By Brian Monroe
bmonroe@acfcs.org
May 5, 2016
In this week’s Financial Crime Wave, big banks pay more than $300 million to settle rate rigging lawsuit, expert calls for “disruptive leadership” in AML, Vatican sees SARs explode, and more.
Rate rigging
Seven of the world’s biggest banks have agreed to pay $324 million to settle a private U.S. lawsuit accusing them of rigging an interest rate benchmark used in the $553 trillion derivatives market. The settlement made public on Tuesday, which requires court approval, resolves antitrust claims against Bank of America Corp (BAC.N), Barclays Plc (BARC.L), Citigroup Inc (C.N), Credit Suisse Group AG (CSGN.S), Deutsche Bank AG (DBKGn.DE), JPMorgan Chase & Co (JPM.N) and Royal Bank of Scotland Group Plc (RBS.L). Several pension funds and municipalities accused 14 banks, including those that settled, of conspiring to rig the “ISDAfix” benchmark for their own gain from at least 2009 to 2012. Companies and investors use ISDAfix to price swaps transactions, commercial real estate mortgages and structured debt securities. The alleged illegal activity included the execution of rapid trades just before the rate was set each day, called “banging the close,” causing the British brokerage ICAP Plc (IAP.L) to delay trades until they moved ISDAfix where they wanted, and posting rates that did not reflect market activity. Under the settlement, payments would include $52 million from JPMorgan; $50 million each from Bank of America, Credit Suisse, Deutsche Bank and RBS; $42 million from Citigroup and $30 million from Barclays, (via Reuters).
Compliance
Here is a thoughtful and thought-provoking piece by a longtime financial crime compliance expert on the need for “disruptive leadership” in anti-money laundering. The recent news of the FinCEN Director departing for the private sector triggered some thought around leadership in AML. To fully understand the leadership paradigm in AML today, it is useful to understand the historical eras of the US AML regime. The Pre-9/11 Era (Government Architecture) Without walking through the detailed timeline, this era begins with the Bank Secrecy Act of 1970 and runs to the USA PATRIOT Act of 2001. During this time, the architects of the US AML regime were hard at work to develop the strategy to combat funds derived from illicit activities. Moreover, these architects developed a regulatory framework for industry (financial institutions) to assist in the effort. Most would agree that this era represented years of conceptual strategy vs. impactful results and effective disruption to illicit finance. However, to say nothing was accomplished during this era would be a great disservice to those responsible for the criminal investigative and law enforcement actions taken. Nonetheless, this era was less dynamic and focal than the environment that changed it all…(via i3Strategies).
Cybersecurity
More than 270 million email accounts with major providers around the world have been compromised, a security expert has warned, with passwords being exchanged by criminals in Russia. Alex Holden, the expert, says most users of Mail.ru, Russia’s most popular email service, have had their account details stolen. Millions of users of the Google, Yahoo, and Microsoft email platforms have also had their data stored in one of the largest databases of stolen credentials ever discovered, Mr. Holden told Reuters. Hold Security, his firm, found the trove of stolen data after a teenage Russian hacker boasted in an online forum that he had access to millions of stolen credentials. The news comes as a Russian opposition leader is seeking to launch a class action law suit against a mobile network provider accused of helping secret services hack the phones of activists. Alexey Navalny, a prominent anti-corruption campaigner and critic of Vladimir Putin, said on Wednesday he wanted to sue the MTS mobile provider in New York over the apparent hacking of two associates’ messages, (via the Telegraph).
Corruption
The Wall Street Journal covers a bevy of financial crime compliance reports in a ripping round up, everything from corruption creeping into business partner practices to hopes of artificial intelligence being able to better parse out and predict risk. Here are some of the issues highlighted:
Eye Out For Corruption:A report by Dow Jones Risk and Compliance and MetricStream Research looking at anti-corruption programs at 330 companies in North America, Europe and Asia found 27% monitor business partners quarterly or more often, while 65% delayed or stopped work with a business partner due to concerns over anti-corruption regulation violations. Nearly nine in 10 (89%) said government sanctions are the most likely trigger for a business partner review, an increase of 12% over last year.
Banking On Extortion:Financial services industry attacks involving extortion tactics or theft of currency increased by 80% in 2015, according to the latest cybersecurity index from IBM X-Force Research.
Banking On Enforcement:Regulators levied around 170 enforcement actionsagainst community financial institutions in the first quarter of 2016, according to the Banking Compliance Index from compliance services management firm Continuity, (via the Wall Street Journal).
Money laundering
British authorities are refusing to investigate evidence of “dirty” Russian money being laundered through UK companies and banks because they don’t want to “rock the boat”, a former hedge fund boss has told MPs. Bill Browder claimed he had lodged six complaints relating to £20m of stolen funds – but law enforcement agencies “always found excuses not to investigate”. Speaking to the Commons Home Affairs Committee, the anti-corruption campaigner said the illicit cash was connected to a £160m tax refund fraud on his Russian Hermitage Fund uncovered by his lawyer, Sergei Magnitsky. Mr Browder became a prominent anti-corruption campaigner after Mr. Magnitsky died in a Russian prison cell in 2009 amid allegations he had suffered beatings and had been denied medical treatment. After his death, Mr Magnitsky was put on trial, with an empty dock in the courtroom, and convicted of the very tax fraud he had been investigating. The procedure was widely condemned as a farce by critics of Vladimir Putin’s government. He told the committee that 11 other countries – including Switzerland, France and the US – had launched criminal investigations into the stolen funds, while the UK’s National Crime Agency, the Metropolitan Police and the Serious Fraud Office declined to do so.And, according to Mr Browder, that money laundering is the tip of the iceberg – as he believes the sum trafficked into the UK has run into “hundreds of billions of dollars,” (via Sky News).
The European Central Bank is set to decide on Wednesday (May 4) the fate of the 500-euro (S$777) banknote, which many people associate with money laundering, the black market and terrorist financing. But its possible abolition is raising hackles in countries such as Germany.
The violet-coloured bill, the largest denomination banknote in the single currency area and physically also bigger than the five other euro bills, is on the agenda of a meeting of the ECB’s governing council, a bank spokesman told AFP. Notwithstanding any surprises, the council is likely to vote to stop issuing them, as the bill is believed to be favoured by criminals for moving large sums of money around without the authorities knowing. “Such notes are the preferred payment mechanism of those pursuing illicit activities, given the anonymity and lack of transaction record they offer, and the relative ease with which they can be transported and moved,” according to a recent Harvard University study. Because of its size and portability, the 500-euro note has become so prized in underground finance that it can trade at more than its face value, and has become known in some circles as a “Bin Laden”, the study said. The 500-euro note is “used more for hiding things than buying them”, said French Finance Minister Michel Sapin in March, (via the Straits Times).
Philippe Hébert, chief risk officer at Barclays France, has alleged that the British bank’s French operations are involved in money laundering and mis-selling. Barclays France is also alleged to have had serious shortcomings with regards to its conduct, compliance and control standards. This was exposed in a letter dated 5 April from Hébert to Tony Blanco, chief executive of Barclays France. Hébert had said: “I am following up the message I sent you on March 3, regarding serious mismanagement at cashier level and the particularly poor handling of this situation by the various control services and lines of defence, even though it carries serious risks of money laundering, especially at branches already known to be at risk (such as Biarritz).”
According to the Financial Times, the letter cited several cases of suspicious activity in the French arm. One such activity that was pointed out was large cash withdrawals by one client on 38 occasions. The withdrawn amount was just short of the €10,000 (£7,858, $11,553) limit and was done at the bank’s Biarritz branch. Another activity cited was the detention of its Nantes branch staff by police as they were suspected to be involved in money laundering. Hébert claimed in the letter the bank had not taken these activities seriously enough, (via the International Business Times).
Insurance
Money laundering converts illicit money into assets which appear legitimate. These assets may appear as insurance policies, bank deposits and even real estate. Money-laundering activities are not limited to financial institutions, as nonfinancial institutions, such as travel agencies, real-estate industries, casinos and gambling, are now used for money laundering. The nature of money laundering, though, in the insurance industry is different from the nature in other industries. The Financial Action Task Force (FATF) has identified certain insurance products as being exposed to the threat of money laundering. The seriousness of this threat is underlined in a FATF Report: “The experts viewed the insurance sector as potentially vulnerable to money laundering because of the size of the industry, the easy availability and diversity of its products and the structure of its business. In regard to this last point, it is important to note that insurance is, in some jurisdictions, often a cross-border business and more frequently than not involves the distribution of its products through brokers or other intermediaries, who are not necessarily affiliated with or under the control or supervision of the company that issues the product. Moreover, because the beneficiary of an insurance product is often different from the policyholder, it is sometimes difficult to determine when and for whom it is necessary to perform customer due diligence [for the policyholder only, or also for the beneficiary?],” (via the Philippine Business Mirror).
De-risking
The de-risking trend in global correspondent banking has exposed the need for more cost-effective, sustainable approaches for managing risk in the international financial system. Regulators generally agree that changes to guidance dealing with correspondent banking should be considered, but for any changes to be effective they must address the profitability equation of correspondent banking. Solutions that increase the compliance burden on industry or sacrifice the effectiveness of controls will miss the mark. When it comes to de-risking, policymakers are trying to navigate competing interests. Those responsible for disrupting illicit activity — such as terrorism, drug trafficking and evading sanctions — hold that banks should exit certain markets where they cannot effectively manage the customer, business line and jurisdictional risks. However, policymakers responsible for promoting global development, trade and investment are alarmed by the prospect of walking back decades of economic progress attributable to financial inclusion and global finance. At the center of this debate are individuals, businesses and foreign financial institutions losing access to services as a result of the de-risking phenomenon, not to mention the global banks whose correspondent banking services are expected to set the standard for financial crime controls, (via American Banker).
Il Papa
The Vatican’s financial watchdog registered 544 suspicious transactions in 2015—almost four times as many as the previous year—but officials said Thursday it reflected greater vigilance rather than any rise in illicit financial activities. The Financial Information Authority, or AIF, said it turned over 17 of those cases, mostly involving potential money laundering, to Vatican prosecutors. “I would like to see the figure zero,” René Brülhart, the AIF’s president told reporters. “But it doesn’t reflect reality. Wherever you have financial transactions, financial activity, you always see something potentially suspicious.” Mr. Brülhart said the Vatican’s oversight system uses a “rather low reporting threshold,” in part to raise awareness of potential problems. He said it was a “fair assessment” that none of the suspicious activity was related to the financing of terrorism. Thursday’s annual report was the fourth published by the AIF, which Pope Benedict XVI set up in 2010 to work toward compliance with international standards on financial crimes. That step began a series of financial reforms at the Vatican, which have been continued by Pope Francis. Mr. Brülhart touted a December 2015 report by the Council of Europe’s Moneyvaal committee, which praised the “intensive review process” at the scandal-plagued Vatican bank. The bank has closed more than 4,800 accounts, in some cases because a client’s profile didn’t conform with the bank’s stated mission to serve “works of religion,” (via the Wall Street Journal).
Corporate transparency
U.S. incorporation is coming under scrutiny in the wake of the Panama Papers leaks, which drew attention to the risks of money laundering through shell companies and other lightly regulated vehicles. While it’s easy–and cheap–to set up a corporation in the U.S., a cottage industry of corporate-services firms in several states makes the process even easier. The industry faces little oversight over how it handles its clientele, exposing a hole in U.S. financial regulation, according to observers. Lawmakers are seeking to plug the hole in a bid to prevent illicit money from making its way into the U.S. financial system. The U.S is one of the easiest places in the world to do business, according to the World Bank. One reason is how cheap and easy it is to set up a corporation, which in states like Delaware, Wyoming or Nevada can be completed in minutes for as little as a hundred dollars, without revealing who owns or controls the entity. But those seeking another layer of secrecy can go further and look to corporate-services firms for help, experts say. Service firms don’t have to ask many questions when filing incorporation paperwork, they said. The question of the secrecy of companies created in the U.S. comes amid heightened awareness brought on by the leak of a Panamanian law firm’s data in a scandal known as the Panama Papers. The firm, Mossack Fonseca, helped thousands create secretive offshore entities, some of which helped clients from countries across the globe evade local taxes or launder money, (via the Wall Street Journal).
Enforcement
U.K. regulators faulted Deutsche Bank AG in a March letter for “serious” lapses in efforts to thwart money laundering, capping a review that already prompted the firm to make changes, according to a person with knowledge of the matter. Examiners criticized the bank’s ability to verify some clients’ identities and goals, or ensure that it wasn’t aiding organizations subject to international sanctions, the Financial Conduct Authority found in the March 2 letter sent to the firm, according to the person, who asked not to be identified discussing confidential communications. The FCA outlined lapses in the U.K. within two parts of the company — the global markets division and the corporate and investment banking business. Deutsche Bank Co-Chief Executive Officer John Cryan pledged in November to improve procedures for bringing on new customers as part of a sweeping overhaul of internal controls meant to avoid a repeat of scandals and regulatory sanctions that have sapped earnings. The firm has been reorganizing regulation, compliance and anti-financial crime operations into a new structure with a global overseer. It also has been scaling back in “high-risk” locations such as Russia, where suspicious trades have drawn a money-laundering probe, (via Bloomberg).