FINANCIAL CRIME IN FOCUS – Edition 2
Published Date: 29th March 2019
Instantly recognisable, the relentless click, clack of Newton’s Cradle (a highly favoured executive toy) was a common sound in offices for many years. If you cast your mind back to your schooldays you’ll no doubt remember that it demonstrates Newton’s third law – ‘for every action there is an equal and opposite reaction’. At this present time, the fight against financial crime feels very much like this. Something happens (often unexpectedly) and we react to it; ‘click’ a new money laundering scandal, ‘clack’, the authorities respond. This week’s news stories certainly reflect this feeling and we start with the EU response to the widespread breach of AML obligations in many of Europe’s banks. The story that feels as though it could go on and on…
In our last update, we highlighted the continued coverage of so-called Laundromat money laundering scandals embroiling banks in Europe. They’ve revealed a wide variation in how controls are implemented and worryingly, inconsistencies in how regulators in different countries supervise them.
Last Thursday (21st,March) the European Commission issued a press release highlighting a political agreement on a ‘more integrated European supervisory architecture’ which is to include money laundering controls. The agreement will empower the European Banking Association (EBA) with overall responsibility for anti-money laundering supervision for the EU. In effect, the EBA will be responsible for overseeing AML supervision in all EU countries.
“We have strong rules against money laundering in the EU, but recent scandals in European banks showed gaps in supervision,” the EU Justice Commissioner Vera Jourova said in a statement on 21st March. “The new rules will ensure that there is no weak link in the EU when it comes to money laundering and terrorist financing.”
Whilst this would hopefully lead to greater consistency of application of AML regulation across the continent there are still challenges. The agreed plan does not indicate whether the EBA could assess penalties and impose remedial measures directly on financial institutions involved in AML violations. And even in a perfect scenario, it would likely take many years for consistency of controls to be achieved across the bloc.
From a UK perspective the UK bank regulators FCA and PRA signed a memorandum of understanding with the EBA which sets out how we will collaborate with EU countries on supervisory cooperation in the event of no-deal Brexit. AML forms part of this arrangement.
How all this will pan out remains to be seen but it does feel like a ‘clack’ response to the laundromat ‘click’. A proactive, pre-emptive approach would also be beneficial here, with more training and education provided to front line staff in financial institutions (FIs), so that they can spot potential financial crime, leverage technology to better identify specific typologies and know who and when they should report suspicious activity to.
Historically fraud and AML have been largely resourced by separate departments in many FI’s. However a rise in cybercrime is leading many firms to rethink this approach. A very sensible move when you consider the similarity in many of the processes, and the fact that the proceeds of fraud invariably turn into money laundering risk.
The growth in cyber related scams has been seen to drive a significant rise in ‘money mules’, intermediaries used to place illicit money into the financial system without detection and obscuring the true source of funds. US authorities have uncovered numerous examples of this as an article published by ACAMS on moneylaundering.com clearly shows.
Digital identity services will play a key role as cybercrime grows and counter fraud, cyber and money laundering functions become closer aligned. Such services provide insight that can create correlation across crime lifecycles, linking seemingly disparate digital transactions through identifying key data points.
Our own regular research piece – the Cybercrime Report – provides deep insight into global online fraud.
If you believe in the importance of transparency of corporate data then you would have been alarmed to read the latest blog from OpenCorporates. It details their court case in Quebec, Canada, to retain access for all to the Quebec corporate registry. This is the first time OpenCorporates has challenged a corporate registry in court.
The story underlines how essential access to data like this is in the fight against financial crime and the challenges there are in getting universal agreement to the principal of openness of company information.
As most people doing this work know, when it comes to unpacking a corporate structure to identify the ultimate beneficial owners (UBO), there are no ‘silver bullets’. It’s often a challenging, time consuming and ultimately fruitless process, yet, with good reason, the 2017 Money Laundering regulations mandate that we identify the persons of significant control behind a business that we are on-boarding.
The UK Government initiative to establish a register of Persons of Significant Control for newly registered business has met with some criticism. The register is based on self-declared information, lacks governance and independent verification. As such can it be confidently relied upon? Add to that the widely documented use of offshore companies registered in secrecy havens and the lack of any company ownership or even director records in certain jurisdictions, and it becomes clear confidently identifying ownership is a significant challenge.
A FATF and Egmont report from last summer (18th July, 2018) highlights how beneficial ownership is so easily hidden. In particular it flags how Accountants and Law Firms can easily become caught up in creating complex corporate structures that are then used for illicit purposes.
Of course, the Panama and Paradise Papers fully brought this to the attention of the public, highlighting various tax evasion schemes and complex corporate structures used for money laundering purposes. The challenge of identifying UBOs can only be addressed by transparency in company registers and a level global playing field.
For those tasked with unravelling ownership structures, there are no short cuts available. They must rely on a variety of tools and information repositories to carry out UBO work, and given the need for local knowledge when dealing with international organisations, will likely need to outsource to ‘in the field’ agents.
This week the UK HM Treasury updated its full list of financial sanctions targets. Being aware of any changes in sanctions listings will not only help your organisation to comply, but create opportunities as previously sanctioned entities are removed from lists and become open for business.
LexisNexis® WorldCompliance Data™ is continually updated ensuring all of our customers have access to the latest sanctions information at the earliest opportunity.
Reportedly, Russian Banks are working hard to figure out how they can circumnavigate potential further OFAC Sanctions. The basic premise is if one Russian bank avoids being sanctioned it can retain access to foreign currency via correspondent banking relationships and other (sanctioned) banks can tap into this.
As anyone in sanctions compliance or responsible for sanctions screening knows, it’s a cat and mouse game for sanction targets to find ways to get around them. Whilst this scheme may work in the short-term, it will no doubt be neutralised at some point – following which, sanctioned entities will likely look to conjure up an alternative sanctions busting route.
A 36% rise in human trafficking in UK has been reported according to figures from the National Crime Agency (NCA). This raises an important question – is modern slavery and human trafficking on the increase or are we getting better at spotting it? With focussed campaigns aimed at encouraging the general public to spot victims of slavery and trafficking, and report them to the NCA via the National Referral Mechanism, one hopes it is the latter, but sadly, it’s likely a mix of both.
It is, however, encouraging to end this update with a couple stories that have a positive result in this space:
ASOS, and other leading fashion brands, were in the House of Lords as they work with the All-Party Parliamentary Group on Ethics and Sustainability in Fashion to eliminate modern slavery from their supply chains.
And finally, the BBC reports that six children were saved from potential sex slavery in Northern Ireland in 2018. Human trafficking is a pernicious crime, with countless victims, so it’s heartening to read how law enforcement have saved some of the most vulnerable in our society from such horrific acts. Every person saved is a victory and should spur us on to better spot the proceeds of such crime, in an effort to protect society by stamping out such abhorrent criminality. Financial crime is not victimless.
Author: Michael Harris
Director, Financial Crime Compliance and Reputational Risk
LexisNexis® Risk Solutions
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