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Financial Crime: laying out the arguments

To understand how seriously the international community is taking money laundering you need look no further than the first paragraph of the G20’s ‘2015-16 Anti-Corruption Implementation Plan’.  

‘Corruption presents a serious threat to global growth and financial stability…’

‘Corruption destroys public trust, undermines the rule of law, skews competition, impedes cross-border investment and trade, and distorts resource allocation…’

‘The G20 remains committed to reducing the incidence of corruption to build a global culture of intolerance towards corruption’.

To underscore the global importance of combating money laundering, Transparency International, a non-profit NGO, lobbied the G20 late in 2014 to put Anti Money Laundering at the top of its agenda:

‘…you must address the flaws that still allow the corrupt to operate with impunity and siphon off tainted monies...’  

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‘Opacity in the global financial system serves as a smokescreen to hide crime and corruption’.

So on that, at least, they can agree.

Before diving into the detail, let’s remind ourselves some definitions as they relate to UK Law.

Here’s the Law Commission on Fraud in 2002: 

‘where, with intent to make a gain or to cause loss or to expose another to the risk of loss, a person dishonestly (1) makes a false representation, (2) wrongfully fails to disclose information, or (3) secretly abuses a position of trust. (Law Commission 2002).

And here is the Chartered Institute of Securities and Investment defining Money Laundering in 2013 on Money Laundering:

‘Money laundering is the movement, concealment and/or conversion, of the proceeds of crime, including the proceeds of offences of fraud. Since the purpose of most frauds is acquisition of wealth or property, it may be expected that the perpetrator will attempt to disguise illicitly obtained assets and funds.

Similarly, in order to undertake money laundering, the perpetrator may possibly undertake a fraud, such as misrepresentation to a bank, as to both their identity and the source of funds, in order to provide a legitimate front for money laundering’.

So, how does Fraud differ from Money Laundering?

‘Fraud is, by definition, a financial crime concerned with the illicit acquisition of assets, whereas money laundering is the process that seeks to conceal the source of such assets arising from a range of both financial and non-financial crimes such as drugs, human trafficking and corruption.’

Now, why am I going long on these statements and definitions? 

Because it’s a timely reminder that this is serious stuff.

Because the financial services industry lies at the heart of our financial system and has a crucial role in the fight against fraud and money laundering.

And because, dependent on your point of view, there is a good deal more that the financial services industry has to do to respond to new and evolving sources of fraud and money laundering.

At the risk of repeating what many may know well, certain banks great and small have been found to fall short in their anti-money laundering efforts.

Standard Bank plc, the UK subsidiary of South Africa’s Standard Bank Group settled early with the FCA for £7.6m in 2014 which thundered that it had:

‘…failed to take reasonable care to ensure that all aspects of its AML polices were applied appropriately and consistently to its corporate customers connected to PEPs (Politically Exposed Persons’)

which weaknesses resulted in ‘… an unacceptable risk of Standard Bank being used to launder the proceeds of crime’.

HSBC in 2012 was reported to have settled with US prosecutors for $1.92 billion, having, according to a Reuters report at the time:

‘…acknowledged major lapses in compliance and ignoring red flags. It also acknowledged enabling clients to avoid US sanctions that prohibit dealings with countries such as Iran, Sudan, Myanmar and Cuba’.

It accepted an action shortly thereafter from the FCA, HSBC Group’s lead regulator, to set up a board to oversee anti-money laundering, sanctions, terrorist and proliferation financing; review procedures to ensure compliance across the Group; accept an FCA-appointed Group Money Laundering Reporting Officer to ensure Group-wide compliance; and employ an independent monitor to report to the HSBC Board. 

You get the point, right.

But there are some difficulties in determining if these all these globally coordinated policies, fines and actions are winning the battle, not least because it’s difficult to be sure how much fraud and money laundering is actually going on.

Here’s the Attorney General’s Office back in 2007:

‘There are no reliable data on the scale and extent of fraud. Some elements of fraud have been measured reasonably accurately. A number of estimates of overall fraud have been made by various research organisations but none of these studies is considered reliable and comprehensive by anyone, including their own authors. This is a serious handicap to analysis and policy formulation because we do not know either the amount of harm that fraud causes to the economy and society or where it is most prevalent. Without this information it is difficult to devise options that would improve the response to fraud. It is also difficult to decide the relative importance of tackling fraud compared with other crime or where to target resources. A proper holistic approach to fraud and a national fraud strategy to deliver such an approach would start from a proper exercise to measure the problem’.

Fast forward to 2013. The UK has a National Fraud Authority, whose Chief Executive, Stephen Harrison, declared that the UK economy lost an estimated £52 billion from fraud, of which financial services entities themselves lost an estimated £5.4 billion.

How about the amount of money laundered through the UK?

The House of Lords in 2010 had to rely on an HM Treasury estimate of 2007 as its European Union Committee set about its Money Laundering and Finance of Terrorism report:  

‘.. the most serious forms of organised crime alone generated an illicit turnover of some £15 billion a year, leading to money laundering through the regulated sector—banks, insurers, accountants, lawyers and the like—of £10 billion a year; and also generated criminal "capital formation"—that is, assets invested in a possible seizable form—of about £5 billion, £3 billion of which was exported overseas.’

Sounds to me as though a lot of dubious money has been washing through the UK’s financial services institutions, if that estimate is anywhere near accurate.

So, against this background, how has our financial services industry been responding?  Here’s food for thought from the FCA’s July 2014 Anti-Money Laundering Annual Report:

‘Overall, the findings from our SAMLP (i.e Systematic AML Programme) assessments, our thematic reviews and our general case work have been disappointing.  Significant weaknesses have been identified in a number of firms, particularly in relation to the assessment and management of higher risk business – the focus of our reviews.

The most common issues we have found include:

a. inadequate governance and oversight of money laundering risk, especially historically

b.  inadequate risk assessment processes to identify high risk customers

c.  poor management of high risk customers and those who are Politically Exposed Persons (PEPs), particularly in relation to establishing the source of wealth and source of funds for PEPs

d.  inadequate due diligence on correspondent banks

 e. inadequate or poorly calibrated AML/sanctions-related IT systems

 f. weaknesses in handling of alerts relating to sanctions and/or transaction monitoring

g.  poor judgements or questionable decisions leading the firm to take on unacceptable money laundering risk’.

Whilst noting that anti-money laundering is now generally recognised as an important issue by Boards, it states that ‘private banks and wealth managers are generally performing better than retail and investment banks’ and highlights that:

‘…large banks in particular still have a substantial amount of work to do on this, and in some cases will need significant investment. This will take several years to implement and there is often significant execution risk.’

Next time, I’ll circle back to some of the key actions sponsored by the G20 Anti-Corruption Implementation Plan, think a little further on how anti money laundering operations can be tough to transform and why it can be slow going to shift the dial in the right direction.

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