FINANCIAL CRIME IN FOCUS – Edition 8
Published Date: 15th June 2019
The big news in this past week was the Monday 10th June deadline for responses to the HMT consultation paper on the implementation of the 5th Money Laundering Directive in the UK.
We’ve seen many trade bodies publishing their responses to the consultation across varied professions including legal, financial services and tax specialists. As 5MLD introduces some significant changes, it’s unsurprising that there has been so much interest in responding.
The 88-page document could seem a little daunting, especially if anti-money laundering (AML) isn’t your day job, so it’s good to see the media in regulated sectors helping to provide clarity to their audience. This excellent article from Accounting Web gives a good high level summary of each section of the consultation document, helping accountants to cut through the noise.
It certainly seems as though the consultation received a good response from stakeholders across the UK – did you submit your views? We certainly did! We look forward to hearing the Government’s feedback in the near future. More to follow…
Generating an estimated US$20 billion annually and, according to the United Nations Office on Drugs and Crime, the fourth most profitable form of criminal trafficking behind drugs, arms and human trafficking, the market for illegal wildlife is thriving. This is truly appalling and we should all be deeply concerned. This article from the Asean Post gives some deep insight as well as a helpful infographic showing the countries where significant wildlife trafficking seizures have been made. Any organisation whose business footprint touches these regions has a responsibility to apply greater due diligence in financial payments and transactions.
Credit is due to Standard Chartered Bank for leading the way in raising awareness on this topic through an informed campaign that highlights the global nature of money laundering via the illegal wildlife trade.
London’s pre-eminence as a global leader for raising capital goes back centuries. Its infrastructure, people, breadth of financial services and even the GMT time zone itself ensures companies and investors from around the world can intersect; its stock exchanges enable companies of all shapes and sizes to float and raise capital, and investors to buy shares. However with its diverse and global character comes risk.
This last week has seen the FCA publish its thematic review of London’s capital markets to improve understanding of the Money Laundering risks. Although good governance has been a long held principle in the markets, the findings of the FCA’s review have highlighted a number of significant weaknesses in AML controls applied across the industry and asked for a response to improve processes.
Following a review of 19 firms, the FCA concluded that there is a general lack of deep understanding of money laundering risk to the capital markets. Complex cross border deals made up of multiple parties to a transaction provide numerous loopholes and weaknesses for money launderers to exploit. Firms tend to only look at the part of transaction they are directly concerned with rather than the whole picture and the main governance focus is on market abuse issues rather than money laundering.
The FCA recommends that all market players start taking a full risk based approach to money laundering in the context of the wider exposure, carrying out thorough customer due diligence that focuses on not just their customer, but also the underlying customers and beneficial owners. It also criticises the general lack of transaction monitoring in the sector. Demanding that Capital Markets beef up their AML controls, the FCA is considering a supervisory response moving forwards.
I’ve personally worked with these markets for many years and, unfortunately, these weaknesses have been apparent for a long time. Firms will have to conduct a root and branch review of their AML processes to ensure they are not just compliant but showing a deep commitment to managing out possible money laundering risk. This will no doubt involve training of first line staff, investment in resources and a commitment to using the best technology and data.
We cannot afford to allow London’s reputation as a global centre for capital markets to be sullied by financial criminals. I well remember the dark days of the AIM market 15 years ago and that can’t be allowed to happen again.
The European Banking Authority (EBA) controversially ignored its own advice and closed its investigation into the Estonian and Danish financial regulators saying no EU law had been breached. It now claims its hands are tied in getting on top of Europe’s money laundering risks due to the fragmented and localised nature of supervision and regulation in member states.
Once again it seems that the authorities are fighting with one arm tied behind the back.
At the ACAMS Europe Conference in Berlin, one of the strong themes was the need for greater information sharing – such initiatives will be critical to managing the money laundering risk in Europe. However it will take considerable cross border collaboration and resources to create an effective public-private partnership culture on a pan-European level.
A report by the UK Foreign Affairs Select Committee raised a number of concerns about sanctions and specifically questioned how the Russian company, EN+ Group, was allowed to list in 2017 given it was owned by a suspected "Kremlin associate" Oleg Deripaska.
Urging the UK government to carry out a "major review" of its approach to sanctions, the Select Committee stated:
"The Foreign & Commonwealth Office also seems unwilling to acknowledge that it has a vital role to play in helping to keep the UK and our allies safe by cracking down on the laundering of dirty money. As this Committee has said in previous reports, dirty money is a national security issue, especially in the light of London's importance in the global financial system. It is simply not good enough for the Minister of State to assert that financial crime is 'not quite' the Foreign & Commonwealth Office's 'patch'". Strong stuff!
There can be no doubt that post-Brexit a major review of the UK’s sanction policy will be high on the agenda as up until now the UK has largely followed EU and UN sanctions. That will be increasingly inappropriate as the UK seeks to protect its own foreign policy interests as we go in new directions in the future. Having a national strategy for sanctions which is dynamic and reflects national interests is critical, post Brexit.
In the last news round-up, we featured some of the highlights of our new LexisNexis® Risk Solutions report: ‘On the Frontline: The UK’s Fight Against Money Laundering’, which we produced with the Economist Intelligence Unit. It incorporates the views of some 300 professionals responsible for AML across regulated sectors, who provide opinion on the effectiveness of the UK’s response to dirty money and the improvements needed.
A specific focus of this study was around fintechs, who we believe have a real opportunity to lead the way in the fight against money laundering. Our latest paper focuses in on fintechs and highlights the fact that almost half don’t think the existing AML regulatory framework is effective. Download a copy of the report and find out what fintechs see as the biggest AML concerns over the next 12 months, which sectors they think are going to be most at risk, and how they would improve the fight against money laundering in the UK.
The cost of getting it wrong just keeps on rising with AML fines in 2019 substantially up on last year and at highest ever levels (based on the current run rate) it was reported in FS Tech.
During the period January – April 2019 fines to the tune of $7.7 billion have been handed out, dwarfing the value of fines for the entire year in 2018 ($4.27 billion). 2014 saw the highest total value of fines handed out at $10.89 billion – 2019 has hit 70% of that in the first four months alone, and could potentially take the mantle of greatest value of AML fines in a year.
I hope the above articles give you some cause to believe you made the right decision. If you need a little further inspiration, read Payal Patel’s story. The head of Fintrail’s Asian Office, Payal’s story is one I’ve heard many times and reflects my own journey into financial crime compliance. Getting into it almost by accident and becoming hooked on a discipline that is constantly changing, endlessly challenging, incredibly interesting and one that provides a sense of doing something for the benefit of society.
What’s your story?
Author: Michael Harris
Director, Financial Crime Compliance and Reputational Risk
LexisNexis® Risk Solutions