of money all over the place.  Checking source of wealth and source of funds for such people will be a full-time job.  Keeping track of their close associates will not be an easy task.  And then we have the age-old problem of client capture: if your entire livelihood depends on one client, how likely are you to rock the boat by reporting a suspicion about that client?

In the US there is an organisation called the Family Office Association, which offers guidance, training and networking to its members, and that seems a good idea – but a search on the word “laundering” on their website brings up no matches at all, which suggests that it is not on their radar.  This will not have escaped the notice of money launderers.

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A case in point

I’m ba-ack!  So let’s leap straight in with a complaint.  As every MLRO knows, nothing enlivens an AML training session like a story – known officially as a case study.  At the moment, staff are lapping up details of “the £16 million Harrods woman” and “the Assad niece living in luxury in Knightsbridge”.  But these are the big public stories of high-level political corruption – and arguably not the laundering worries that most people in the financial sector are going to be tackling every day.  Moreover, stories make it into the media only when official allegations have been made or – more commonly – once verdicts have been passed by the court.  And, as we all know, the “near miss” can be just as good a training opportunity.  Quoting lists of “red flag” indicators gleaned from industry reports does not make it real enough for people – it does not make them stop short and think, “That could easily have been me”.

I am frequently asked by clients to include case studies in my training.  But they must be relevant to our sector, they say, and they must be current.  This is not unreasonable – but where am I to find such stories?  Of course I fillet the case studies and best practice guidelines issued by regulators, and I sometimes pinch stuff from other jurisdictions and pretend it’s local.  I also ask MLROs if they have any tales from their own organisation – actual laundering, or near misses – and the answer is nearly always this: “Yes, but we can’t tell you about them and we don’t want staff to know.”  (Before I get waves of outrage about SARs and tipping off, I mean either instances where concerns were raised and then allayed, or ones where the investigation is now done and dusted.)  One MLRO even said that he wouldn’t be happy for staff to know about how a particular laundering scheme had (almost) worked because “it might give them ideas”.

What would be ideal as a training resource is a library of detailed yet engaging case studies.  But who could be trusted – or indeed bothered – to maintain such a thing?  The Egmont Group – the trade body for FIUs – does some work in this area, but their last set of case studies was published after the Best Egmont Case Awards in 2013.  (And these are grouped by jurisdiction and predicate crime rather than by affected sector, so you need to read a lot to find ones that are most relevant.)  You can use final notices and best practice indicators from regulators to cobble together stories, but it’s hard work.  So come on, MLROs: who’s up for submitting in-house tales of woe, suitably anonymised, to a central repository to be used for the good of all AML training?

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Words speaking louder than actions

Now I know it’s important to Think Big – to have goals and targets and ambition.  But you can take it too far.  And I rather think that in their recent “Economic Crime Plan 2019-2022” the joint forces of HMG and UK Finance (which I understand is the jazzy new branding for the British Bankers’ Association and a few others) have done just this.

Turn, if you will, to page 17, to the section titled “Project and commitments”.  Now, I am a world-class list-maker.  My bullet points go down to four levels – so we’re talking semi-professional planning.  But I have yet to create a table of 52 actions (it’s just occurred to me: is that one a week?).  And some of these are really, really formidable.  “Develop framework to repatriate funds to victims of fraud”, for instance, and “develop a sustainable, long-term resourcing model for economic crime reform”.  The Pollyanna side of my nature has been beaten into submission by the barrage of frankly ludicrous “promises” made by those who are trying to convince us that Brexit will be a little bump in the road, easily negotiated, and so I have no appetite for long lists of holy grails – particularly when none of the five actions related to “Better information-sharing” even features the word “international”.  And as for the five actions related to “International strategy”, all five are apparently “ongoing” – so no target date for improvement or completion.

But perhaps it makes sense when I read that this plan was signed off by Home Secretary Sajid Javid and Chancellor Philip Hammond – neither of whom holds that office any longer.

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So near and yet so far

At the end of June 2019, the UK’s Gambling Commission – one of our five-star AML regulators, getting top marks from users for both approachability and communication – published its 2018 money laundering and terrorist financing risk assessment.  This examines all incarnations of the gambling industry in the UK – arcades, gaming machines, lotteries, betting (remote and non-remote), bingo (remote and non-remote) and casinos (remote and non-remote) – and assigns to each a risk rating.  The money laundering risk ratings vary across the risk spectrum, while all forms of gambling are considered medium risk for terrorist financing.

For those of us unfamiliar with the gambling world, this report provides a timely explanation of the sector as it works now: gone are the days of perching at green baize tables, wreathed in smoke and kissing the dice for luck.  For instance, did you know that arcades now offer “privacy booths” for certain gaming machines [the mind boggles as to what might require privacy…] which makes it harder to supervise their use?  The increase in cashless payments further reduces customer interaction with staff.  And the latest technological advance – Bring Your Own Device – means that “a customer could place bets without needing an account or interacting with employees of the operator” (although this has yet to happen in the UK).  Add to this the increase in the use of crypto-currencies, as well as the continued use of informal value transfer systems (such as hawala) to fund accounts and a theme develops: no matter whether the gambling provider is technically non-remote (i.e. a real-life, physical premises), much of the money is moving in a remote manner that increases the risk of it evading due diligence checks and adequate monitoring.  And that’s a gamble none of us wants to take.

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RUSI and the red team

Regular readers will know how I love “crisp” writing: writing that is clear, well-structured, unambiguous and just that little bit elegant.  (Compare and contrast with most of the hurried, rambling and frankly inaccurate drivel that appears online these days.)  Two of my favourite and most reliable sources for such written marvels are the Law Society of England and Wales (their practice notes are a masterclass in lucidity) and RUSI – the Royal United Services Institute, and more specifically their Centre for Financial Crime and Security Studies.

In the early summer, the CFCSS of RUSI published one of their occasional papers – this one on the topic of money laundering risk in the UK professional services sectors (“in particular the legal, accountancy, real estate, and trust and company service sectors”).  The report shares the findings from two workshops held in early 2019 and looks first at the money laundering threats facing these sectors and then at the responses to those threats.  The threats presented could be the baddies in a peculiar panto: we have the Oligarch and the Organised Crime Launderer.  And the standard responses – risk-based approach, CDD and suspicion reporting – are considered for their effectiveness in countering these threats.  And, as is the RUSI way, the report is topped and tailed with recommendations.

However, the most interesting part of the RUSI exercise is sadly missing.  As explained the introduction to the report, “it was decided to hold one session looking primarily at threats and vulnerabilities (threat workshop) and one looking at the responses of the professions (response workshop).  A further session, the red team exercise, was designed to allow attendees to draw up their own money-laundering scheme.  The outputs from this session are naturally not included in this paper.”  I can only hope they are being shared in a less public forum, as they will prove invaluable.

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The law(yer) is an ass

AML efforts tend to move in one direction: more, greater, stronger, bigger – whatever the right adjective may be.  Occasionally we see an unwinding (as when many jurisdictions removed general insurance business from the AML family) but for the most part, we tend to extend and increase.  That said, the intended direction of travel can be halted – and sometimes by the most unlikely brake.  Or maybe that’s my naivety talking; you might not find this unlikely at all.

The US is not a jurisdiction in which I work and so I hesitate to comment in any detail on their AML regime, except to observe that they do like to plough (sorry, plow) their own furrow (or should that be furrough?).  What I do know – and what often surprises those new to the world of AML – is that under the American regime, lawyers are not subject to AML obligations.  The AML obligations (CDD, record-keeping, etc.) are contained in the Bank Secrecy Act of 1970, which was significantly amended by the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (USA PATRIOT Act) of 2001, and (putting it simply) these laws apply only to “financial institutions”.  And no matter how broadly you define that term, it does not include lawyers.

Now call me an old cynic, but is that not crazy?  Everyone know that lawyers are vulnerable to money laundering – either deliberately enabling schemes for baddies or failing to spot that they are being misused by clients who look like goodies but are in fact baddies.  Just last month the FATF published updated guidance on the risk-based approach specifically for legal professionals, in which it states as accepted wisdom – which, come on, it is – that nearly every service offered by the legal sector can be used for money laundering, from holding client funds to advising on property sales, from forming companies and trusts to managing client affairs.  So it would seem logical that the US would upgrade its AML regime pretty sharpish to do what nearly everyone else in the world has been doing for years: welcome their lawyers into the AML fold.

There are plenty of influential Americans who want this to happen.  But they keep coming up against the most obstinate of opponents: the American Bar Association.  Yes, the official American Bar Association.  OK, so people are often a bit lukewarm about joining the AML family – UK lawyers were not cock-a-hoop about it either, I seem to recall.  But the Law Society does not have the clout of the ABA, and common-sense prevailed on this side of the pond.  The issue has come back into the headlines recently because the ABA is currently engaged in opposing the creation of a register of beneficial ownership.  We’re not talking about a public register – they oppose any register on the grounds that it “would impose burdensome, costly, and unworkable new regulatory burdens on millions of small businesses and their lawyers” and “raises serious privacy concerns for small businesses and the many individuals who would be designated as beneficial owners”.  You can read their full objections here.  If I were a wealthy criminal and needed a lawyer to help me with a spot of laundering, I know where I would go, and I’d pay handsomely for the privilege [little legal joke there – very little].  And I’m not alone in suspecting that this is the real reason for all the objections to anything AML-ish which could in any way inconvenience any paying client.

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FATF 1, EU 0

The Fourth Money Laundering Directive brought us many delights, including Article 9: “Third-country jurisdictions which have strategic deficiencies in their national AML/CFT regimes that pose significant threats to the financial system of the Union (‘high-risk third countries’) shall be identified in order to protect the proper functioning of the internal market.”  The requirement is retained unchanged in the Fifth Money Laundering Directive.  Now I can see arguments on both sides.  Regulated businesses – particularly when it comes to dodgy jurisdictions – do like certainty, and an approved list of “high-risk third countries” might seem attractive.  But there are, it seems, more problems than benefits.  It’s looking outwards only, for a start: assessing only “third countries” (i.e. non-EU Member States) brings to mind planks and specks.  And as the European Commission – which adopts the list – is a political body, it is vulnerable to political pressure.

And so it has proved.  The first list was adopted by the European Commission on the advent of MLD4, and that first list was basically a carbon copy of the FATF’s list of jurisdictions with “strategic AML/CFT deficiencies”.  But then the Commission started to wonder whether it could do better than the FATF – yes, better than the agency that has devoted itself entirely to matters money laundering and AML for three decades.  Obviously that wondering should have led to the answer “no”, but it did not.  And in June 2018 the Commission published its own “Methodology for identifying high risk third countries”, which involves looking at the FATF list and then “taking into account strategic deficiencies… in relation to: (a) the legal and institutional AML/CFT framework of the third country, in particular: (i) the criminalisation of money laundering and terrorist financing; (ii) measures relating to customer due diligence; (iii) requirements relating to record-keeping; (iv) requirements to report suspicious transactions; (v) the availability of accurate and timely information of the beneficial ownership of legal persons and arrangements to competent authorities; (b) the powers and procedures of the third country’s competent authorities for the purposes of combating money laundering and terrorist financing including appropriately dissuasive, proportionate and effective sanctions, as well as the third country’s practice in cooperation and exchange of information with Member States’ competent authorities; (c) the effectiveness of the AML/CFT system in addressing money laundering or terrorist financing risks of the third country.”  If all of that sounds familiar, good: it’s because it covers the same ground as the FATF’s own modern methodology (compliance and effectiveness).  So far, so pointless.

But although the methodologies seem similar, the outcomes certainly are not.  And on 13 February 2019 the EC announced that it was adopting a new list of “high-risk third countries” – twenty-three in total.  Two in particular were rather annoyed at their inclusion: the US huffed that their four territories on the list (American Samoa, Guam, Puerto Rico and the US Virgin Islands) should not be there because “the same AML/CFT legal framework that applies to the continental United States also generally applies to US territories” [I’m saying nothing], while Saudi Arabia was quietly furious.  And quietly effective: King Salman sent letters to all EU leaders urging them to reconsider their decision, saying that his country’s inclusion “will damage its reputation on the one hand and will create difficulties in trade and investment flows between the Kingdom and the EU on the other”.  That did the trick: on 8 March 2019 the new list was unanimously rejected by the EU Member States and tossed back to the EC for them to have another think.

We now hear, courtesy of Reuters, that the commissioner in charge of the issue, Vera Jourova, has come up with a cunning plan: a revised process to list countries.  Instead of directly blacklisting those with shortfalls, the new process would be based on a “staged approach” under which risk countries would need to commit to changing their rules and practices by set deadlines, effectively producing a grey list of jurisdictions that would be blacklisted only if they failed to apply required reforms.  Again, if that sounds familiar, it should: IT’S HOW THE FATF DOES IT.  *throws hands in air in despair*

There will now be a two-week pause in blog posts while I hide away at the top of a mountain to finish my sixth Sam Plank novel.  You can keep track of my fiction-based progress on my writing blog, and indeed you can even have your say on what you think the title of the book should be.  And if you fancy having a look at the books, you can now download a free guide to the series, with the first chapter from each book and a glossary of Regency terms – you’d be bird-witted not to!  I’ll be posting here again from 7 August onward.

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