MLROs.com Meeting 23 rd February, ‘09

1. MLROs.com Meeting 23rd February, ‘09 “CURRENT FINANCIAL CRIME HOTSPOTS” DAVID BLACKMORE, SENIOR CONSULTANT, MHA / BAKER PLATT

2. AGENDA NEW DIMENSIONS TO AML CDD / EDD FRAUD MARKET ABUSE & INSIDER DEALING CORRUPTION TERRORIST FINANCE & THE 2008 CTA CONSENT THE PAYMENT SERVICES REGULATIONS, 2009

3. AGENDA NEW DIMENSIONS TO AML

4. PLACEMENT, LAYERING, Etc? A legitimate businessman earns income through equally legitimate business activities outside his home state. The income is paid into an a/c with your bank. In breach of the law in his home state he does not declare the income or interest on it to his tax & revenue authority. Is your bank laundering his money?

5. PLACEMENT, LAYERING, Etc? Answer: you may well be! This is despite the fact that your firm is handling legitimately earned funds & that it is not changing the appearance of or converting the property in any way.

6. What is money laundering? Historically the term money laundering has been taken at face value Assumption that money laundering only occurs whenever a person is literally attempting to launder, wash or convert property in some way This narrow interpretation of ML can be misleading – Why?

7. NEW DIMENSIONS? Conclusions:- 1) the “normal” interpretation of the objective of money laundering is the avoidance of detection, prosecution & confiscation of their criminal proceeds is NOT valid for all cases! 2) the real objective may be the need to disguise their ownership of property. Thus they break the connection between themselves & the property that is capable of linking them to the predicate criminality for which they are seeking to avoid detection.

8. NEW DIMENSIONS? 3) Money laundering is thus as much about disguising ownership of property as it is about converting or “washing” criminal property. 4) No money needs to have changed hands at all!

9. Money laundering - Reality Property is laundered in many different ways including all arrangements entered into involving the proceeds of crime Money laundering is the concealment of the ownership, control, purpose, movement source and destination of value Examples – Abacha, Enron, Worldcom, Tyco, Parmalat

10. The nature of the ML threat Threat comes in two forms: From criminally derived property that enters arrangements with which you are concerned 2. From arrangements with which you are involved which may by their very nature cause property to become illicit

11. CORPORATES - KEY CONSIDERATIONS “…..despite the important and legitimate roles corporate entities, including corporations, trusts, foundations and partnerships with limited liability, play in the global economy, they may, under certain conditions, be used for illicit purposes including money laundering, bribery and corruption, improper insider dealings, tax fraud, financing of terrorist activities and other forms of illegal activities.” Source: “The Misuse of Corporate Vehicles, Including Trust and Company Service Providers,” FATF, Nov, 2006.

12. Choice of jurisdiction Different rules apply in different offshore jurisdictions to the following issues: - Disclosure of beneficial ownership - Issuance of bearer shares - Corporate directors - Required number of shareholders - Production of accounts - Taxation

13. Volume business Incorporation and Company Service Providers (CSP) costs are relatively modest. Fierce competition has driven costs down Each CSP business ‘manages and controls’ hundreds and in some cases thousands of companies Problems can and do result: Directors decisions are not always informed Principals have de facto control Culture of acquiescence

14. Enhanced vulnerability Dummy settlors Letters of wishes Use of charitable beneficiaries Certain protector provisions Managed trust companies Vista trusts Trust Deeds do not always reveal settlors & other parties with an interest!

15. Culture In many trust companies there is a ‘culture of acquiescence’ Client instructions are often followed unquestioningly Risk of losing business!

16. Enron’s use of SPVs To hide bad investments and poor-performing assets. Declines in value of assets would not be recognised by Enron (Mark to Market.) Quick execution of related-party transactions at desired prices. To report over $1 billion of false income To hide debt (Borrowed money and not put on financial statements of Enron) To manipulate cash flows, especially in 4th quarters & therefore year-ends Many SPV transactions were timed (or illegally back-dated) just near end of quarters so that income could be booked just in time and in amounts needed, to meet investor expectations

17. “RED FLAGS” FOR CORPORATE CDD Multi-jurisdictional &/or complex structures Payments (esp. foreign) without clear connection to the declared activity of the entity Use of offshore bank accounts without clear economic necessity or business logic Use of nominees Use of shell companies Use of tax, financial & legal advisers to develop &/or establish the structure.

18. USING THE “RED FLAGS” IN CDD (1) Case by case! The more of the listed red flags come to light in ID&V, KYC enquiries, the greater the risk that ultimate identity of beneficial ownership/control might be able to remain unknown. “Does it all make sense?” According to FATF the legal entity most misused “..is a private limited company with shared capital, combined with activities in a jurisdiction other than the jurisdiction where the entity was created.” (Source: FATF report, Nov, 2006).

19. USING THE “RED FLAGS” IN CDD (2) Find out who really runs the show !– the vexed question of Ultimate Beneficial Ownership of a company or who are the trustees, settlors, protectors, beneficiaries involved with a trust? What’s the purpose of the entity? If PEPs are involved are they there for decoration or do they exercise executive authority? Can they move money? Why is a foreign jurisdiction being used for the creation/administration of the entity? What’s the purpose/rationale for a complex structure? Again, does it all stack-up?

20. A word to the wise! “If the consequence of asking difficult questions of particular clients leads to the loss of business then so be it. It is infinitely preferable to ask questions and risk losing business than risk becoming embroiled in often lengthy, public and expensive legal proceedings which could have catastrophic consequences for a professional’s career and their company.” Source: Article by BakerPlatt, 2005.

21. TOO MUCH TO ASK?? If you think that’s all too much, consider the FSA enforcement against Sindicatum Holdings Ltd (Final Notice, 29th October, 2008):- CDD/EDD failings included: Failing to recognise higher risk of clients from “less transparent jurisdictions”; Not collecting CDD evidence at take-on, or at all; Acceptance of client-sourced information, no independent sources; Failure to verify who were directors, beneficial owners or controllers; Inadequate review of non-English language documentation; Copy docs not adequately certified; I D & V docs lost/mislaid; incomplete &/or no checklists at all!

22. SINDICATUM HOLDINGS LTD “The FSA considers that the breaches are serious, relate to a significant number of the firm’s clients, and have occurred over a long period of time, that is October 2003 to September 2007. Further, the breaches and the significance of the breaches were identified by the FSA, not by the firm.” (Final Notice, para. 4.21., 29th October, 2008)

23. AGENDA FRAUD

24. FRAUD TRENDS Fraud in 2008 highest for 13 years - £1.1bn Court cases; accounting fraud 7 times higher than 2007; fraud by managers, employees trebled; (Source: KPMG Fraud Barometer, 2/02/09); Commercial cheats cost UK banks £2 Bn a year; Source: BDO Stoy Hayward, published 16th Dec, 2008 SFO calls for whistleblowers via new hotline! (Dec 08)

25. FRAUD TRENDS • Barclays settles E50m fraud claim with sheikh (DT 4/01/09) • Al Qaeda using gambling websites to launder terror funds (DT 2/01/09) • Madoff & $50 bn – watch this space! • Stanford International Bank – watch this space! • GFX Capital Markets – as above!

26. OTHER FINANCIAL CRIME TRENDS! SRA currently investigating 60+ solicitors for alleged mortgage fraud complicity FSA looking at over 30 referrals on I.S. failings FSA enforcement clearly targetting Market Abuse/ Insider Dealing via criminal charges; UK insurers face crack-down on bribery/corruption after AON £5.25 m FSA fine – Final Notice, 6th Jan’09; Banks are similarly warned! HMRC raises the stakes on non-UK funds – Liechtenstein, US, etc; new Disclosure Agreements with Guernsey, IOM, BVI, Bermuda; others in process! FSA’s continued enforcement on mortgage fraud– see Jan ’09 Financial Crime Newsletter No.12; FSA Review on Sanctions – still not published, but mentioned at 2008 FC Conference!

27. THE 2008 HEALTH-WARNING! EVER MORE RELEVANT ONE YEAR ON! “It is therefore absolutely right that tackling financial crime continues to be a key priority for us this year. Our Financial Risk Outlook highlighted that tighter economic conditions could increase the incidence of some types offinancial crime,or lead to firms diverting their attention away from tackling financial crime.” (My underlining; Source:speech, “The FSA’s retail strategy”, Clive Briault, former MD Retail Markets, FSA, 27th February, 2008).

28. AGENDA MARKET ABUSE & INSIDER DEALING

29. AGENDA MARKET ABUSE & INSIDER DEALING 2007 – no cases 2008 – 6 completed cases + 3 criminal cases started + 8 arrests! 2009 so far – 2 cases

30. MARKET ABUSE / INSIDER DEALING The Belgian Friend The Amateur Investor The Board Member The City Professional The I.T. Nerd Constant Themes Rumours

31. AGENDA CORRUPTION

32. CORRUPTION AON – Key Features: Risk assessment failures; Counterparties & jurisdictions; Training & Awareness failures; Procedural failings on 3P payments; Monitoring failures; No internal audit! Lessons from Abacha still not learnt!

33. AGENDA TERRORIST FINANCING

34. NEW TEETH in the armoury! Counter Terrorism Act, 2008 (CTA) In force on Royal Assent, 26 November, 2008; Claimed to be necessary to address risks from m/laundering, terrorist financing + proliferation of nuclear, radiological, biological or chemical weapons; Schedule 7 gives HMT powers to issue Directions on: Customer due diligence; On-going monitoring; Systematic reporting (NEW!); Limiting or ceasing business (NEW!);

35. THE CTA CTA Practicalities: As Orders issued by HMT, possible overlap with POCA & TA Orders issued by Courts; Application to financial & credit firms, NOT professionals! HMT Direction if any 1 or more of conditions met: FATF Advisory (ies); HMT’s reasonable beliefs on m/l, terrorist finance or development of weapons posing threat to UK national interests; Broader powers than MLR 18 on ceasing/restricting business &/or occasional transactions. Criminal & civil penalties!

36. THE CTA What can firms do? Ensure compliance with legislation + new Draft JMLSG Guidance on CTA, 21st Jan, 2009; Review / Amend Risk Assessments esp. on clients involved in weapons/components industries + market counterparties from certain countries/jurisdictions; Review / Establish a clear CTF Policy tailored to your business profile; Review / Amend Operating Procedures; Provide / Update training & awareness as Directions can be issued to persons as well as firms; Await promised HMT Guidance & review all again, if necessary!

37. THE CTA What can firms do? Decide what is realistic! You can raise awareness via education & training; You should be able to review your client base for EDD on high-risk (in CTA terms) clients, counterparties & correspondents; You should be able to elevate source/origin of funds + country-risk to the top priorities for both EDD & monitoring; You can stay close to relevant news reports; e.g. the FATF Plenary later this month, when a certain Middle East jurisdiction is believed to feature prominently on the proliferation issue! You can include CTA requirements in your Disaster Recovery / Business Continuity Plan, procedures & TESTING!

38. AGENDA CONSENT

39. CONSENT HOME OFFICE CIRCULAR XX / 2008 GUIDANCE TO LEAs ON CONSENT REGIME INTENTION TO “ENSURE CONSISTENCY OF PRACTICE” RESPONSE TO “CONCERNS FROM THE FINANCIAL SERVICES INDUSTRY & OTHER SECTORS & PROFESSIONS”. OBJECTIVES under POCA:- detection, prosecution, prevention; PRINCIPLES: balance of parties’ interests; proportionality; engagement PRACTICE: refusal in majority of cases only “when a criminal investigation with a view to bringing restraint proceedings is likely to follow or is already under way”

40. CONSENT ENGAGEMENT BY SOCA:- CONSULTATION WITH REPORTERS; ACTIVE MONITORING + PERIODIC REVIEWS BY SOCA & LEAs THROUGHOUT MORATORIUM SOCA TO “CONSIDER ANY REASONABLE REQUEST FOR A REVIEW BY PERSONS AFFECTED BY THE DECISION (SUCH AS THE REPORTER” SOCA’s detailed internal policy on the process to be available for LEAs to consider; OBSERVATIONS: Is this the start of addressing issues raised by the UMBS ONLINE Case? STILL NO DECISION ON CONSULTATION RESPONSES RE-THE REGIME ITSELF!! HOW LONG DOES IT TAKE?!!

41. AGENDA PAYMENTS SERVICES REGULATIONS, 2009 (PS REGS)

42. PS REGS 2009 PAYMENT SERVICES REGULATIONS 2009 LAID 10th Feb, 2009; c.i.f. 1st Nov, 2009; AML/CFT IMPLICATIONS? FSA Licencing regime for non-bank providers All payment types covered; 2012 Target for next-day electronic payments Registration ONLY for small firms – who monitors their AML compliance? HMRC! They still need banks! Reliance under MLR? Interaction with other legislation, e.g. TACT, CTA, POCA?

43. MHA CONTACT david.blackmore@mha-consulting.com www.mhaconsulting.com Tel: 02476 466492 Mob: 07825 095797 Main office tel: 01483 266166 Main office fax: 01483 548725

44. MLROs.com Meeting 23rd February, ‘09 “CURRENT FINANCIAL CRIME HOTSPOTS” DAVID BLACKMORE, SENIOR CONSULTANT, MHA / BAKER PLATT