Posts Tagged: vetting
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.”
Seeing the bigger picture
May 13 2018
Even regulators can sometimes fail to see the wood for the trees. In highlighting Mr Staley’s conflict of interest when he became aware of the whistleblower’s letter against an employee he had hired, the regulators barely scratched the surface of a wider issue. It was not just his failure to recognise that it was his conflict of interest which made it wrong for him to involve himself at all in the whistleblowing process. Rather, it is that he did not seem to understand (or if he did, he did not let this understanding guide his actions) the crucial importance of both knowing when there was an actual or potential conflict of interest and knowing how to avoid it or minimise it.
This is critical to more than just whistleblowing.
At a time when the all-encompassing financial institution is pretty much the norm, conflicts of interest policies are essential – to address conflicts between firms and their clients, between clients, between employees and the firm, employees and clients etc etc. But above all they are essential because they seek to address the very problem caused by the existence of financial behemoths. Their very size and and the scope of their activities create all sorts of actual and potential conflicts of interest which, if not properly recognised and managed, risk damaging the trust which is essential to the survival and success of a financial institution, indeed of the financial sector as a whole.
One of the ironies of that Big Bang 21 years ago is that, in enabling the abolition of the inefficiencies of all those small brokers, jobbers and the rest (inefficiencies which were believed to hold the industry back) through their mergers and takeovers by large (mostly) US banks, it led to the recreation on a massive scale and in enhanced form of all sorts of new conflicts and issues around trust, necessitating ever larger – and increasingly complex – rulebooks.
The regulators have been playing Whack-A-Mole with wrongdoers ever since.
So it is not a surprise that a failure to recognise and/or a determination to ignore conflicts of interest have been at the heart of some of the worst scandals of recent years: split cap investment trusts, market manipulation, PPI and pensions mis-selling, LIBOR, FX, front-running and so, dismally, on. All the more important, therefore, for those at the top to understand why managing conflicts of interest properly is at the heart of establishing and maintaining trust in their institution – and the whole sector.
Note too the reference to Mr Staley being concerned that his authority to make hiring decisions was being undermined by the whistleblowing allegation. There is the authentically aggrieved tone of the senior man unused to not getting his own way. Let’s not be too hard on him though. He is not the only person in power to have reacted thus to any challenge, though possibly the first to have this made public in such circumstances. And yet the hiring process is the first – and often – best collective opportunity to decide whether this person is right for this firm in this role. A whistleblowing provides an opportunity for such a challenge, as does the vetting process. The latter risks being seen as a bureaucratic step to be got through, rather than an opportunity for proper scrutiny, if people feel that the decision is already a done deal and any questioning of it unwelcome.
After a year long investigation a pity that the regulators’ decision did not consider these points.
Still, no reason for the industry not to take the wider view about the lessons to be learned from this affair. Will its leaders do so? Or will they breathe a sigh of relief, make some process changes, create a few more reports but largely carry on much as before?