The age of the mistress criminal?

I have written a couple of times before (here and here) about the ascendency of women in the world of criminality in general and money laundering in particular.  And it seems that this is no short-term trend – it’s a continuing development.  When Greater Manchester Police issued this press release just before Christmas, one thing caught my eye immediately: three of the mugshots are of women.  Moreover, two of them – sisters Abia and Shazia Din – were the ringleaders and netted the longest sentences for their troubles.  When one of their henchmen was sent to prison, his place in the gang was swiftly taken – not by a son or brother but by his daughter, Natalie Wrafter.  Actually, this is how Shazia and Abia themselves came to be in charge: one brother was arrested and another went on the run, and they picked up the reins of the family business.

I’m not one to perpetuate gender stereotypes, but some of the details of the case are rather feminine.  Shazia seemed to be in charge of the money, and her main front business for the laundering was the Beauty Booth – a legitimate company selling mascara, lipstick and body lotion via Amazon.  And when surveillance officers filmed Shazia and Natalie in the car park of the prison in Doncaster, exchanging thousands of pounds in cash, Shazia had a toddler in her arms – the toddler ran off and Natalie chased it while Shazia stowed the cash in the boot of her car.  This very ordinariness may be part of the secret of the success of female criminals – indeed, the Din gang favoured using female drug couriers because they are less likely to be stopped and searched by police.

Another recent example of a female-led crime syndicate is that of Ruja Ignatova – aka “The Missing Cryptoqueen”.  There has been an excellent podcast telling her story, so I won’t even attempt it, but I do think it’s interesting that (a) she gave herself the nickname Cryptoqueen (in other words, she chose to stress her gender) and (b) many of her female victims (in essence, she was running a Ponzi scheme, enticing people to invest and then bring in other investors for a commission) trusted and admired her precisely because she was a woman.  As Jen McAdams told the BBC, she was persuaded by seeing that Ignatova had spoken at a prestigious conference: “That ticked a box… The power of the woman – well done!  I felt proud of her.”  Male criminals may have to look to their laurels; if these stories are anything to go by, their dominance of the modern criminal world (where brains are now more lucrative than brawn) may be coming to an end.

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Fishy business

For years, the AML community has been trying to get their message heard at the highest levels of the regulated sector.  Business schools have various terms for it, from “tone from the top” to “business culture” to “the rotting fish” (as in, a fish always rots from the head).  But for the most part, it’s a very hard sell.  CEOs and other board members know that financial penalties – although irritating – will not harm them unduly.  The share price may take a short-term hit, but market forces will soon reassert themselves and the ship will be righted.  And the media is more likely to focus (understandably) on the criminals making the money than on the businesses laundering it for them (particularly if the laundering technique is complicated and/or boring to explain).  But last week was a bad week for regulated sector CEOs – and a good week for AML-ers.

On 20 January 2021 Swiss regulator FINMA issued a notice confirming that Julius Baer bank “fell significantly short in combating money laundering between 2009 and early 2018” and that “organisational failings and misplaced incentives encouraged breaches of the legal obligations to combat money laundering”.  (“As an example, a client adviser looking after Venezuelan clients in 2016 and 2017 received bonuses and other remuneration in the millions, even though Julius Baer had reported a number of his clients… to the [Swiss FIU]” – but that’s a story for another day.)  One of FINMA’s requirements is that “the bank must establish a Board committee specialising in conduct and compliance issues, or set up a similarly effective mechanism” – I’m fairly surprised that it didn’t already have one, but hey ho.

In a further notice issued a day later, FINMA announced that they had issued written reprimands to two managers at the bank.  They stop short (why?) of naming names, but several media sources confirmed that the two lucky recipients of the billets doux were Boris Collardi and Bernhard Hodler.  Collardi was Julius Baer CEO from May 2009 until his unexpected resignation in November 2017 (and is now a partner at rival wealth management firm Pictet) while Hodler was head of compliance and took on the CEO mantle for eighteen months.  The current CEO, Philipp Rickenbacher, has vowed to clean up his bank’s client base.

On the same day, Angelo Caloia – former president of the Institute of Works of Religion (more informally, the Vatican Bank) – was sentenced to eight years and eleven months in prison after being found guilty of embezzlement and money laundering.  He was president of the IOR from 1999 to 2009, and was convicted of embezzling money while managing the sale of Italian real estate owned by IOR between 2001 and 2008, declaring less than the actual value of the sale and pocketing the difference – some €50 million.  Two lawyers (father and son) were convicted of the same offences alongside him and also jailed.  All three men were fined, were ordered to repay the money, and were banned from public office in perpetuity.  In perpetuity: now that’s the right tone to strike.

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All in the mind

I have a daily Google alert that sends me anything containing the phrase “money laundering”, and earlier this month it sent me down the rabbit-hole of reading about “mental money laundering”.  It’s not – as sometimes happens – the simple adoption of the phrase by an unrelated subject; there is actually something in it that is of relevance and interest to MLROs and other AML-ers.

There is a sphere of behavioural science that looks at how mental accounting – i.e. our propensity to treat money differently depending on, for instance, where it came from or how we intend to use it – affects decision-making.  This goes against the perceived wisdom (much beloved of those who oppose AML efforts) that money has no smell – that there is not good money or bad money, dirty money or clean money, but just money.  Rather, recent research shows that we treat money more frivolously if we came by it easily – a win on the lottery, perhaps, or finding a tenner in the street.  Indeed, I remember my mother winning an outside bet on a horse in the Grand National and calling it her “mad money” – and spending some of it on a tennis racquet for me, which was certainly not part of her usual strict household budget.

Money that we come by unethically falls into the same “mad money” category.  Numerous experiments have demonstrated that people are more generous with money they’ve earned deceitfully (perhaps because they know, in their heart of hearts, that they don’t really deserve to keep it).  So what to do if you’ve acquired some money in an underhand manner but don’t want to feel that uncomfortable pressure to give it away?  Why, you indulge in a spot of mental money laundering.

In a series of experiments, researchers set up a game in which participants were incentivised to lie.  They then offered all participants (the honest ones and the liars) the opportunity to donate to charity – and the ones who had taken the incentive to lie gave more generously.  A subset of those who had taken the incentive were entered into a lottery, where they “won” exactly the same amount as they had gambled.  When they were then offered the opportunity to donate to charity, they were less generous than those who had taken the incentive but not gambled – which suggests that, in their minds, they had taken the stain of dishonesty from the money by putting it through the lottery.  The same effect was observed when those who had lied were offered a chance to pool their money with that of honest people – their subsequent pattern of donation (matching that of the honest people) suggested that they now considered their pooled money to be cleansed.

In short, if a firm launders money for a client, they are providing a double service: they are both laundering the money and improving the client’s mental wellbeing.  How very marvellous.

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Piggy’s Progress

At the end of each year I do a stock-take of my piggy sales – by which I mean, I add up how many copies of I have sold of my two suites of AML books for non-exec directors (i.e. those with AML oversight and steering responsibilities) and for staff (i.e. those with AML implementation responsibilities).  The NED piggy comes in five flavours (UK, Guernsey, Jersey, Isle of Man and generic international), while the staff piggies come in a wide combination of jurisdictions and sectors.  They’ve been on my mind recently because luckily I was able to fill that peculiar week between Christmas and new year with updating all the UK piggies to reflect Brexit – black armbands on their little trotters, etc.

So how did we do in 2020 with rehoming our little piggies?

  • The NED piggies are moving very slowly – eleven in the UK, five in Guernsey and one international only, and no interest at all from Jersey or the Isle of Man. But with directors being fined more regularly for failing to engage fully with their AML responsibilities, the piggies and I live in hope.
  • The staff piggy picture is more complicated because there are seventeen versions of the book. Still, I can see straight away that not one of the four Gibraltar piggies sold a single copy.  We did only slightly better in Guernsey, selling ten piggies – six of those to the fiduciary sector.  Jersey was a bit more piggy-friendly: 31 piggies moved to the sun-drenched shores of St Helier, with 23 of them sharing their new homes with bankers.  But top destination for piggies was once again the UK: 185 porcine adoptions took place – with the banking sector taking home 143 piggies.  Only four piggies moved in with UK estate agents.

I have made a push for the Brexit-ready UK piggies, sending notes about them to all the relevant trade bodies – with a particular plea for help to those representing estate agents and letting agents (with the recent headlines about continued high-level laundering through the UK property sector, surely they would welcome a bit of book-learning).  Of course, the Brexit changes to the piggies are not seismic, but it would be handy for an MLRO to be able to demonstrate to a regulator that staff have the very dernier cri in AML info.  (In protest at being dragged out of the EU I plan to use more Continental turns of phrase – call it self-Schadenfreude.)  But so far, only four UK piggies have left the pigsty in 2021 – perhaps they’re under lockdown.

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Head, brick wall, etc.

I first started designing and delivering AML training in 1996.  That’s a full quarter-century ago.  And can you imagine how many times I have said, over those twenty-five years, things like “check regularly for PEPs – regulators are hot on EDD for PEPs” and “make sure you chase down any deficiencies in CDD as quickly as possible”.  These are not new concepts.  And yet still – still – we are seeing regulators taking businesses to task for the most basic of AML failings.  We’re not talking about people wrestling with the finer points of defence SARs or struggling to define legal professional privilege – it’s the really basic, obvious, well-documented stuff, spelled out in everyone’s guidance, that is still being done wrong.

In a Guernsey finding at the very end of 2020, we read of a client who was “an ultra-high net worth individual from a high-risk country [who was] working with and being associated with individuals who were politically exposed, [while himself] being involved in the management and control of state (high-risk country) owned organisations linked to armaments, the extractive industry and IT services for the military” – and yet the business concerned “failed to identify the client as a PEP for the first ten years of the relationship”.  To misquote Chandler from “Friends”, could the client BE more PEPpish?

Three weeks earlier the Maltese authorities had fined a “prestige” credit card provider for various AML failings: one client had declared an annual income of £150,000 and then over a few months made €1.2 million in payments – most “transferred into the company’s bank accounts from the company’s interrelated company incorporated in Hong Kong”, but no processes were in place to identify the source of those funds.  Source of funds?  Really?

And in June 2020 the UK’s FCA fined Commerzbank an eye-watering £37,805,400 for numerous shortcomings in its AML regime – made all the more baffling because “they occurred following visits by the Authority to Commerzbank London in 2012, 2015 and 2017 to discuss issues relating to its AML control framework, during which the Authority identified weaknesses that Commerzbank London was to address”.  Again, these were not complicated issues: for instance, “2,226 existing clients were overdue refreshed KYC checks” and “[the bank’s] automated tool for monitoring money laundering risk on transactions for clients… did not have access to key information from certain of Commerzbank’s transaction systems”.

Hello?  Is anyone listening?  These are standard, basic AML requirements.  Please don’t make me wonder whether I’ve wasted that quarter-century.

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Let’s risk it for a Brexit

Better late than never, I suppose – the UK’s third National Risk Assessment, due in October 2019, was finally published on 17 December 2020.  When discussing risk assessment with MLROs, I describe it as a focussing exercise: you start big, with the broad sweep of a National Risk Assessment, then you look at any sectoral risk assessments that may be relevant, then you devise your much more tailored Business Risk Assessment (which refers to the previous two steps and shows how your specific business either reflects or refutes the risks identified for your jurisdiction and sector), and finally – the ultimate purpose of the whole exercise – you do a risk assessment of each and every client in order to apply the appropriate and proportionate CDD to them.  Logically, therefore, the NRA should be the first step – but in reality nearly all MLROs, whatever their jurisdiction, have had to set about their BRA long before an NRA appeared over the horizon.  It reminds me of the Queen in “Alice in Wonderland”, with her preference for “sentence first – verdict afterward”.

We’ve had a risk-based approach to our in-house AML endeavours since at least 2007, when the FATF published its “Guidance on the Risk-Based Approach to Combating Money Laundering and Terrorist Financing: High Level Principles and Procedures”.  But the concept of an NRA did not gain traction until the FATF Recommendations were updated in 2012, when new Recommendation 1 stated that “countries should identify, assess, and understand the money laundering and terrorist financing risks for the country, and should take action, including designating an authority or mechanism to coordinate actions to assess risks, and apply resources, aimed at ensuring the risks are mitigated effectively”.  And in the EU it was not until the arrival of the Fourth Money Laundering Directive in 2015 that an NRA was actually required: “Each Member State shall take appropriate steps to identify, assess, understand and mitigate the risks of money laundering and terrorist financing affecting it, as well as any data protection concerns in that regard.”

There is plenty to read in the new UK NRA but given the timing [black armbands at the ready – 36 hours to go], I thought I would concentrate on the Brexit-y bits.  Interestingly, the word “Brexit” is not mentioned once in the NRA, although “transition period” gets a look-in now and again.  The section on SAMLA concentrates entirely on sanctions and does not mention money laundering at all – no intent is expressed with regard to future AML legislative plans.  We can perhaps take some comfort from this undertaking: “Although the UK has now left the EU, FATF recommendations that were implemented via EU legislation have been retained in UK law under the European Union (Withdrawal) Act 2018.  The UK will continue to meet and exceed FATF standards.”  Sadly, given the UK government’s recent abysmal record for keeping its promises, I’m not holding my breath.  See you next year!

And in case you all thought I was just sitting around between Christmas and new year, reading a book on the filming of “Cranford” and mainlining Montezuma dark chocolate buttons, I can confirm that I have now updated all six of my UK piggy books to be Brexit-compliant.  The covers may be a little tear-stained, but any copies you order from Amazon from today onwards will be the very dernier cri in AML info for your UK staff and NEDs.

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Ho-ho-ho and CDD

I am assuming that one or two of you might be at work today, so let us turn our AML minds to an important seasonal matter: conducting CDD on Father Christmas.  For this particular individual even the most basic identity checks are difficult, as he goes by almost ninety different aliases around the world – including Father Christmas, Santa Claus, Sinterklaas, St Nicholas, Joulupukki, Pascuero Viejo and Grandfather Frost.  Some of these names suggest a link to an organised religion, while others are determinedly secular.  His age is all but impossible to ascertain – he appeared regularly in Victorian publications and even then was shown in pictorial ID as an elderly gentleman with white hair and beard, and now it’s nearly two centuries later.

His residential address is equally concerning.  According to hearsay, he stays at home for 364 days a year and then spends one single night traversing the globe – seemingly with no interference from border guards or customs officers.  Children tell me that putting just “Father Christmas” on the envelope is sufficient, so perhaps enquiries could be made of your local postal service to ascertain the address they hold on file for this individual.  Legend suggests that he resides in Lapland, but Lapland covers nearly forty thousand square miles, and ascertaining the location and ownership of any grotto or similar place of seasonal residence or business would be tricky: the 2019 FATF mutual evaluation of Finland warned that “the ability of competent authorities to establish the beneficiary ownership of legal persons in a timely manner is limited [as] the public registries are not fully reliable and relevant remedies to ensure that registers are kept up-to-date are not available”.

We must also consider whether he is a PEP and therefore subject to enhanced due diligence.  In my AML training I encourage people to all but ignore job titles (which are often nonsense – Kim Jong-un of North Korea styles himself “The Genius Among Others” and “The Brilliant Comrade”) and instead to remember why we are concerned about PEPs in the first place: they have access to public influence and to public money.  FC scores highly – very highly – on the first measure: there cannot be a head of state or senior politician, judge, military leader or police officer whom he has not met, and many of them boast of having entertained him in their own homes, even plying him with food and drink in exchange for his company and good wishes (which could be interpreted as an emolument approaching corruption).  As for the second measure of PEPitude, well, now you’re asking.  There are 2.2 billion children in the world.  Even if 1% of them have been naughty rather than nice, that still leaves a requirement for 2.178 billion presents.  So we’re looking at the purchase of raw materials and then the wages of manufacturing elves, admin staff (checking the naughty/nice lists and matching presents to children), distribution managers – and a vet for the reindeer. All of this costs money, and we have no idea of FC’s source of wealth or source of funds.

So how to proceed?  Well, I’m not given to turning a blind eye when it comes to CDD but perhaps, just this once, that would be my recommendation.  Turn off your computer, lock your office door and remember to leave out the port and Stilton for your overnight visitor [my father said with great conviction that by the time Father Christmas reached our house he would have had his fill of milk and cookies].  Merry Christmas, one and all!

Parts of this appeared initially in the most recent issue of Money Laundering Bulletin – many thanks to the editor, and it’s a recommended read!

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Shady trade-y

Right at the start of my working life, just after the Industrial Revolution, I did one of those early personality tests.  I’m struggling to remember what it was called (something about umbrellas, or maybe anchors?) but it was meant to push me in the direction of a career that I would find fulfilling.  And after answering the hundreds of questions, it informed me that I should be an Expert.  In other words, I would be happiest spending my life learning more and more about a subject.  Which is entirely true.  The only unexpected thing is that my target is accelerating away from me: the more I learn about money laundering and AML, the more there is to learn.

One facet that I have neatly sidestepped for two decades is trade-based money laundering.  It’s not that I’m not interested; it’s just that I suspected (and this has been proven to be true) that this is a ginormous subject in its own right, and we Experts don’t like to skim – we like to immerse.  But I can sidestep for no longer and the time has come for me to get to grips with TBML (which sounds much jauntier than it is).  And if you work for a firm that has customers in trade (and I don’t mean that in a snooty, “Upstairs, Downstairs” way), you too might need to take the immersive plunge.

Way back in 2006, the FATF put its TBML cards on the table: “There are three main methods by which criminal organisations and terrorist financiers move money for the purpose of disguising its origins and integrating it into the formal economy.  The first is through the use of the financial system; the second involves the physical movement of money (e.g. through the use of cash couriers); and the third is through the physical movement of goods through the trade system.”  The APG followed that in 2012 with a detailed typologies report (modern Asia being almost entirely built on trade), which alarmed me with two stark warnings: “TBML requires mingling of the trade sector with the finance sector – and having an AML regime for finance sector alone is a weakness” and “there are many links in the trade chain and any one can be weak: manufacturer, trader, consigner, consignee, notifying party, financier, shipper, insurer, freight forwarder and end purchaser”.  And as my exposure to international trade is limited to “place order on Amazon and hope for the best”, I know that I am out of my depth.

And it seems I am not alone in the AML community, as a very recent report from the FATF comments: “Most private sector respondents, mainly financial institutions, consider TBML as the hardest type of money laundering activity to detect.  TBML is highly adaptive and can exploit any sector or commodity, making it difficult for financial institutions to prioritize resources and translate the latest insights into the business rules and compliance systems.  In practice, TBML schemes can consist of a large number of front companies, with funds transmitted between several banks, meaning each of the involved financial institutions can see only a small part of the network.”

Quite rightly, this is not a problem for the (current) AML community alone.  Steps recommended by the FATF include ensuring that TBML is addressed in National Risk Assessments, ensuring that registers of beneficial ownership are robust so that companies can be unpicked for CDD purposes, and extending the AML family to include other parties in trade, such as shipping companies.  In the meantime, the prudent MLRO will read the latest FATF report and use its case studies and red flags to become a little more trade-savvy.

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It’s just how we’re made

In a normal AML training session I do not have time to deal with the more philosophical aspects of the subject, but when I run extended workshops – as I have been recently – there is scope for delving into the “why” behind the “how”, “when”, “where” and “who”.  And I have had something of a revelation.

It is no surprise to anyone that there is an ongoing tension between the sales side of a business and its compliance effort: one is tasked with bringing in the business, and the other is tasked with turning away some of that business if taking it would be too risky.  I had always assumed that this tension was down to profit, but on reflection I think it runs more deeply than that – profit is just the convenient argument that is used to express the deeper differences.

We all know that compliance people are more cautious by nature – if you’re a risk-taker, you don’t sign up to work in compliance.  But there are other key differences.  Compliance people are good with detail and with concentration: they enjoy the challenge of finding answers to questions and getting evidence to confirm (or indeed refute) what they have been told, and they’re willing to spend hours on that challenge.  Sales people, on the other hand, prefer the big picture – they think that details will bog them down and slow their progress in pursuit of their goal.  Sales people love the chase, the thrill of landing a new piece of business – but the adrenaline rush fades quickly and then they’re on to the next target.  In other words, they are fantastic at starting things but poor at finishing them.  And this is where the compliance person shines: compliance people get enormous satisfaction from tying up the loose ends and completing the picture.  (They’re probably ace jigsaw-puzzlers.)  We’re all slaves to evolution: the ancestors of the sales team were hunting down the next mammoth, while the forebears of the compliance department were back at base, skinning and dissecting the previous mammoth and deciding how to share it out and store one of the haunches for leaner times.

Of course this is a simplification and generalisation – we all know exceptions.  But when an MLRO finds himself once more (as inevitably he will) in stern conversation with an account manager who is dragging his heels on those CDD checks, it may be some comfort to reflect that perhaps it is not a deliberate attempt to thwart AML efforts: it’s simply how the fellow is made.  And a bit of empathy on both sides could make the relationship less fraught – and may help the MLRO design procedures and training that can present the requirements in a light that is more attractive to sales-minded, mammoth-hunting colleagues.

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Great-grandpapa’s billions

Like many of you, I have been reading “Kleptopia” by investigative reporter Tom Burgis.  It’s both wonderfully well-written and terrifically depressing.  If there’s a British PM in the past twenty years who hasn’t been advising foreign kleptocrats on how to use the UK regime to their advantage, or assuring them of a warm welcome if they do, I can’t think of one.  And this book was published before the latest wave of accusations of cronyism to hit the Tory party, particularly with regard to the awarding of fabulously lucrative contracts during the pandemic.  (The leading light in this particular campaign is the Good Law Project.  And if you want to see how all the names and entities link up, there’s the marvellous/depressing website “My Little Crony”.)

I will leave reviews of “Kleptopia” to others more qualified.  But one thought that occurred to me again and again as I was reading was longevity.  At the moment, we are all – justifiably and entirely correctly – outraged at what appears to be the feathering of their own nests by Trump, the UK “chumocracy” and countless other PEPs around the world.  But how will this be seen in a couple of centuries’ time?  Although many of England’s stately homes were built on the proceeds of the slave trade, and public outrage at the time was sufficient to result in the Slave Trade Act 1807 (abolishing the trade but not slavery itself) and then the Slavery Abolition Act 1833, the families concerned were permitted to keep their proceeds (and were also compensated for their financial loss when required to give up their slaves – but that’s a story for another day).  For the next two centuries they lived lavish lives, at the heart of our ruling classes, and it is only very recently that we have seen public anger against figures involved in slavery (witness the tearing down of the statue of Edward Colston in Bristol earlier this year).

Will it be the same with the kleptocrats of our own times?  Will we – the defrauded public, for it is our public money that they steal – demonstrate and campaign against them, eventually bringing about changes to the law so that they cannot profiteer in the same way again, but still allow them to keep the proceeds and settle in for centuries of comfort?  Or will we put in the enormous effort that will be needed to unwind their schemes and discover their financial hiding places, to seize their criminal proceeds? In AML training I am often asked, in relation to source of wealth enquiries, how far back should we go?  How many ancestors ago must the criminal be before his descendants can claim to have inherited clean money?  But this is a question not for AML trainers, or indeed for compliance staff and MLROs: it is a question for society.  And I hope that “Kleptopia” and Chum-gate will encourage more people to ask just this question.

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