Launderer seeks splendour without diminishment

It cannot have escaped your notice that Canada is in a lather about its real estate sector being used for money laundering.  Stories are appearing seemingly every day about some new scheme or other that has been uncovered, thanks in part to the work of Peter German, a lawyer and ex-Mountie who advises the government on all manner of things, including money laundering.  (You may remember that it was he who wrote the report exposing the extent of money laundering through the casino sector in British Columbia back in June 2018.)  His new report – “Dirty Money – Part 2” – looks at laundering through the horse racing, luxury vehicle and real estate sectors.  And it’s scary stuff, particularly when you see that the cause is not just the deviousness and determination of criminals, but also the weakness of the Canadian AML regime: “Opaque ownership structures allow criminals to remain anonymous and provide a veil with which to conceal money laundering activity in real estate.  Of the legal entities that hold C$28 billion [about £16 billion] in residential property in British Columbia, the vast majority are privately owned with no information on who ultimately controls them.  There is no way to accurately identify nominee owners or properties held through unregistered trusts.”  As my Singaporean stepmother would say, aiya lah – why so stupid?

I’m no expert on the Canadian AML set-up – it’s not one of the jurisdictions in which I work – but even a cursory reading of the German report tells me that there are several really quite basic shortcomings that are surprising in a sophisticated jurisdiction:

  • “[There is] the continuing inability of the federal government to address the Supreme Court of Canada’s 2015 decision in the Federation of Law Societies case which essentially exempted the legal profession from financial reporting to FinTRAC [Canada’s FIU].”
  • “Very little attention is being paid to unregistered MSBs by law enforcement and regulators.”
  • “Large and small auction houses routinely transact business in cash. They are also not subject to financial reporting to FinTRAC.”
  • “FinTRAC acknowledges that it does not regulate certain sectors of the economy which are vulnerable to money laundering including motor vehicle dealers, auction houses and boat sellers.”

Against this background we must also put the attractiveness of life in Canada.  As a recent BBC article on the subject puts it: “Canada is a rule of law country that believes in due process and rehabilitation.  A criminal on trial in Canada will be treated much better than they would in the People’s Republic of China, for example.”  This yet another example of AML efforts trailing woefully behind.  In the same way as international organisations position themselves in jurisdictions where tax and regulation are less onerous, criminals perform their own AML arbitrage.  I should imagine they are reading the German report with glee and booking flights to Vancouver as we speak.

(And in case you’re wondering, the motto of British Columbia is Splendor Sine Occasu – Splendour Without Diminishment.)

Posted in AML, Money laundering, Organised crime, Uncategorized | Tagged , , , , , , , , , , , | 1 Comment

Inside the tent but still p***ing in

In my guise as a magistrate I have become familiar with a thrilling document called the “Magistrates’ Court Sentencing Guidelines”.  It’s an entirely public, well, publication, as justice is meant to be transparent and accessible to all.  And if you search for “theft” in the guidelines, you will find a variety of flavours, including “theft of a pedal bicycle” (an offence we try quite often here in Cambridge) and “theft in breach of trust”.  It has its own offence because the idea of someone doing something wrong while operating in a position of trust or responsibility is seen as particularly serious.  And in recent months we have seen something of a rash of people engaging in money laundering while working in a job which is supposed to involve a measure of anti-money laundering activity.  On 7 May 2019, for instance, the National Crime Agency announced the jailing of three men – two bankers and an accountant – who had colluded to steal money from the bankers’ customers and launder it through accounts set up by the accountant.  In total they stole £390,000, mainly from elderly customers – and were jailed for fraud by abuse of position and money laundering.

This is a particularly difficult risk for the MLRO to manage.  Of course we try to ensure, through pre-employment screening, that only honest and capable people are employed within the regulated sector; we do criminal records checks and we take up references.  For the most part this makes it harder for those who are dodgy from the outset – those who want a job in the regulated sector simply so that they can launder money – to get in.  But what of those who start out with good intentions and end up going astray?  People fall from the path of righteousness for all sorts of reasons, from genuine need to simple greed (now there’s a title for a novel – © Susan Grossey 2019).  And to guard against these situations, the MLRO’s best defence is a long nose and at least one big ear.

The long nose is for snooping around, in the most benign fashion.  Does an employee start turning up for work in a car that is out of his price range (given his salary), or talking about holidays that are beyond her financial reach?  (There may be another source of wealth… but there may not.)  Conversely, does a member of staff seem more agitated or stressed than usual, or more unkempt?  Displaying behaviour that could suggest mental anguish or money worries?  The big ear is for listening to concerns before the employee takes matters into their own hands and decides that the only way to get the money to pay off a debt or escape an abusive relationship or live the dream lifestyle is to turn to crime.  Organised crime gangs have long noses and big ears of their own, to sniff out weaknesses and listen to gossip, in order to get their hooks into those on the inside who can do the dirty laundering for them.  They know that money laundering is a people business, and the smart MLRO remembers that too.

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Asking for trouble

When Brexit is simply too, too depressing, I remind myself that in my own little world at least nothing much is changing.  Cambridge – where I live – is as cosmopolitan and outward-looking as ever, and the Fifth Money Laundering Directive trundles inexorably towards us.  Yes: even though the People Have Spoken (clarification: but not in my house or indeed hearing) and said they want no more of this EU nonsense, we still have to absorb MLD5 as its transposition deadline of 10 January 2020 will fall within the UK’s Brexit implementation period.  And HMG wants our thoughts on how to do this.  (Well, if we’re honest, they probably don’t, but modern democracy being what it is, they have to ask.)  The consultation on the transposition of MLD5 into our domestic legislation was launched on 15 April and runs until 10 June 2019, so you have a bit of time to gather your thoughts.  I will of course be making my usual fulsome representations – I can imagine the epidemic of eye-rolling that grips the Treasury when my multi-megabyte email arrives – but I have allowed myself a sneak preview, and it’s going to be fun.

For instance, as we know MLD5 requires the inclusion of “art intermediaries” in the AML family – at the moment, art dealers may be included if they accept large cash payments and thereby qualify as high value dealers, but in the new regime, they will be in regardless of how they take payment.  Of course, anyone in the AML family must be overseen by a supervisory body to check that they are doing their AML work properly.  And regular readers will know that we in the UK have the most crazy and inefficient AML supervisory regime (about which I have opined before).  So I can quite understand that creating yet another AML supervisor for art intermediaries is not a good idea.  But neither is the suggested solution: “The Treasury considers HMRC as a supervisor suited to the role of regulating art intermediaries, given their current supervision of high value dealers.”  You mean their current ineffective, light-touch and generally rubbish supervision of HVDs?  And given that in June 2018 their boss Jon Thompson told the House of Commons Treasury Committee that he wasn’t sure HMRC should be doing AML supervision at all?   Why yes: that sounds like the perfect agency to take it on.

My, I’m looking forward to crafting my response to this consultation.  I think I will set aside a whole day and a box of Jaffa Cakes to do it justice.

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Something good written by Committee

As you are surely aware, the UK is currently convulsed (almost to the point of turning itself inside out) by a frenzy of self-analysis.  And AML has not escaped the mood of introspection: on 8 March 2019, the House of Commons’ Treasury Committee published a report titled “Economic Crime: Anti-money laundering supervision and sanctions implementation”, including evidence heard by the Committee and summarising their suggestions as to what could be done to improve both the UK’s response to economic crime and its AML regime.  It’s a substantial report – nearly eighty pages in length – and much of what it says about the UK’s shamefully fragmented and inefficient (and, more worryingly, ineffective) AML supervisory regime has been said before, not least by me.  But there are other nuggets of loveliness, looking at such issues as PEPs, de-risking and SARs, and in a couple of these areas the Committee takes a remarkably common-sense approach.

When considering PEPs, for instance, the report acknowledges that a difficulty remains with deciding who is and who is not a PEP, regardless of the regular attempts to define them in legislation.  Databases are available but, as the report says, these commercial solutions “may be beyond the resources of very small companies”.  This of course creates another risk, as the savvy corrupt PEP might well take his business to a firm that will be (a) dazzled by the prospect of such an illustrious client and (b) unable to check his true status and risk categorisation.  The Committee’s suggestion?  “We recommend that the Government creates a centralised database of PEPs for the use of those registered by AML supervisors.”  Hardly imaginative, and it has been suggested to me many times in the past, but it would be – I think – the first such government database in the world.

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A dash of pedantry

A small matter, this week, but one of great interest to me: to hyphenate or not to hyphenate?  I have always written “money laundering” but there are those – among them, the Economist newspaper, whose style guide I trust in almost every other way – who prefer “money-laundering”.  To my eye that looks ugly, but I have to admit that when it comes to its opposite, “anti money-laundering” (Economist) makes more immediate sense than “anti-money laundering” (me).

Being a graduate in English, a novelist and a big-time pedant, I am keen to get this right.  The Oxford English Dictionary tells us:  “Hyphens are used in many compound words to show that the component words have a combined meaning (e.g. a pick-me-up, mother-in-law, good-hearted) or that there is a relationship between the words that make up the compound: for example, rock-forming minerals are minerals that form rocks.  But you don’t need to use them in every type of compound word.”  Ha – so even if it does count as a compound word, it’s not compulsory to hyphenate.

My version is supported by the entry for “laundering” in the Collins English Dictionary, which actually gives “money laundering” as a non-hyphenated phrase.  And this also reveals the exciting news that the word “laundering” is increasing in popularity and usage – which I assume shows a growing fascination with financial crime rather than with housework.  So what do you think, dear readers: should we hyphenate or not?

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Best foot forward

In recent weeks I have worked in Guernsey and Jersey and I am rather fond of both places – not least because they have rather strict AML regimes, and you know how I feel about taking AML jolly seriously.  Despite their best efforts, both G and J are frequently the target of finger-pointing by larger jurisdictions, who call them “offshore” as an insult rather than as a geographical observation, and who make no secret of the fact that they consider the islands to be afloat on a sea of dodgy money.  This is, of course, entirely erroneous, and those of us living in the UK, with the billions being laundered here each year, Shud No Better.

That said, none of us is perfect, and both islands – along with their northern cousin, the Isle of Man – could put yet more effort into improving their international reputation.  I speak of the Corruption Perceptions Index.  I like this index, as regular readers will know: it is well-researched, clearly presented, promptly delivered – and does what it says on the tin.  It does not pretend to measure corruption, which is all but impossible to do: instead, it records perceptions of corruption and ranks accordingly.  In the latest iteration – published in January 2019 – there are 180 countries in the CPI.  This means that, depending on how you count disputed territories, there are at least seventeen countries missing – and among them are Jersey, Guernsey and the Isle of Man.

This is a shame for all three as – I imagine – were they to be included in the CPI, they would score well.  Whatever others might say about them, no-one has suggested that they are riddled with corruption (or at least, not in my hearing – and I’m always listening…).  Scoring well on the CPI is a fillip to international trade, not least because it reassures those who do risk assessments in the financial and related sectors that money flowing through you is more reliable, and that your PEPs can be trusted not to pilfer from the public purse.  So what to do?  Well, the CPI is in fact a composite index of thirteen source “surveys and expert assessments” by such august institutions as the World Bank and the Economist Intelligence Unit – this is to give a broad view of the world and to retain objectivity.  And to be included in the CPI your jurisdiction has to appear in at least three of the thirteen sources.  J, G and IoM appear in only two – bah!  If I were running the show in any of the three, I’d look at getting my island appraised quick smart by a third survey or expert assessment – and then I’d appear on the CPI (in a good, high position) and (even better) be able to blow a raspberry at the other two islands.

Posted in AML, Bribery and corruption, Money laundering, Publications, Uncategorized | Tagged , , , , , , , , , | 6 Comments

Too much of a bad thing

Please may I distract you from the festering plague sore that is Brexit by drawing your attention instead to something we Brits do rather well, which is AML supervision.  In fact we’re so good at this that we have dozens – literally dozens – of agencies involved in it.  To quote from the December 2018 FATF mutual evaluation of the UK (you can imagine the evaluators groaning as they realise just how many meetings they are going to have to hold): “The Financial Conduct Authority supervises the majority of financial institutions.  HM Revenue and Customs supervises some financial institutions (money service businesses which are not supervised by FCA) and… High Value Dealers, estate agents, and accountants and TCSPs not supervised by professional body supervisors or the FCA.  The Gambling Commission supervises casinos.  There are 22 legal and accounting sector self-regulatory body supervisors.”  That’s a total of 25 AML supervisory bodies.  For one jurisdiction.  So it can be a bit disjointed.  Indeed, in their recent report “No Rest for the Wicked: Driving Change in the UK’s Post-FATF Evaluation AML Regime”, think-tank RUSI described the supervisory regime as “complex and fractured” (neither adjective instils much confidence).

For years there have been calls to rationalise things – and do bear in mind that many jurisdictions can manage with one single, solitary AML supervisory body.  Granted, the UK is a large and varied financial jurisdiction so one-size-fits-all may be too ambitious, but we could pare it down to, for instance, the FCA, the GC, one for accountants, one for lawyers, and HMRC for the estate agents and HVDs.  And in January 2018 the government did make a change… by introducing a supervisor to supervise the self-regulatory AML supervisors.  This is OPBAS – the Office for Professional Body Anti-Money Laundering Supervision – and with admirable restraint RUSI calls it “an extra layer of complexity”.

OPBAS has been up and running for a year now and has just published the results of the AML supervisory assessments it undertook in 2018.  I’ll be honest: it’s not an encouraging picture.  The point of OPBAS is to “ensure the [22] professional body AML supervisors provide consistently high standards of AML supervision”.  And by their own admission, in this recent report, there is plenty to do.  Of the 22 bodies in their purview:

  • 80% lack appropriate governance arrangements
  • 91% are not fully applying a risk-based approach to their AML supervisory activities
  • 23% undertake no form of AML supervision [what?!]
  • 80% lack appropriate staff competence and training
  • 36% lack sufficient record keeping policies and procedures, meaning they do not always record their rationale for decisions
  • 48% lack formal internal audit or quality assurance procedures.

If we needed another reason – beyond a general outbreak of sanity – for stripping some of these bodies of their AML supervisory role, here we have it: they’re rubbish at it.  And I had so hoped that this was going to be a good news story.

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Cash and coffee

Last week I wrote about the growing (or at least, continuing) popularity of cash in Switzerland, so this week I am looking at the other end of the spectrum.  I recently spent a long weekend in Copenhagen and while I was preparing for the trip, I realised that I didn’t have any krone.  I contacted the friend I was visiting to ask about using local ATMs and she said, “Don’t bother – you won’t need cash anyway”.  And she was right: from getting the metro into town from the airport, to our numerous fika stops (that’s a remarkably handy Danish word for “meeting up for coffee, cake and chat”) and beyond, I was card-ish and contactless.  I spent the whole weekend without a single krone in my purse.  Although Sweden is leading the charge – many of their retail outlets and transports systems now refuse to accept cash at all, to keep costs down and to protect staff – Denmark is not far behind.  Fewer than 25% of transactions in Danish shops involve cash, while the Danmarks Nationalbank estimates that 46% of Danes carry less than 100 krone at any given time.  That’s £11.50.  And remember that Denmark is an expensive little place, so that’s probably just about enough to get a lunchtime sandwich.

Personally I don’t need even more ways to pay for things – it’s easy enough to spend with just cash and cards – but trendy youngsters are using Apple Pay and Google Pay on their phones and watches.  Meanwhile Amazon has also opened “Amazon Go” convenience stores in Chicago, Seattle and San Francisco, where customers scan a barcode linked to their Amazon Prime account when they enter the store and their purchases are charged to the account instead of individually purchased at checkout.

From an AML point of view, this all seems like a good development: the more transactions we can route through regulated institutions, the harder it is for criminals to move their money without detection, and the more perfect an audit trail we will have for prosecution and confiscation purposes.  But there are social concerns.

In June 2018, the FCA’s “Financial Lives” survey (of 13,000 people) revealed that 1.3 million adults in the UK (3% of the adult population) are unbanked, i.e. have no current account or alternative e-money account.  The unbanked are most likely to be the young – often unemployed or homeless – and the elderly (who may distrust financial institutions or feel left behind by the move to online banking with its attendant closure of local bank branches).  And concerns about people being denied access to products and services if they can’t go cashless has created something of a backlash.  Philadelphia has become the first US city to ban cashless stores: in July 2019 a new law will come into effect obliging most retail outlets (shops and restaurants) to accept cash.  According to Philadelphia city councilman Bill Greenlee, the new law restores the right of everyone with money to do business in stores: “I can go into a coffee shop across from City Hall that’s cashless and get my coffee and muffin, but the person behind me that has United States currency can’t get the same cup of coffee.  It’s a fairness issue; it creates an us-and-them kind of situation.”  So there’s the real difference between European and American coffee: it’s not the strength or size – it’s how you pay for it.

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Purple, portable and prized

Cash is an odd thing: like the Cheshire Cat in Wonderland, it periodically disappears and then once again reappears.  In my next blog post I will talk about disappearing cash but this week I want to tell you about Switzerland, which is once again going against the grain and ploughing its own furrow (which is an extremely rare farming technique known only to elite Alpine agrarian workers).  Most of the rest of the world is getting rid of high-value banknotes, as we discussed here and here.  But not Switzerland.  They have one of the most valuable banknotes in regular circulation: the 1,000 Swiss franc note.  In the bureau de change at my local M&S, I’d have to hand over more than £780 to get just one of these.  That’s fifteen times the value of our largest note, the already-rare £50 (or the bull’s-eye to our Cockney friends).  So you think they might be a bit worried about this, particularly in the face of the European Central Bank getting rid of the €500 banknote at the end of last year thanks to concerns about money laundering and terrorist financing.  But no: on 13 March 2019 the Swiss National Bank proudly rolled the presses on a newly-designed 1000-franc note.  It’s lovely and purple and “focuses on Switzerland’s communicative flair” with an image of a handshake.  That’s a bit unfortunate, really, given how often bribery is symbolised by a handshake.

The Swiss are big on privacy, of course.  When someone there proposed launching a national railcard a bit like the Oyster system we once had in the UK, there was a national outcry because people feared having their travel habits tracked.  And they are big users of cash, perhaps for similar reasons.  In a survey on payment methods conducted throughout 2017 by the Swiss National Bank, they found that “cash is the most common method of payment for households in Switzerland [with] 70% [of payments] processed with cash”.  And although smaller payments are more often made with cash than larger ones, “35% of non-recurring payments that involve amounts of more than CHF 1,000 are settled with cash”.  When was the last time you made a cash payment of £780?  Me either.  Imagine cramming all of that into your wallet or purse – and that, of course, is precisely why large value banknotes are still so popular with criminals.

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Cut on the bias

We’re all biased – there’s no getting away from it.  My own particular unfair bias is against taxi drivers; as a cyclist I have been sworn at, side-swiped and (once) squeezed with my bike against the back of a lorry in a queue of traffic by enough taxi drivers to make me mistrust the lot of them.  But as I write this I know it’s unfair.  A few months ago I was on a Boris bike in Marylebone and I was lost; cycling the wrong way up a one-way street I came wheel to bonnet with a black cab.  I steeled myself for the (in this case, justified) abuse but I could not have been more wrong: the driver wound down his window, asked whether I was lost (must have seen the sheer panic on my face) and gave me careful directions and a jolly wave as I set off.  And yet, and yet… I’m still not keen on cabbies.

By now you’re wondering how on earth I am going to haul this around to AML, but hold on tight because here we go: we need to be aware of our own biases when doing due diligence checks and risk assessments.  We all have our own cognitive bias – a built-in tendency to assess information in a certain way.  And from an AML perspective, two flavours of cognitive bias are particularly dangerous.  Confirmation bias means that once we have made up our mind on a subject (taxi = t***er), we tend to notice only information that confirms that view (squished against lorry) and discard anything that contradicts it (charming fellow in Marylebone).  And in order to make a fair assessment, you should of course take all information on face value and put it into the mix – whether it supports your much-cherished view or not.

Alongside this we have availability bias.  When asked to judge whether something is true or not, we often make our decision based on how easily examples (or counter-examples) come to mind, and not on a full assessment of all possible examples.  In the AML sphere, let’s take corrupt African leaders.  I bet you can name five without even breaking a sweat.  Given a little longer and a plate of Jaffa Cakes, I bet you could get to a dozen – spoilt for choice, shooting fish in a barrel, etc..  But have you heard of the Ibrahim Prize for Achievement in African Leadership?  Founded by Sudanese-born mobile phone magnate Mo Ibrahim, the award recognises “recognises and celebrates African executive leaders who, under challenging circumstances, have developed their countries and strengthened democracy and human rights for the shared benefit of their people, paving the way for sustainable and equitable prosperity”.  And now that you know that (and without following that link – I’m on to you) , can you name five previous winners?  Go on then, two?  (I’m insisting on two, because Nelson Mandela is just too easy – and yes, he won an award in 2007.)  Tricky, isn’t it – because the press rarely reports good, honest African leaders when the bling-y ones are so much more fun, with their gold-plated bath-taps and cellars of three hundred bottles of Chateau Petrus.  But in the spirit of full disclosure – after all, full disclosure is the enemy of availability bias (and there’s a winning slogan for your holiday t-shirt) – I should say that although Ellen Johnson Sirleaf of Liberia won an award in 2017, “in 2009, 2010, 2012, 2013, 2015 and 2016 the [Ibrahim] Prize Committee, after in-depth review, did not select a winner”.

So what can we AML-ers do to guard against our own bias?  Top tips:

  • When gathering due diligence information, don’t discard it as you go – something that seemed irrelevant at the time might become much more significant later in the process, so save it all to make an informed overall judgement
  • Encourage active questioning and constructive dissent to solicit a wide range of views
  • Show your findings to someone who is prepared to play devil’s advocate, particularly if you fear you might be too close to the situation to assess it objectively
  • Read and learn widely: the more balanced and deep knowledge you have, the less likely you are to fall unwitting victim to bias.
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