Prize porkers

As visitors to my website and this blog cannot help but notice, I have written a few books about AML.  There are two series of the “piggy” books – one for directors (with their AML oversight responsibilities) and one for staff working at the AML coal-face.  (For MLROs themselves, I have written an altogether more detailed, weighty and piggy-free tome, the “Money Laundering Officer’s Practical Handbook”.  Although, as with the FCA’s Handbook and the GFSC’s Handbook and so on, you would have to have monster hands to hold it – which makes me wonder what distinguishes a handbook from just a book.  Is it a book you should keep always to hand?  But I digress.)

To return to the piggies.  In one series there are five editions, and in the other there are sixteen, giving a grand total of twenty-one piggies – a sty-full, to be sure.  As all self-respecting, self-published authors should, I keep careful records of the sales of these books, to track demand and see whether, when it comes to update time, all should be maintained or some should be allowed to slope off quietly into the sunset.  And I can report that one piggy of the twenty-one outsells all the others by quite some way: “AML: What You Need to Know – UK banking edition” sells four times as many copies as (in second place) “AML for NEDs – Guernsey edition”.

Now I appreciate that the UK is my largest jurisdiction, and within that jurisdiction banking is the largest sector that I target.  But still I am surprised every month by the number of UK banking piggies that are rehomed.  Or at least I was, until a nice chap contacted me via LinkedIn and uploaded a photo of his newly-acquired banking piggy – which he had been given as a prize for participating in “an excellent team performance”.  Now this is lovely news.  I often distribute prizes myself during training; I love using AML games (such as bingo, word games, money laundering simulations, and snakes and ladders) and I regularly stock up on money-themed prizes (such as chocolate coins, banknote erasers and piggy-banks) as rewards for the winners.  I have always been a bit shy of handing out my own books as prizes – it seems rather self-congratulatory – but it is heartening to know that people are pleased to get them, and it does solve the Mystery of the Unexplained Sales.

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Hypocrisy and heavy-handedness

Since I left Sunday school with nary a backward glance when I was about eight, I have had little to do with organised religion.  I enjoyed daydreams about unattainable priests as much as the next teenage girls, but realised quite quickly that when it comes to men of the cloth, more look like Father Jack Hackett from “Father Ted” than like Cardinal Ralph de Bricassart from “The Thorn Birds”.  But a couple of announcements in recent weeks have brought my attention back to the church.

Speaking during morning mass, and then reported on Vatican Radio on 23 February 2017, Pope Francis had harsh words for those who live a “double life”: “Scandal is saying one thing and doing another; it is a totally double life: ‘I am very Catholic, I always go to Mass, I belong to this association and that one; but my life is not Christian, I don’t pay my workers a just wage, I exploit people, I am dirty in my business, I launder money.’  A double life.”  He then went further and said that “it is better to be an atheist” than to bring scandal to the church: “[With] scandal, you destroy.  You beat down.  And this happens every day, it’s enough to see the news on TV, or to read the papers.  In the papers there are so many scandals, and there is also the great publicity of the scandals.  And with the scandals there is destruction.”  I trust that the self-avowed good Catholic members of organised crime groups from Italy to Albania, from Colombia to New York, are squirming in their pews.

And in a handy follow-up to my last post but one – about banks and others applying AML obligations thoughtlessly and inflexibly – we have the story of Saint Nicholas Church in Harpenden in Hertfordshire, whose account at HSBC was closed for a fortnight after the bank “accused church staff of repeatedly failing to provide up-to-date details of individuals involved in the church’s finances, which it said was vital to fight money laundering and fraud”.  As a result, standing orders bounced and parishioners whose money was returned were confused.  According to the BBC story, “details demanded were part of HSBC’s controversial Safeguard programme [which was] set up in response to the bank being fined £1.2 billion in 2012, over money laundering and sanctions busting”.  Church treasurer Peter Timms seems to have a deal more commonsense than his bankers: “This was very heavy-handed treatment, particularly for a charity run by volunteers.  Banks should know their customers, and exercise a bit of common sense. If they’re concerned, they should speak to us properly.”  Amen to that.

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Idling in neutral

One of the difficulties of running a specialist, one-person business is providing relevant training for the staff – i.e. me.  If an AML conference looks particularly ground-breaking I will sign up, but many of them go over (what is to me) familiar ground, often with speakers who are trying to sell products and services to MLROs.  (And this is fine if you are an MLRO – you get information and in exchange you listen to a sales pitch – but is rather pointless for me.)  In a bid to keep my own knowledge current, and to exercise the little grey cells, I have recently signed up for my very first course with FutureLearn, an online distributor of free (yes, free) training courses in a wide range of subjects.  I’m not sure how they make their money – although you can pay for a certificate at the end of the course, if you want one – but the quality of the training I have seen so far is excellent.

My course is called “Antiquities Trafficking and Art Crime” (come on: you knew there would be a money laundering angle somewhere – although, with my fondness for their magnificent cycle routes, I was quite tempted by the “Introduction to Dutch” course).  And it’s been a while since I read any criminology, so I have been particularly enjoying making links in my mind between the money side of the illicit trade in art and antiquities, and the more familiar money laundering of my day job.

For instance, we have just been learning about “techniques of neutralisation” – ways in which criminals justify to themselves what they are doing, in an attempt to neutralise their criminality.  The FutureLearn course looked at the motives of dealers in looted antiquities, but in my own work I am aware of similar techniques being used by both money launderers and those in the regulated sector who choose to ignore AML procedures.  The five techniques of neutralisation initially postulated by American criminologists David Matza and Gresham Sykes in the 19502 are these:

  • Denial of responsibility: the offender proposes that he was a victim of circumstance or forced into situations beyond his control (“It wasn’t my fault”)
  • Denial of injury: the offender insists that his actions did not cause any harm or damage (“It wasn’t a big deal – they could afford the loss”)
  • Denial of the victim: the offender believes that the victim deserved whatever action the offender committed (“They had it coming”)
  • Condemnation of the condemners: the offender maintains that those who condemn his offence are doing so purely out of spite, or are shifting the blame from themselves unfairly (“You were just as bad in your day”)
  • Appeal to higher loyalties: the offender suggests that his offence was for the greater good, with long term consequences that would justify his actions (“My friends needed me – what was I supposed to do?”).

It is not unusual to hear similar justifications today: all they did was make an inflated insurance claim, and heaven knows the insurance company can afford it; why should I spend hours on EDD when my boss takes on clients without thinking about it; if the government is going to waste money on defence, who can blame me for not paying tax; I would have reported the client but I was too busy; if I had turned down that business my team would have missed its sales target, and my colleagues needed their bonuses.  And now I know what to call them: techniques of neutralisation.

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Do as I say

I’m going to do to you what is often done to me: I am going to tell you my own anti AML story.  Actually, it’s an anti anti AML story – you’ll see.

In deference to the diktats of the Financial Services Compensation Scheme (spread that money around) and in an attempt to earn some interest, I put my company money into a variety of one-year fixed interest savings bonds.  One, at Financial Institution 1, matured the week before last.  Their interest rate has plummeted, so I decided to move it over to a similar bond account that I have at Financial Institution 2.  When FI1 asked me to nominate the account for the transfer of the closing balance, I gave the details of FI2.  I received a closing statement from FI1 – and a phone call from FI2.  We can’t take this money, they said, because FI1 is not the account you used to fund the bond initially [that was my general business current account at Financial Institution 3].  Ah, thought I: a source of funds enquiry – how appropriate and, to be honest, rather exciting.  And so I explained all of the above, using all the key words I know MLROs like, and offering to scan and email the closing statement from FI1.  But to no avail: FI2 said that they had to return the money whence it had come.  But you can’t, I explained, as the account at FI1 is now closed – hence the “closing” statement.  Ah, said the chap.  In that case, we’ll have to send you a cheque.  Wouldn’t a bank transfer be safer, I asked, and slightly less likely to lead to money laundering, as I could take your cheque anywhere…?  Silence.  I imagined frantic riffling through the pages of the AML manual.  No, came the answer: only a cheque can be done.  Harrumph.

Anticipating trouble, on Saturday I called into my local branch of FI3.  I told them the story.  Soon, I explained, I will be paying in a large cheque from FI2, which is bound to trigger questions, but as proof of source of funds I will have only a closing statement from FI1.  Please could you note on my file that I have warned you about this, and perhaps we can short-circuit any alerts.  No need to worry, said the manager of the branch: our cheque people will look only to see that the payee name matches, and our fraud people won’t care as long as the cheque comes for a UK-regulated institution.

*head in hands*  You can see why I have anonymised the names.  It makes me despair, this unthinking, illogical application of AML legislation.  FI2 is required to ascertain source of funds and, if they are happy with the explanation, proceed.  They were happy with the explanation, but “computer says no” and only one account can be recognised for money in and out.  FI3 is required to do source of funds checks, and instead seems to be applying an outdated and frankly dangerous (for them) reliance on cheques from regulated institutions.  I have yet to receive the cheque and try to pay it in: I’ll let you know.

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Don’t do as I do

It will not surprise you to learn that I am no fan of Donald Trump; I think he is ill-informed, unprepared, tactless, uncontrolled and just plain nasty – and that’s on a good day.  But there’s not much I can do about him, except what I do about everyone, which is ask whether there is money laundering involved.  I have no wish to bring down the might of American lawyers on my head, so I will confine myself to repeating allegations and observations that have been made by reputable agencies and sources.  To be honest, I’m spoilt for choice.

  • Back in March 2016, FinCEN (the American FIU) imposed a penalty of US$10 million on the [now bankrupt and shuttered] Trump Taj Mahal Casino Resort in Atlantic City for “several willful BSA violations, including violations of AML program requirements, reporting obligations, and recordkeeping requirements”. This was not the first time of telling: “Trump Taj Mahal has a long history of prior, repeated BSA violations cited by examiners dating back to 2003.  Additionally, in 1998, FinCEN assessed a $477,700 civil money penalty against Trump Taj Mahal for currency transaction reporting violations.”
  • On 2 August 2016, Time magazine alleged that “as major banks in America stopped lending [Trump] money following his many bankruptcies, the Trump organization was forced to seek financing from non-traditional institutions. Several had direct ties to Russian financial interests in ways that have raised eyebrows.”  The Trump property arousing most interest was the Trump SoHo hotel in New York, which is the subject of a lawsuit claiming that Bayrock, the business group underpinning the hotel, was supported by Russian criminals: “Tax evasion and money laundering are the core of Bayrock’s business model.”
  • On 19 October 2016, the UK’s Financial Times announced that its investigation “has found evidence that one Trump venture has multiple ties to an alleged international money laundering network. Title deeds, bank records and correspondence show that a Kazakh family accused of laundering hundreds of millions of stolen dollars bought luxury apartments in a Manhattan tower part-owned by Mr Trump and embarked on major business ventures with one of the tycoon’s partners.”  The story was carried and repeated by Fortune magazine in the US.
  • On 25 November 2016, the Independent newspaper in the UK reported that Ukrainian oligarch Dmitry Firtash was facing extradition to Spain to answer charges of money laundering; Mr Firtash was also “part of a consortium including former Trump aide Paul Manafort in a major Manhattan property deal”.

It is therefore perhaps not surprising to see Trump already starting to dismantle the regulations that have been put in place partly to prevent another economic and banking collapse and partly to ensure the probity and transparency of the American financial system.  As quoted by CNBC on 3 February 2017, Senator Elizabeth Warren was quick to see the irony: “[Trump’s actions] will put two former Goldman Sachs executives in charge of gutting the rules that protect you from financial fraud and another economic meltdown.”

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Windows of opportunity

As I design, prepare and deliver AML training, I often find that unexpected themes appear in what I am saying.  Nearly every training session I do has some revised basic information – what money laundering is, what the local legislation is, and so on – but I try to ensure that the majority of the material (and this is particularly important for repeat clients) is new and current, enabling staff to build and develop their understanding of money laundering and AML.  And it is in this new material that I find themes will emerge.

This season, the theme I am seeing is that of “windows of opportunity”.  For example, the UK’s first National Risk Assessment (published in October 2015) showed us that the most popular laundering destination for known UK criminal assets is the United Arab Emirates.  Why, I wondered – and I think it’s because it is a jurisdiction where the financial sector is growing and becoming more sophisticated at a rate that is outstripping local legislation and indeed local compliance/AML expertise.  And so it forms a window of opportunity for launderers: the jurisdiction works for what they want, while the AML efforts are failing to keep up.  And then there’s Bitcoin, and other virtual currencies.  They work: enough jurisdictions are recognising and accepting them to make them an option for moving money, while regulation and legislation are struggling to catch up.  Arguments are still raging about whether virtual currencies are actually currencies or whether they are in fact commodities, and until we sort out the basics, there’s not a hope that the correct legislation, regulation and guidance can be written.  Another window of opportunity for criminals: the virtual currency system works, and is woefully under- or even completely unregulated.

Criminals are the consummate opportunists: unshackled by concerns about legislation or even morals, they can turn on a sixpence and divert energy and resources to taking full advantage of any window of opportunity that may open.  And as soon as it closes, they’re off to the next one.

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Still selling their souls

In my spare time I think about financial crime, because I am the author of a series of historical financial crime novels set in London in the 1820s.  When I tried to interest publishers in the first in the series, “Fatal Forgery”, I was told that no-one is interested in financial crime, and that the plot – concerning [the true story of] a banker who stole from his own customers – could not happen these days.  To these publishers, may I now say HAH!  And you can’t see it, but I’m sticking my tongue out too.  For what have we here, but a banker and five other “financiers” who (says the judge) sold their souls for swag and bling, and diddled small business customers of HBOS out of £245 million.

When you see pictures of the six criminals, you are struck by how ordinary they look – no horns or forked tails.  They simply used the fact that most people rely on those in positions of authority and expertise to guide them through unfamiliar territory; “my” historical banker took advantage of the new innovation called share certificates (what? I don’t have a stack of gold in the bank’s vault, but just a piece of paper?), while this sextet convinced bank customers that their best course of action was to entrust their businesses to a turnaround consultancy – which turned around their honest money into fancy yachts, luxury holidays and sex parties.

Of course, one major difference is that in the 1820s my constable narrator never uttered the words “money laundering”.  The world was still very cash-based – even banknotes were something of an innovation – and the investigation of crime was in its infancy, so there was little need for criminals to do anything to disguise their money.  Today I am delighted to see that the “HBOS six” sentences all included a nice little uplift for money laundering.  Mind you, in the 1820s any conviction for an offence of dishonesty led pretty sharpish to the scaffold – more of a dropdown than an uplift.

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Artful dodges?

I have written before about the potential for money laundering presented by the art world.  Of course, I know this in theory only: I have never once been the customer of an art auction house.  (I spent some childhood years in Newmarket and often attended bloodstock auctions, where my mother would make me literally sit on my hands in case I accidentally bought us a gelding, and this terror of misbehaving at an auction has stayed with me.)  Under UK (and EU and related) AML legislation, art auction houses and other dealers in art are brought into the AML family by dint of being high value dealers – i.e. they trade in goods for significant amounts of cash – and this remains the same in the Fourth Money Laundering Directive and is unaffected by recent proposed changes to that Directive.

However, I think it is fair to say that the art sector has married into the AML family rather reluctantly, and has, thus far, tended to see all this AML endeavour as rather distant from them, perhaps even rather grubby in its insistence on asking impertinent questions about customer identity and source of funds.  But with several recent high profile cases of wealthy individuals using their art collections to disguise their money, the art world has come under more public scrutiny.  And in response, last week the Responsible Art Market (RAM) initiative published its first “Guidelines on Combatting Money Laundering and Terrorist Financing”.  (According to its own website, RAM was formed in Geneva in 2015 and “aims to raise awareness amongst Art Businesses of risks faced by the art industry in Switzerland and abroad and to provide practical guidance and a platform for the sharing of best practices to address those risks”.)

I’m not going to quibble about the structure or detailed content of those guidelines – I think they are a useful first go at uniting what is obviously quite a disparate sector – and although they are not as I would have written them, anyone who writes such things for a living would say the same.  But there are two points at which I take more serious issue with what the art sector is being advised, as I fear that it is not a correct interpretation of the legislation, at least in the jurisdictions whose law I know.

The first is that the guidance advises the reporting of “grounded suspicions” of money laundering or terrorist financing.  I am not sure what a “grounded suspicion” is, but section 330 of the UK Proceeds of Crime Act 2002 makes it an offence to fail to report “knowledge or suspicion” of money laundering, or to fail to report if there are “reasonable grounds” on which you could have had such knowledge or suspicion.  A “grounded suspicion” sounds entirely different to me, suggesting almost that you need evidence or proof before reporting.

And the second is found in the section of the guidelines that talks about assessing source of funds: “The preference for all transactions should be for the Art Business only to accept payments from reputable banks in jurisdictions subject to AML regulation and supervision.  In this way Art Businesses can rely on the fact that the financial institutions handling the funds (which are subject to a high degree of AML regulation) will have carried out the necessary checks and verification and be satisfied that the source of funds is clean.”  This is suggesting a degree of reliance that all other parts of the regulated sector have learned does not exist, and offers unwise comfort to the art sector.  As we all know, you can hope that the others in the chain have done their due diligence, but if you end up with a criminal on your books, he’s your customer and you will pay the price.

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Dabs and mince pies

Have you heard of Aadhar?  No, nor me.  The name comes from the Hindi for “foundation”, and it’s a cloud-based ID database that holds the details of (at last count) over a billion Indians.  When you register with Aadhar, you record your fingerprints, iris scan, name, date of birth, address and gender, and in exchange you are given a unique twelve-digit number which you quote to prove that you are you.  Set up initially to enable the payment of welfare benefits to the correct people, Aadhar is now used to check and verify identity in all sorts of environments – including, of course, the wider financial services sector.  For the man who led its development, Nandan Nilekani, said from the outset that his invention would be open-access and free to use, for both government and industry.  As a consequence, according to the Economist article that alerted me to the existence of Aadhar, “fingerprint readers are a common sight in phone shops, insurance offices, banks and other sellers of regulated products”.

The arguments against a central ID database are many and varied, from concerns about civil liberties to fears of hacking and state corruption.  One point that is never made, however, in favour of such systems is the international one.  No-one – or at least vanishingly few people – objects to having to produce photo ID (usually a passport) to travel internationally.  And to obtain such photo ID, you have to submit your details for verification to a database.  Now, if you want to open a bank account or buy an insurance product or take out a mortgage or sell your home, you are launching a transaction into the international financial system.  You may not be leaving the country, but your money certainly is, in some form or another.  All finance is global now.  And so is it really unreasonable to expect your money – through its association with you – to prove its identity before it sets off on its travels?

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Curiosity might save the cat

One of the management buzz-phrases that seems to be staying the course is “tone from the top”.  In the world of AML, the tone from the top has in fact originated at the bottom: first we had MLROs beating the AML drum, then boards became involved when legislation was upgraded to require business risk assessments, and now supervisors are taking their own medicine (as evidenced by the spread of risk-based supervision) and even governments are getting in on the act (with Recommendation 1 of the FATF’s Forty stating that “countries should identify, assess, and understand the money laundering and terrorist financing risks for the country [and then use that assessment to] apply a risk-based approach”).  The tone from the top for one part of the UK’s regulated sector in particular – the gambling industry – has recently become decidedly frostier.

Businesses licensed by the UK’s Gambling Commission are required to abide by its licence conditions and codes of practice (LCCP).  Enhancements to the LCCP came into force in October 2016, including a requirement that licensees report to the GC “any criminal investigation by a law enforcement agency in any jurisdiction in relation to which the licensee is involved… and the circumstances are such that the Commission might reasonably be expected to question whether the licensee’s measures to keep crime out of gambling had failed”.  In other words, if a customer is hauled off to court, the GC wants to hear about it from their licensee and not (or at least not first) from the police.  In the past, there have been several instances of criminals of all stripes – but mainly thieves and fraudsters – laundering their loot through casinos.  And in a speech to an industry conference in November 2016, GC Chief Exec Sarah Harrison made it clear that this sort of infringement would no longer be dealt with in a gentle manner, with negotiated settlements and the like: “It is important that you are and remain alive to managing the risks of money laundering and terrorist financing, consistent with the licence objective to keep crime out of gambling.  Here, I want to encourage you specifically to raise your game and be far more curious about the source of customer funds.  Our recent casework showed a lack of curiosity, and at worst, a leadership culture which puts commercial gain over compliance.  I still hear now that some businesses are adopting a strategy of ‘wait and see’ – wait until the source of funds is proven to be illegal before acting.  This is far from a risk-based strategy, nor is it credible.”  She had a stern warning about the future of the GC’s enforcement strategy: “[We have so far shown] a preference for pursuing compliance through means that stop short of a licence review, in favour of a regulatory settlement.  We propose to remove this bias in favour of settlement… In addition, we will propose changes to our statement on financial penalties with the likelihood of higher penalties going forward, in particular where we see systemic and repeated failings.”

If I were a gambling woman, I’d bet that the next UK gambling business to play fast and loose with criminal proceeds will feel that tone from the top in the form of a tone of bricks.

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