Financial Crime: "A horrible subject......"
By Mark Outhwaite, Principal of OHL Consulting LLP
March is a wonderful month. At it’s beginning, the Daffodils are in full bloom, we can celebrate the start of Spring ( Met Office), and / or St David’s Day. On the 15th (the Ides of March) we can commemorate the anniversary of the assassination of Julius Caesar, on the 17th March St Patrick’s Day and around the 20th March 2008 the actual Spring Equinox.
In other words, depending on how you look at it, March can be a vibrant month, with the promise of nature reborn and growth for the year ahead. Or it can be a time to celebrate national identity, or a time to reflection on ambition and the limitations of power. Or it can become a pedant’s delight with many technical arguments as to when the hell Spring actually starts!
The same is true if one were to assess the health of the fight against financial crime in the UK. Some see the fight against Financial Crime as “a horrible subject…”; Others see it as a moral duty of all good corporates to engage in the fight; some ignore it and hope it will go away; others panic; the professional MLROs soldier on, whilst the ones you really need to watch quietly go about their business of laundering criminal proceeds through your firm.
With limited time and resources, what sort of hot topics can we expect to encounter this Spring?
Fraud
Well let us start with the classic, ever popular problem of fraud. It was the late Ronald Reagan who observed, “The most terrifying words in the English language are: I'm from the government and I'm here to help.” And helped we have been. Yes we have a new Fraud Act that should help prosecutors make a case stick, but do we have any meaningful increase in Government resources to police it?
Well the Government begging bowl is out for the private sector to fund a National Fraud Reporting centre whilst, as I understand it, the princely sum of £30 million, over the next three years, is being made available as new funds to help fight fraud. Now the recent ACPO fraud review indicated that fraud in the public sector (where the only reliable statistics could be found!) was running at approximately £13 billion in 2005. Fraud against the private sector was not recorded accurately, if at all, hence the need for a National Reporting Centre. Now, check my maths please, but assuming a constant rate of fraud (lol) detected in the public sector at £13 billion a year vs. a new spend of £10 million a year average spend by Her Majesty’s Government and I make this a glorious new spend of 0.0769% of the identified annual (and grossly underreported) problem to defeat fraud. Would you like to guess where the rest of the costs are going to come from and with the Budget to come later on in this month?
Couple this with the sensible view from the Financial Services Authority that a slowdown in the UK economy will lead to a greater number fraudulent acts being detected, particularly in mortgage fraud. Then link that in to a press story of a leaked report from the Police Federation, that “Murderers, rapists and fraudsters are getting away with crimes because of a major shortage of experienced detectives.” (Losing the Detectives: View From the Frontline is based upon 27 focus groups in nine police forces in England and Wales. As reported in the Daily Telegraph March 3rd 2008) .We know that if your firm is lucky, you might get a connection to the City of London Fraud squad. But are they able to cope with all frauds that occur on their patch or do they take a risk based approach and deal with only major, i.e. over 1 million in value? Have you worked out what amount of fraud losses would kill your firm?
I suggest that the sensible conclusion drawn from the above is that in identifying preventing and policing the threat from fraudsters, especially for frauds under £1 million, you and your firm are pretty much on your own. So what should you do? Revisit and update your anti-fraud policy and your firms’ internal controls and make sure that not only are cash and assets protected by sensible standard operating procedures but that your managers are actually managing! That is to say that responsible colleagues are identifying and escalating fraud risk issues, Internal Audit recommendations are actually followed up and resolved, colleagues are warned that the risk of an internal fraud is rising, and that you know who will conduct any fraud investigation that can be used in court before an incident happens.
The 3rd European Union Anti-Money Laundering Directive (The regs)
Now here is a key piece of financial crime regulation which, like the legislation underpinning it, is changing its shape and reach faster then the alien from the film of the same name. Senior Management think, “I’ve spent considerable time and resources on this, I think I understand it and that the new systems works” when lo and behold the problem comes back at you faster than you can say “how the hell has it changed this time?”
Anyway, here is a brief stab at some of the areas you may want to spend some of your precious time looking at, depending, of course where your firm starts from and what it actually does.
The December 2007 regulations extend supervision to all businesses in the regulated sector, including trust and company service providers, estate agents, and consumer credit businesses.
It introduces a plethora of new and or improved government and professional bodies responsible for supervising and checking that their members are compliant with the new regulations. They range from The Office of Fair Trading (Consumer Credit Licenses), via the Institute of Certified Book Keepers to the Faculty Office of the Archbishop of Canterbury with many more in between.
So you will need to identify if your organisation is one of those now covered by the Regulations. If your firm has not previously been subject to the now defunct 2003 Regulations, you should create procedures to monitor client activity, capture relevant client information and report suspicious money laundering activities. This may include the creation of the role of a money laundering reporting officer (MLRO).
If your firm’s activities not already “registered” with an appropriate supervisory authority, registration may also be required. For example, organisations subject to supervision by Her Majesty’s Revenue and Customs will need to register.
However, if your organisation was subject to the 2003 Regulations, you should review your existing procedures and update them to comply with the new obligations in the Regulations. The following list is not exclusive and includes, in no particular order:
Identify the beneficial ownership of each customer. 25% is the key figure here.
Conduct continuous monitoring.
The regs incorporate a risk based approach to AML and you now have to conduct appropriate due diligence based on risk.
Have in place enhanced customer due diligence and monitoring for customers where there is a situation that by its nature creates higher risk of money laundering or terrorist financing.
Identify and manage the risks of dealing with Politically Exposed Persons.
Maintain adequate reporting and records.
Provide appropriate, adequate and regular staff training.
Ideally, of course, your firms will have achieved all this prior to new regs coming in. Realistically you need to be addressing these issues as soon as is reasonably practical.
I am left with a question as to whether the high rate of change and the unending stream of regulation is proof positive that Old Ronnie Reagan was right when he said “Today, if you invent a better mousetrap, the government comes along with a better mouse.”
The Consent Regime Consultation Document
The Home Office launched a consultation paper on 13/12/2007 which does not seem to have been widely noticed. If you are quick (and lucky about the date you read this) you should read and comment on it if you can (through your trade or professional association?). The closing date for comments is the 11th March and here is the link.
http://www.homeoffice.gov.uk/
After all, if the Government is consulting and you don’t avail yourself of the opportunity, you’ve got no one to blame but yourself.
Insider Dealing /Clean Markets
The FSA has recently been reemphasising it’s obligation to police the markets to prevent financial crime. In a speech in October 2007, Margaret Cole, Director of Enforcement at the FSA emphasised that prevention is better than cure. The following points should act as a useful Aide-Memoire of the outcomes the FSA expects:
appropriate and effective systems and controls in form of robust internal procedures;
an insider list that is short as possible and based on need-to-know;
a willingness to undertake a thorough internal review following a leak;
effective and targeted training of staff including support staff;
monitoring of staff personal account dealing;
robust controls when dealing with third parties;
effective information technology controls; and
an awareness of the limitation of code words as an effective tool to keep information confidential, especially if used in isolation (Speech by Margaret Cole, Director of Enforcement, FSA to the American Bar Association. 4th October 2007).
US Extradition
News bulletins, these days, like to end on a jolly “and finally” item in the hopes that the viewer won‘t leave too depressed.
And in that vein, I can at least make the observation that, given the ludicrously one-sided extradition treaty signed with the United States, your chances of travelling to the Land of the Free for free have escalated significantly. Sure you’ll be travelling coach and in chains, but your accommodation will be paid for.
In my mind, the extradition treaty rammed through parliament by David Blunkett and the Labour Party significantly increase the likelihood of innocent people (innocent of crimes in the UK, not necessarily of crimes under US Law) working in the UK AML regulated sector being extradited to the US to help the prosecutors with their enquiries. The UK Government has left individuals with no defence against extradition, not even that of having to establish a prima facie case. An excellent article can be found on the subject at the website of a leading QC, Mr Jonathan Fisher. www.jonathan-fisher.co.uk . Just scroll down the publications page to the heading Articles and Research Papers. It is the entry entitled "UK / US Extradition in Financial Crime cases". Happy reading!
And Finally!!!
A partner of a law firm recently gave me some feedback on a financial crime update that read “You made a horrible subject halfway palatable” which made me laugh.
What I wanted to do with this article to do was to try and highlight, with humour, some of the issues that are “flocking your way” this Spring and to make them “palatable” to you. Because if you don’t engage now in a realistic risk based assessment of the financial crime risks that you and your firm run, you personally might end up paying the price.
Now back to the real world of work. Hopefully you feel that you have been forewarned about some of the changes happening this Spring.
So heads up people, there is a lot going on in the financial crime arena and we need to adapt now. Let’s try and make sure that it will be the bad guys (and girls) who are the ones that get caught out.
Good luck!
Ta Ta For Now
Mark
________________________________________
Principal
E-Mail: Mark.Outhwaite@ohlconsulting.com
Tel: 01279 731176
Mbl: 07788 672263
Skype: mark.robin.outhwaite
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