When will the lessons be learned? Avoiding the Knock on the Door

During a 30-year police career in London, a couple of things were apparent. Stupid, low-level criminals never learn and keep getting caught. On the other hand, sophisticated, organized criminals make a point of keeping up with legislation, policing methods and trends, and adapt their behaviour to minimize the chance of being caught and losing the fruits of their criminality. Nowhere has this been more apparent than in the world of the money launderer.

In fact, it is the versatility of the launderers, and their willingness to change their tactics, that has driven the constant attempts by states and international organizations to close off the alternative channels that launderers use to clean the proceeds of crime. This is what has driven the latest FATF recommendations and the review by the European Union of the Third AML Directive, both of which address the existing weak points of their predecessors.

So the criminals, the legislators and the policymakers are all keeping up with developments in money laundering. It would not be a surprise then to find the most vulnerable parties in this arena, the regulated financial sector, doing its best to do the same, and avoid the knock on the door from law-enforcement and regulators. The surprise actually is that this does not seem to be happening.

Whilst travelling the globe identifying and advising against financial crime, it is troubling to find that repeatedly, adequate AML policies are not being adopted, or, if adopted, are inadequately applied. Given high-profile prosecutions of corrupt national leaders, and the recent turmoil created by the so-called 'Arab Spring' and the emergence of much evidence of corruption, it would be fair to assume that politically exposed persons (PEPs) and their ill-gotten gains would be high on the agenda of the sector.

In the UK, the two latest high-profile cases have rather exploded that assumption. In March of this year, the UK Financial Services Authority (FSA) fined Coutts & Company (Coutts) £8.75 million for failing to take reasonable care to establish and maintain effective AML systems and controls relating to high-risk customers, including PEPs. (http://www.fsa.gov.uk/). The FSA's investigation identified that Coutts did not apply robust controls when starting relationships with high-risk customers and did not consistently apply appropriate monitoring of those high-risk relationships. In addition, the FSA determined that the AML team at Coutts failed to provide an appropriate level of scrutiny and challenge.

It is interesting to note that the regulator found deficiencies in nearly three quarters of the high risk or "politically exposed persons" whose files it examined—although it must be stressed that there was no evidence that Coutts had actually handled stolen money. The latter fact did not stop the imposition of the highest ever AML fine in the UK (which included a discount of 30 percent for cooperation by the bank). Coutts, a private bank now owned by RBS, is known as the 'Queen's banker', as it handles the accounts of Her Majesty Queen Elizabeth II. Because of this, it is enormously attractive to foreign despots, who not only admire the cachet it provides, but also value the discretion that such an establishment undoubtedly provides.

Other cases highlight where banks have apparently, through lax controls, actually handled the proceeds of corruption. NGO Global Witness "calls for a thorough investigation into HSBC, Citibank and Abbey National (now owned by Santander) for their roles in the laundering of millions of pounds by James Ibori, former governor of Nigeria's oil-rich Delta State. Ibori pleaded guilty to ten counts of money laundering and fraud in relation to an estimated $250 million of stolen state assets. (http://www.taxresearch.org.uk/Blog/2012/04/16/british-banks-guilty-of-helping-nigerian-money-launderer/).

Ibori's official salary was £4,000 a year and his formal asset declaration stated that he had no cash or bank accounts outside of Nigeria. Despite this he managed to buy several houses around the world, including one in the UK valued at £2.2 million, luxury cars (a Bentley, Range Rover and Maybach), and a $20 million Challenger private jet. According to the prosecutor, Sasha Wass QC, Ibori and his associates used multiple accounts at Barclays, HSBC, Citibank and Abbey National to launder funds. Millions of pounds passed through these accounts in total, some of which were used to purchase expensive London property. He has been sentenced to 13 years in prison in the UK, where the case was conducted. Now the case is concluded, it will be interesting to see what repercussions are visited upon the above-mentioned account holding banks.

The point of all this is to illustrate that some of the biggest and most respected mainstays of the world financial system are repeatedly being shown as having inadequate systems in place to deal with PEPs, and the risk of dealing in the proceeds of corruption. As might be expected, experience with dealing with regulated companies further down the food chain shows that most have similar deficiencies.

The blame for this must in some part fall on those very states and organizations that impose the regulations and recommendations in the first place. There are many sources of information to establish proper due diligence on customesr who might be on one of the published sanctions lists (OFAC, EU, UN, HMT). Unfortunately, as far as PEPs are concerned, there is no such definitive list, and the available commercial applications providing this information are variable in both price and effectiveness.

In the final analysis, however, the responsibility lies with regulated companies to get their due diligence and know your customer systems right. Reliance on automated systems, while a sensible option to assist the process, does not properly apply a risk based approach (RBA). The fundamental activity that must underpin every AML regime is training.

The driving force of every business is profit, which is healthy and right. However, while the profits to be had in this sector can be substantial, they come with risks attached. These risks are most likely to be identified and dealt with by real people, not by rigidly applying rules, but rather by exercising their judgment based on knowledge. In this case, knowledge of what does and does not look or feel right in an AML context. This does not occur naturally—staff at all relevant levels in the organization need to be fully trained in the concepts of money laundering and terrorist financing, not just given a set of protocols to follow.

The company's people are its best protection against the cost and ignominy of prosecution and regulatory sanction, and they are entitled to get the best available training to enable that protection to be applied. The training budget can be the most cost-effective part of the AML programme and should never be neglected.

Magnificent though the police are, as a regulated business you really don't want them knocking on your door!

Simon Dilloway BSc (Hons), MSc, FSyI, former Metropolitan Police Officer in London, former Financial Investigator New Scotland Yard, Managing Director of KYC Cube Ltd, MD of Lopham Consultancy Ltd. He is currently a member of the Panel of Experts advising the UN Security Council Libyan Sanctions Committee on the financial sanctions.

The opinions expressed in this article are those of the author alone, and not of any of the organizations that he represents.

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