FINANCIAL CRIME IN FOCUS – Edition 12
Published Date: 14th October 2019
Using a web of shell companies is a common ‘tool of the trade’ for money launderers and a topic that is never far from the headlines. In just these last few weeks, Latvia – which has faced scrutiny from its Western allies over weak money laundering controls - has announced the closure of over 17,000 shell companies.
Is this just the tip of the iceberg? Yes, absolutely. Places like Latvia and Estonia might seem a long way away, but with many shell companies and LLPs registered in the UK, the enemy is right here in our midst.
Graham Barrow and Ray Blake – hosts of the popular podcast ‘The Dark Money Files’, have applied their tenacious investigative skills to unravelling shell companies. In one example, they unpack a dormant UK registered company in great detail, showing an extraordinary array of overseas directors coming and going, regular changes to the directors names and links to adverse information (court cases), high profile individuals (oligarchs, presidents and prime ministers), a coal mine, an alleged murderer, a drugs gang and the mafia. However, despite all of this, the company filed dormant accounts every year since it was first incorporated. It is now under investigation.
Clearly this is not an isolated situation. Compliance teams need to develop better skills in identifying, unpacking and probing unusual corporate structures to understand their ownership and purpose. Whilst steps are being taken to address the abuse of UK limited companies, this will not happen overnight, and compliance professionals need to be acutely aware of the threat of shell companies.
Stripping back the layers of a business is complex and can take time, yet businesses demand speed and accuracy. In order to meet these sometimes conflicting challenges, anti-financial crime professionals must conduct the right level of due diligence and not just rely on disparate information sources and standard search engines.
It’s good to see that reform and the governance of data at Companies House are firmly on the agenda and we eagerly await results of the recent consultation.
One of the key tasks for financial crime compliance professionals this Autumn, is preparing for the imminent arrival of the 5th Money Laundering Directive (5MLD). Set to be transposed into UK law on 10th January 2020, the directive will impact regulated firms to varying degrees, dependent on their exposure to certain businesses, territories and customers.
One of the most dramatic changes with 5MLD is the inclusion of virtual currencies and virtual payment mechanisms into the scope of the regulations, along with high value art dealers. Could your firm be exposed? It’s critical that you’re able to identify and conduct adequate due diligence on any customers within these sectors, which are now recognised as higher risk.
I’ve had many conversations with firms who say they will not engage with virtual assets (VAs) and virtual asset service providers (VASPs), but is this position sustainable in the long term as they become more commonplace? I would strongly suggest that like King Canute trying to stop the tide coming in, it’s unavoidable in the long run.
In addition to being mindful of new industries coming into scope, most firms will need to review and beef up existing Customer Due Diligence (CDD) policies, specifically for those scenarios which trigger Enhanced Due Diligence (EDD). Notably, transactions that involve high risk countries will require additional scrutiny, as will companies’ checks for Politically Exposed Persons (PEPs), which now need to pick up all those identified as having ‘prominent functions’ in individual EU member states’ national PEP lists.
New provisions around beneficial owner registers are also being introduced; designed to improve transparency, particularly for offshore registered entities. The benefits will likely not be recognised instantly, as many countries are yet to set up public registers of beneficial owners. Whilst the UK has a head-start, having already implemented the Register of People with Significant Control, nevertheless identifying beneficial owners in complex corporate structures remains a big challenge for firms.
If you’re looking for help with 5MLD, LexisNexis® Risk Solutions has produced a guide to the 5th Money Laundering Directive, which provides an overview of several of the changes that will impact regulated firms in all sectors and offers up some key considerations you may wish to take into account as you prepare.
Whilst the regulation and revised JMLSG guidance has yet to be published, time is marching on and a plan of action will need to put in place to prepare for January 10th. Keep an eye on the JMLSG and HMT websites for news – we’ll be reflecting on any updates when they happen.
Sanctions screening has become much more complex, requiring considerable skill from sanctions compliance analysts to ensure designated entities are correctly identified. We are frequently asked to carry out additional checks for clients whose payments have been frozen by their bank due to a possible name match and, usually, it’s a case of mistaken identity. However, this can cause considerable difficulties for companies whose payments have been withheld.
Yet it’s easy to understand how mistaken identity can arise. Our good friend Jeremy Round of SQA Consulting frequently advises on the challenges of name screening. His latest article provides a detailed account on the specific difficulties in screening Korean names and how easy it is to get the wrong person. Given the growing significance North Korea has on both EU and OFAC sanctions lists, sanctions screening analysts will find this article helpful in avoiding cases of mistaken identity.
Of course, it’s not just the screening of names that can cause a headache for sanctions professionals. The Venezuelan government is considering the use of cryptocurrencies to make international payments for goods and services which will make detection and checking of possible sanctions breaches almost impossible. This follows on from the regime’s recent attempt to create a sovereign cryptocurrency known as ‘Petro’, to circumnavigate sanctions. As more members of the Venezuelan regime are sanctioned, this time for human rights abuses, one can only assume that more attempts at sanctions evasion are likely.
These challenges make it all the more difficult for sanctions analysts to carry out their job effectively. We know this first-hand as our own international research team closely monitors all sanctions regimes and blacklisted entities to make sure they’re covered in our LexisNexis® WorldCompliance Data™.
Trying to navigate the complex world of sanctions is increasingly challenging so it’s more critical than ever that firms can be confident that the sanctions data they screen against is high quality, up-to-date and content rich, and that their sanctions screening analysts are highly trained.
The need for analysts to demonstrate their proficiency in sanctions compliance has been recognised by ACAMS, which has just launched a Global Certified Sanctions Specialist Certification programme. I have signed up. Anyone care to join me?
...or at least not the gold you thought you’d bought. As this article from KYC360 reports there is a growing global forgery industry in gold. Gold bars of inferior quality are being fraudulently stamped with the mark of major refineries, slipping into the supply chain, and proving very hard to detect. Of course money launderers and fraudsters are taking full advantage.
The corruption lobbyists, Global Witness, have been tracking and reporting on the illegal gold trade for years. Take a look at this article to see how a private Chinese company traded arms and cash for access to rich gold deposits in the Democratic Republic of Congo, which are then traded and refined illegally before entering the global supply chain.
Finally, two stories that highlight how organised criminals draw in the vulnerable in our society as mules, to conduct illicit activity on their behalf; perhaps without the victims even being aware of it.
The Crown Prosecution Service successfully prosecuted a Liverpool milkman of previously good character, but who was desperate for money and agreed to act as a carrier for a group and who was subsequently caught transporting a large amount of cash in a car. The CPS accepted that he had no idea how the money was ‘made’, but he has paid a heavy price for his involvement.
Young people are also at risk of being sucked into criminal schemes, and Barclays Bank has reported the significant rise in the number of Money Mules under the age of 21. The lives of so many young people and university students are being ruined as they are drawn in with the promise of easy money and just making a few transfers through their student account.
As compliance professionals, we need to be keenly aware of the problem of money mules. On that note it’s great to see this educational video from Santander, conveying the important message in a highly engaging style.
Author: Michael Harris
Director, Financial Crime Compliance and Reputational Risk
LexisNexis® Risk Solutions