FINANCIAL CRIME IN FOCUS – Edition 3
Published Date: 5th April 2019
Folklore has it that the expression 'money laundering' originated in the prohibition era in the 1920s. Mafia criminals such as Al Capone allegedly purchased Laundromats and ‘washed’ their illegal profits from prostitution and bootlegged liquor sales through these legitimate businesses, hiding the true source of their illegal funds. Little would they have imagined that 90 years later the same terms would be used to describe a global criminal industry which is engulfing and tarnishing some of the world's most prestigious banks. Yet here we are, witnessing more Laundromat revelations on an almost daily basis, with another major Scandinavian Bank being named and its CEO and Chairman paying the price.
As we said in our last edition, this story has much further to run…
Much has been written in the headlines on the latest scandal which adds another Scandinavian institution to the roll call of blue chip banks embroiled in the Baltic Laundromat (with the chairman reported as the latest to quit) but this marvellous research by MoneyLaundering.com journalist Koos Couve is the stand-out piece for me.
In it, he unpacks the nitty gritty bank processes and weaknesses in Respondent/Correspondent bank relationships, how again the lack of governance of Scottish LLPs were used to process extraordinarily large transactions that made no sense, and how seemingly obvious red flags such as a significant percentage of high-risk accounts in the client portfolio were overlooked.
Lax controls, naivety, culture, a belief that they were ‘low risk’ and wilful blindness; likely all contributing factors in the institutions' failings. No bank should feel safe that this wouldn’t happen to them; it probably has. We all have to learn from what is currently unfolding.
Whilst I doubt the dramatic levels of illicit cash that have flown out of Russia in the last decade will unlikely happen again en masse, the question should still be: where next? Those tackling financial crime must become much more proactive and pre-emptive in identifying money laundering risk. The impression at the moment is very much the opposite.
Meanwhile, an FATF conference on terrorist financing reminded us that as well as fighting money laundering we must keep a sharp focus on combatting terrorist financing. 57 jurisdictions were represented in the 160 officials who attended a workshop focusing on improving the outcome of terrorist financing prosecutions. Attendees included judges, prosecutors and relevant international organisations. The value of parallel financial investigations to ensure that all relevant actors in a terrorist network are discovered was a major theme. In the UK, this has already been an area of focus for the Joint Money Laundering Intelligence Taskforce (now part of the National Economic Crime Centre) since its launch in 2015.
Have art and antiquities become the new high-value assets of choice for money launderers? We see the scenery shifting from real estate to high-value art and antiquities. It's always been a favoured way for money launderers to integrate ill-gotten gains into the system of course, but this is set to grow now that the regulators and law enforcement are so focused on the property sector. This article from Artlyst goes into detail on the burgeoning illegal market for art and antiquities. More analysis will be needed for Financial Institutions to fully understand their risk exposure and the specific typologies surrounding this approach, but we are sure to see more and more cases of illegal trafficking in art and antiquities in the coming years.
This past week saw several stories break which focus on Asia, covering corruption, money laundering and sanctions risk, they cut across the financial crime spectrum.
Banks with exposure to China are reassessing their risk based on growing geopolitical tensions in the country and possible new U.S. sanctions. As reported in a recent moneylaundering.com article ‘A European bank with U.S. operations conducted a China-specific risk assessment last year to map out all clients and counterparties most likely to form ties with sanctioned entities in the future and fully understand its risk exposure.’
Over the last few years managing sanctions risk has become ever more complex, notably with the introduction of sectoral and narrative sanctions, and the U.S. leaving the Joint Comprehensive Plan of Action. Further sanctions on China would make this an even more complex environment, given the importance which China has in the global financial economy, and the fact that products and services from China are highly ingrained in supply chains around the globe.
Whilst the news for a long time has been focused on illicit funds flowing from Russia and ex-Soviet states, there are, of course, threats stemming from other regions. Recent reports from Canada have highlighted the challenges they are facing with illicit funds emanating from the Far East. Money laundering, driven by Chinese organised crime as this recent OpEd indicates, has seen billions washed through real estate and casinos.
Looking to the tail end of 2018, a story broke in the Canadian press which highlights the extent to which a Chinese organised crime gang – The Big Circle Boys – have infiltrated Canada and are allegedly linked to drug trafficking, violent crime and money laundering. A slightly longer read (and numerous handy videos too), it highlights how they are believed to be connected with an opioid epidemic in Canada, which, depressingly, has resulted in the deaths of so many Canadians that the average life expectancy in British Columbia has dropped for the first time in decades.
Finally in our round-up this week the spotlight is back on the 1MBD scandal, which surrounds the missing millions from a Malaysian sovereign state fund that ‘disappeared’ into a black hole. Prosecutors from the U.S. and Malaysia allege that the money, which was allocated to help the people of Malaysia, has been used to fill the pockets of a few powerful individuals buying the usual ‘goodies’ favoured by financial criminals. Like our lead story on the Laundromats, this scandal has global implications, tainting some of the world’s most famous politicians, investment banks, financiers and even Hollywood actors.
Reputations are at risk and once again the importance of identifying politically exposed persons and applying in-depth due diligence is underlined. This current investigation from the BBC provides an in-depth look at the issue, all the major players embroiled in it and the implications for justice with court cases about to start.
To quote the famous phrase, truth is often stranger than fiction and many of these stories read like the plotline of the latest thriller.
Author: Michael Harris
Director, Financial Crime Compliance and Reputational Risk
LexisNexis® Risk Solutions
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