Money Laundering and Corruption in plain sight.

Two pieces of news last week caught my attention: 

- the first about the FIFA scandal http://www.nytimes.com/2015/06/06/sports/soccer/as-fifa-scandal-grows-focus-turns-to-its-auditors.html?_r=0

- the second about an internal investigation at Deutsche Bank targeting Russian trades.

http://www.bloomberg.com/news/articles/2015-06-05/deutsche-bank-probe-said-to-target-6-billion-of-russian-trades

Both items are ‘news’ and yet nobody is surprised. If at all there is curiosity it’s about “why did it take so long to come out”. In the case of the FIFA scandal one old-style reporter (Andrew Jennings) has been digging for close to 15 years to unveil the bribery, corruption and other mal practices at the FIFA. Publishing several books and many articles about the topic along the way.

http://www.washingtonpost.com/news/morning-mix/wp/2015/06/03/how-a-curmudgeonly-old-reporter-exposed-the-fifa-scandal-that-toppled-sepp-blatter/

I understand there’s a difference between common belief, pub talk and hard facts. Proving money laundering or corruption is usually no mean feat, certainly not in an international context and if hard evidence is needed to pursue (criminal) investigations and prosecution.

But all these FIFA transactions were executed via (mostly) reputable banks. And the Russian clients subject of the internal investigations have likely been banking for years with Deutsche. Apparently the banks involved didn’t have their AML/CFT act completely together. If onboarding processes, transaction monitoring and periodic client reviews are done properly and management is acutely aware of the risk profile of clients and transactions this could have been detected early.

The work that i-KYC does, is exactly what could prevent these findings: ensuring that staff have a thorough AML/CFT awareness, ensure that the institution follows the right procedures and implementing an escalation and management framework around the whole KYC program.

Have a good week.   

rolf@i-kyc.com

Looking for clarity in the new MAS regulations and how i-KYC can help you

Friday afternoon - A nice time to attend a seminar (http://www.rhtacademy.com/seminars/new-amlcft-obligations-financial-institutions-are-you-ready ) quite a crowd looking for clarity. Nizam Ismail opens and talks about the balance the MAS tries to find in promoting a risk based approach while creating as much clarity as possible in terms of ‘what is allowed and what is not’. Some of the changes are ‘old news’ – the notion for instance that PO Boxes are not allowed for a residential address was already practice in the bank I worked for 10 years ago. The reaction of the audience proves however that many have not adopted that practice yet….

The rest of his talk is focused on the details of the regulations and how to interpret them. The organizations that the audience of mostly compliance officers work for need to be given clarity… The thing is: a policy can only give so much clarity – you need people like us to make it work, train staff and implement a policy. One thing that is obvious is that the MAS will focus more on how well trained staff are – exactly the type of work we do with a lot of our customers.

The new regulations put more emphasis on filing and the use of systems, so co-sponsor LexisNexis (http://www.lexisnexis.com/en-us/gateway.page ) talks about their – widely known and well recognized solution – and how they see the developments in the industry.

KPMG (http://www.kpmg.com/SG/en/services/Advisory/Forensic-Services/Pages/default.aspx) closes of to give some do’s and don’ts based on what they have found in quality reviews of files as part of their regulatory audit work. Great and helpful, but knowing which mistakes to avoid doesn’t mean you know how to run a proper remediation program. The recommendation: “ appoint a project manager “ is too much an open door to be helpful for success. You need guys like us that have done this before, know the ropes and deliver on time and to quality.

So what did we learn:

- there is more work to be done;

- a law firm, an auditor or a system provider alone will not do the trick;

- a risk based approach implemented well into any organization, combined with adequate training and potentially a well-run remediation program are still the right answer.

So - you still need a partner like i-KYC to implement a program end-to-end and people with experience in operationally implementing KYC in all its aspects.

You know where to find us – good weekend. 

Is the MAS really tightening the rules?

The MAS last week moved the MAS Bill for first reading in parliament. Comments all around suggest that the rules are being tightened but is that really true on closer inspection? Let’s have a look.

First of all, MAS has up till now issued AML/CFT notices which are not primary legislation. The MAS Bill corrects that, but of course it will hardly make the life of the average FI more difficult.

Secondly the AML/CFT regime is extended to stored value facilities, non-bank card issuers and designated financial holding companies. So that’s not really a tightening of the regulations but more extending the reach.

The third element is about sharing more information with more external parties. This is mostly applicable to branches and subsidiaries of foreign FI’s and means that information can be shared with home financial and AML/CFT supervisors (if these are not the same).

Finally it sets out requirements for FI’s to perform CDD and retain CDD records, which is hardly anything new.

Time will tell. The MAS Bill will definitively have an impact but perhaps not as much as feared.

Rolf

TBML – a hopeless case?

RHT GRACE (http://www.rhtgrace.com/) organized another networking session yesterday; an interesting evening about Trade Based Money Laundering. The presentation and following discussions highlight the lack of definition and guidance from regulatory bodies, leaving financial institutions in the dark. Investing in systems is needed but at the same it’s hard to justify the benefits of dedicated TBML systems while lots of trade transactions don’t use traditional trade finance products like L/C’s. As a consequence financial institutions just see the bare transactions without any information on the underlying physical goods or values. What’s more is that something like tax evasion is a much sexier crime to attract focus and funding.

So where does that leave a financial institution? Can nothing be done? Well, it’s not easy but it’s not rocket science either and we at i-KYC actually have quite a bit of experience in this area.

First and foremost the organization needs to recognize that trade is different. It’s a separate, specialized part of a financial institution, with dedicated, often complicated products handled by specialists. That fact needs to be reflected in the AML program to start with and needs to lead to a dedicated section in the AML/CFT policy, a clear risk appetite statement and finally an implementation in the organization by means of procedures and training.

A key aspect in all this is of course that the organization truly knows its customers…. the phrase Know Your Customer should not be about just ticking the box but about genuinely understanding customers and their transactions.

If you want to know more about our dedicated TBML programs contact us.

Rolf

W:          www.i-kyc.com

E:            rolf@i-kyc.com

                 

Ticking the box or more?

In the work we do with financial institutions we use concepts that are familiar to most you. The 3 lines of defense model, taking a risk based approach, defining a risk appetite and assessing an organization against this are a few key examples of these.

That’s an approach that goes well with our fellow AML/CFT practitioners and compliance officers in general. If we talk to the first line of defense though – whether it be sales staff, relationship managers, the trade finance department, tellers, payment processing staff or support staff – we often find some skepticism when we take this approach.

In the front line there are 2 things we notice. First there is a clear and explicit desire to know ‘what is allowed’. As a specialist or advisor we’re asked to give direction and guidance on client onboarding, filtering treshholds, documentation requirements and more. Understandable but what is needed is that the organization takes an approach in line with its own policies and guidelines. An advisor can share best practices but every organization is different.

Secondly we notice that the majority of staff still believes that compliance costs money and that the organization should do the minimal and not more. Even though most management and staff are aware that non-compliance is expensive there’s little desire to do more than just ‘tick the box’.

Just curious if this is something that others see as well, we welcome your thoughts and reactions.

Rolf

E:  Rolf@i-KYC.com

W: www.i-kyc.com

Punishment

The FT – and many other media following – report the record $ 56bn in fines for the banking industry over 2014. To put it in perspective, the author mentions that this amount is “the equivalent of the gross domestic product of Croatia”. That sounds like a lot although Croatia makes up only 0.05% of the world population, so maybe $56bn is not that much.

At the same time fines are handed to a few big banks only – BNP was fined a substantial portion of this amount on its own. Banks from India, China, Japan or smaller banks have sofar hardly been fined, so does that mean that everything is in perfect shape?

In Malaysia earlier in the year in his opening address to a financial crime conference we could hear Roger Wilkins, the President of the FATF quote Machiavelli, stating that nothing draws attention as a dead body in the town square at lunch time…

Fines are handed (long) after the fact and they focus the attention of decision makers in financial institutions on money. Both aspects don’t help to prevent financial crime, to change the culture in organisations or increase awareness of staff and management alike.  

Maybe more fines are unavoidable but the industry would benefit from punishment in other than just monetary form – think of community service for offending bankers - and other measures to prevent finanical crime from recurring.

I wish everyone a good start of 2015.

Rolf

Plumbing

Some thoughts after reading an article in The Economist last week, about the pros and cons of using SWIFT in enforcing international sanctions (http://www.economist.com/news/international/21633830-blocking-rogue-states-access-worlds-financial-messaging-network-potent-measure).  An interesting article, basically highlighting the dangers in ‘cutting off’ whole states or nations from international payment infrastructures, under political pressure.

The article describes that polital pressure is exactly that: political. And what is politically correct for the US (isolating Russia for its intervention in the Ukraine) is not for others. The other way around: what’s politically correct for China (excluding Taiwan from SWIFT access) would not be for other countries. Targeting individual banks or financial institutions which have committed crimes is of course different, that’s directly related to terrorism prevention. Although even in that field there are differences of opinion, to just name 1 example: what is terrorism to Israel is a freedomfight for Hamas….

It points out as well that shutting out nations by using SWIFT in that way could lead to the creation of a rival. What the article doesn’t touch on is the fact a rival already exists…… it’s called bitcoin.

If bitcoin is here to stay, is left to be seen, but fact is that it has found a place in the international payments industry. Bitcoin is still used as an instrument of speculation by many, but focusing on that alone is ignoring the fact that actual transactions take place in bitcoin. Half of which are linked to China. No doubt that there will be legitimate transactions in bitcoin but it would have been worthwhile to understand more about the nature, beneficiaries etc. of (certain) bitcoin transactions.

Unfortunately, unlike SWIFT which can give legislators and enforcement agencies access to transaction details, bitcoin cannot. Creating that access would greatly help the standing and acceptability of bitcoin as a transaction currency.

My view: infrastructure is neutral and should stay that way. Don’t shut down the highway for all white cars just because OJ Simpson drove one…