Posts Categorized: Enforcement
July 30 2020
Last week Parliament’s Intelligence and Security Committee wrote about how Russian oligarchs and their money had been welcomed by the UK from the mid-1990’s onwards, with Britain’s “light touch … regulation” (where have we heard that before?). The UK’s rule of law and judicial system were seen as a particular draw. But, as the report says: “few questions – if any – were asked about the provenance of this considerable wealth.” Oh dear.
The report says that, rather than the encouragement of ethical practices and transparency amongst the Russian investors as hoped, Britain’s institutions provided “ideal mechanisms by which illicit finance could be recycled through what has been referred to as the London ‘laundromat’”. The patronage and influence this money brought to “willing beneficiaries” helped the reputation laundering process. And then there are the enablers, described with some asperity, as those who “on occasion help launder money through offshore shell companies and fabricate ‘due diligence’ reports”. Dear oh dear.
The authorities do have some ways of countering this: Unexplained Wealth Orders, for instance and seizure of assets. How well these work is another matter, of course. The Court of Appeal recently overturned three UWO’s obtained against the family of the former president of Kazakhstan, now subject to appeal by the National Crime Agency. The NCA may win its appeal but, as stated in the report, there is an imbalance of resources between the NCA and those with the wealth to fight back. And the longer the money is around and channelled through companies, property, trusts, charities and the rest, the easier it is to disguise its original smell and explain it away – enough to fight off the UWO, anyway.
There have been some successes: in relation to the spending (£11 million on a townhouse, £16 million spent in Harrods over a decade) by the wife of a former chairman (and convicted fraudster) of a state-owned bank in Azerbaijan, for instance. Or the seizure by the City of London police of £2 million in cash held in British banks by a professional money launderer acting for the Calabrian mafia, the ‘Ndrangheta, after a two-year investigation.
Three points are worth noting:
- One of the weakest points of any system is the point of entry. Much easier to keep “dirty” money out than to try and get rid of it once it is in and, over time, made to appear respectable or, at least, explained. Ditto re dodgy individuals.
- Once in, getting rid of the dodgy individuals and money risks becoming a game of Whack-a-Mole, one which tests the patience and resources of the authorities and requires their relentless and sustained focus.
- Be wary of those seeking to use the credit and reputation you have built up over years. That applies to professionals as much as it does to countries. It is flattering to think you will teach and improve them. The grubby reality may be that it is your reputation which is tarnished. It’s an old problem: some well-established banks and professionals learnt this the hard way – with one Robert Maxwell back in the early 1990’s. It’s a lesson worth remembering rather than relearning.
One thing is puzzling though. For years – since at least 1994 – there have been money laundering regulations, with the latest iteration brought in last year. The level of information needed is onerous and extensive. The principle underlying all these rules and regulations and the concept of due diligence is that banks and lawyers and estate agents and the myriad of intermediaries should really know and understand their customers and where their money comes from. So how is it that, even now, a couple of Calabrian Mafiosi are able to set up a company that does nothing, give an address where they do not live and deposit £2 million in an English bank account?
Surely it is not because, as reportedly attributed to Anarchasis, a Scythian visitor to 6th century Athens: “Written laws are like spiders’ webs; they catch the weak and poor but are torn in pieces by the rich and powerful.”
Better Late than Never
May 31 2019
The recent decisions by the FCA to fine UBS and Goldman Sachs £27.6 million and £34.3 million for transaction reporting failures going back to November 2007 and HBOS for its failure to inform the regulator of its suspicions that fraud was occurring in its Impaired Assets team – again in 2007 – is a reminder that the failings of long ago still have bite. All three firms will doubtless be relieved to put these investigations, finally, behind them. Systems changes will have been made, extensive remediation measures taken, training given and few, if any, of the people involved will still be in the organisations. Sighs of relief all round. After all, the past is another country. They did things differently then.
And yet, 12 years from the events in question to enforcement is a generation, probably two, in City terms. There will be people now starting their banking careers who were in short trousers when these events were happening. It will be all too easy for them to think that there is little for them to learn from what went on in these cases. After all, haven’t all the lessons already been learnt? They would be wrong.
For those training the next generation, the challenge is to make the lessons to be learnt from these past cases real for people working today – if the same dismal cycle is not to be repeated in future. Perhaps too the FCA might realise that the pursuit of perfection in their investigations risks making their ultimate outcomes little more than historical accounts of past misdeeds rather than a quick sharp reminder to those involved and their contemporaries of the perils of not taking their obligations seriously. Delaying justice for too long risks not just denying it but blunting its wider impact.
Here We Go Again
February 28 2019
One of the financial sector’s characteristics is a short memory. After about 5-7 years memories, particularly of tough times, begin to fade. New joiners bring their enthusiasm and keenness to do new deals, develop new structures, explore new possibilities. Blockchains, ever more complex algorithms, AI, new paradigms: all are being created and expanded. The future’s exciting. So the surfeit of scandals which came to light following the financial crisis a decade ago are beginning to sound like stories from a forgotten age, interesting but no longer really relevant to now, let alone the bright new future.
And then, from the other side of the world, comes this – a searing report (a Royal Commission, no less) into misbehaviour in Australian banks, to remind us, once again, that – in the words of an official with the US’s Financial Crimes Enforcement Network back in 2013 – “large amounts of money sometimes bring out the worst in people.”
(As an Australian might put it: “You don’t say!”)
The report followed a year-long public inquiry into the culture and practices within Australian banking and revealed shocking, widespread and systemic examples of the sort of misbehaviour with which we have become so familiar.
- Rewards for misconduct: the focus of all the institutions, whether banks, mortgage brokers, insurance firms, intermediaries was on selling, as much as possible for as high a fee as possible, regardless whether this was in the customer’s best interests. In some cases, non-existent services were provided to dead people for years.
- It will come as no surprise that this arose from badly skewed incentives. Or greed, of both the individuals and the institutions, as the Report says, bluntly and refreshingly.
- Firms abused their superior knowledge to mislead and defraud customers. Conflicts of interest were ignored. Individuals did what they could not what they should.
- When customers complained, staff were trained to lie to them, even when compensation was paid; deliberate actions were conveniently and misleadingly described as an “administrative error”.
- Firms lied to and misled regulators, often for years on end. Nor were these the actions of junior staff but of senior management who felt no compunction about noting down in internal correspondence how to keep information from regulators and prevent any proper scrutiny of their actions.
- Regulators were weak and did not hold those who misbehaved to account, even when they became aware of them.
500 pages set out in blistering detail a sorry tale of greed, fraud, lies, poor leadership, contempt for customers and a systematically rotten culture. The usual action is, of course, now being taken: resignations, new leadership, building a good culture, training, new legislation, enforcement, litigation and so forth.
Two points in particular are worth noting:
- These scandals did not happen in investment banking but in retail institutions, those dealing every day with ordinary consumers, the very people who need trustworthy and reliable financial services, who had a right to trust their providers and who were so badly let down.
- The banking sector in Australia is one of the most profitable in the world: 2.9% of Australia’s GDP. Compare this to the US share of 1.2% and 0.9% in the UK. The pre-tax profits of Australia’s banks are 6thin the world even though it is only the world’s 13th largest economy and its population only 25 million. Little wonder that they thought they could do no wrong.
When sectors / institutions start thinking of themselves as indispensable (“look at our profits, our tax revenues”), when finance forgets that it is a service industry, there to serve others not itself, when banking is seen as a product to be sold rather than as a long-term relationship to be nurtured, then hubris and the sorts of behaviours seen in Australia, as well as elsewhere, will happen.
The Australian report is a salutary reminder that the old stories still have much to teach us.