One basket for the rotten eggs

December 08, 2014 by Mark Dunn

This article was reprinted with permission from Money Laundering Bulletin, read the original article here.

The convergence of financial crime prevention continues unabated. For the past several years, driven by both changes in the direction of regulatory supervision and an associated need to realise greater efficiencies in compliance systems & controls, there has been a rapid convergence of financial crime risks. Where once anti-money laundering (AML), fraud, sanctions screening, anti-bribery & corruption (ABC) and corporate security existed as distinct operational roles, loosely held together across a firms' policy and procedures, the drive for some time has been to adopt a group financial crime approach to risk management and the deployment of more centralised resources to tackle such risks. Similarly, the legislation and guidance to prevent financial crime have increasingly adopted an integrated approach and the past few months have seen further evidence of this convergence.

Expanding the scope of corporate liability

At September's Cambridge Symposium on Economic Crime, David Green, Director of the UK's Serious Fraud Office (SFO), reiterated his call for an expansion of the UK Bribery Act 2010 section 7 offence to cover wider financial crime. [1] Currently, section 7 of the Act, the corporate offence of 'failure of commercial organisations to prevent bribery', focuses specifically on incidents of misconduct associated with corruption and puts the onus squarely on companies to take responsibility for managing the risks of bribery in their business. Essentially, the corporate offence and the broad definition in the Act of an 'associated person' committing bribery covers the behaviour of not only a company's direct employees but its agents, suppliers, joint venture partners and other third-parties in the UK and overseas. The sole defence in the Bribery Actalso relates to section 7 and that is for a company found to have failed to prevent bribery to be able to demonstrate that it 'had in place adequate procedures' designed to prevent associated persons from committing an offence. The UK's Ministry of Justice official Guidance accompanying the Act sets out the Principles firms should consider when implementing such adequate procedures. [2]

For some time, Green has been an advocate for expanding the scope of the section 7 offence to go beyond bribery & corruption and to encompass wider financial crime and other misconduct such as fraud: "I will also continue to speak in favour of amendment of S7 of the Bribery Act to create the offence of a company failing to prevent acts of financial crime by its associated persons. That would significantly increase our reach on corporate criminality, and is an idea that appears to be gaining traction." 

At the same conference, the Attorney General, Jeremy Wright, also signalled work in progress to explore this initiative: "Government officials are considering proposals for the creation of an offence of a corporate failure to prevent economic crime, modelled on the Bribery Act section 7 offence." [3]

This sentiment echoes statements early in 2014 by Solicitor General Oliver Heald on prospective review of corporate criminal liability laws. Although, in reality, changes to UK law in this area are unlikely before the next general election in 2015, it signals increasing intent by the UK government to adopt a more integrated approach to financial crime.

Tackling corporate transparency

At the same Cambridge Symposium on Economic Crime in September, the Attorney General highlighted another UK government initiative which has been gaining momentum in 2014 and also shows converging focus in financial crime prevention: "The Government is legislating to implement a central registry of company beneficial ownership, to identify and tackle misuse of companies to hide criminal assets. Enhanced transparency of company ownership will help us to tackle tax evasion, corruption and money laundering."

Trying to identify and verify the identity of the ultimate beneficial owner (UBO) has long been a difficult task for AML and other financial crime practitioners. Tracking down and confirming UBO identity is often perceived as a major bottleneck in any customer due diligence (CDD) process, second only to the 'false positive' problem that blights many an inefficient sanctions screening programme.

This issue has been further highlighted as companies increase their efforts to implement anti-bribery & corruption (ABC) measures and struggle to identify those beneficial owners who may have a controlling interest in a prospective joint venture partner or other third-party intended to help the company develop its business in overseas markets. Such ABC due diligence is intended to uncover potential links to Foreign Public Officials (FPOs) and others with close ties to government deemed a higher corruption risk.

The lack of beneficial ownership information in the public domain, which is easily accessible, accurate, comprehensive and up to date, continues to be a prime concern. The problem increases significantly when conducting checks on entities from emerging and other markets deemed higher risk. This issue is far from new – it was first recognised by policymakers over 25 years ago and despite more than a decade of frustration that has seen reports, proposals and recommendations from bodies such as the OECD, World Bank, European Supervisory Authorities and the European Commission, nothing had been done to visibly improve corporate transparency.

Knowing that identifying beneficial owners is almost impossible, firms have had to try and meet such requirements by asking their prospective clients and third parties to disclose this information as a key condition of transacting business. The names of individuals provided are then put through the due diligence process.

However, a resolution to this perennial problem started to look more likely with the revised Financial Action Task Force (FATF) Recommendations published in February 2012 and the intent that "[C]ountries should ensure that either: (a) information on the beneficial ownership of a company is obtained by that company and available at a specified location in their country; or (b) there are mechanisms in place so that the beneficial ownership of a company can be determined in a timely manner by a competent authority".

In October this year, FATF made further progress with the publication of its 'Guidance on Transparency and Beneficial Ownership' [4] for FATF member states and reflected the ongoing convergence of financial crime risks by referring to how corporate vehicles have been "misused for illicit purposes, including money laundering (ML), bribery and corruption, insider dealing, tax fraud, terrorist financing (TF), and other illegal activities".

Ironically, after all these years, it is the focus on tax fraud, specifically, and the revenues lost to tax evasion and avoidance schemes rather than money laundering that has accelerated the UK government's drive along with other G8 members to commit to publishing national Action Plans to prevent the misuse of companies and legal arrangements. The 8 principles underpinning such plans include a commitment for countries to "[C]onsider measures to facilitate access to company beneficial ownership information by financial institutions and other regulated businesses. Some basic company information should be publicly accessible". [5]

Despite the UK seemingly making good progress on this initiative, in reality it is likely to be some time before such a consistent approach to corporate transparency is adopted by the G8 let alone in other countries perceived to be higher risk in terms of corruption and wider financial crime.

Further integration markers

Alongside FATF's guidance on improving corporate transparency, October also saw another example of the ongoing convergence of financial crime as a new 'Definitive Guideline for Fraud, Bribery and Money Laundering Offences', published by the UK Sentencing Council, became active. [6] Released on 31 January, the new Guideline will apply to entities sentenced on or after 1 October 2014. Under the corporate offenderssection of the Guideline, the message concerning possible financial penalties is very clear: "The fine must be substantial enough to have a real economic impact which will bring home to both management and shareholders the need to operate within the law. Whether the fine will have the effect of putting the offender out of business will be relevant; in some bad cases this may be an acceptable consequence."

To drive the point home, November saw the UK Financial Conduct Authority issue 'GC14/7 Proposed guidance on financial crime systems and controls' in which it seeks views on updates to its regulatory guidance – 'Financial crime: a guide for firms' [7] - following publication of two thematic reviews covering 'How small banks manage money laundering and sanctions risk: update' [8] and 'Managing bribery and corruption risk in commercial insurance broking: update'. [9]

Despite an increasingly convergent treatment of financial crime-related offences through legislation, guidance and other initiatives, many legal and compliance practitioners will be very familiar with the catch-all approach adopted by the FCA, also taken by its predecessor, the Financial Services Authority, namely, the use of obligations:

"SYSC 3.2.6R: A firm must take reasonable care to establish and maintain effective systems and controls for compliance with applicable requirements and standards under the regulatory system and for countering the risk that the firm might be used to further financial crime.

"SYSC 6.1.1R: A firm must establish, implement and maintain adequate policies and procedures sufficient to ensure compliance of the firm including its managers, employees and appointed representatives (or where applicable, tied agents) with its obligations under the regulatory system and for countering the risk that the firm might be used to further financial crime."

The publication of 'Financial crime: a guide for firms', first mooted in 2011 and subsequently approved and updated, reinforces the FCA's approach. The guide brings together examples of good practice to consider and poor practice to avoid for mitigating risks right across the financial crime spectrum, including money laundering, terrorist financing, bribery & corruption, sanctions and fraud.

Industry reaction

The response from the financial services sector over the past several years, prompted by increased regulatory scrutiny both in the UK and elsewhere - acutely in the United States - together with new legislation and an inevitably higher demand on compliance resources, has been to adopt a group financial crime approach. In the past, a series of diverse and often local teams, focused on specific disciplines, such as AML customer due diligence, fraud, third-party ABC checks, sanctions screening, suspicious activity reporting and internal investigations, coexisted loosely despite many of these functions conducting similar core tasks such as risk assessment, due diligence, screening and monitoring.

In the past few years larger firms have adopted a regional focus with integrated financial crime teams responsible for overseeing all of these tasks, applying slight nuances in processes to reflect compliance with local legislation as required. Such regional centres enable firms to apply a more consistent and robust approach to managing financial crime risk across the enterprise. These regional teams often report up toGroup Financial Crime or similar roles and ultimately into a central committee overseeing Risk across the organisation. Such an arrangement also drives associated cost and business process efficiencies by prompting reviews of often previously disparate resources and, in some cases, ageing proprietary systems used for tasks such as identity verification, enhanced due diligence, PEP & sanctions screening, transaction monitoring, account onboarding and compliance auditing. Alongside the need to meet more stringent regulatory expectations, the streamlining of such processes also benefits companies' strategic execution as firms strive to expand into those emerging and developing markets offering significant growth opportunities while mitigating higher risks of corruption and other financial crime.

However, for firms outside the financial services sector and not subject to AML rules, there has been a sharper learning curve as an increase in enforcement activity covering areas such as sanctions, environmental disasters and perhaps the most devastating, anti-bribery & corruption, has brought home the need to rapidly implement effective and efficient due diligence, sanctions screening and other controls. As a result, a number of seasoned compliance professionals from the financial services sector have been recruited by global corporate entities.

As we approach the end of 2014, financial crime and other business risks facing firms across the globe have rarely been greater. Such heightened risks have prompted a slew of incoming new measures and the amendment of existing legislation to tackle money laundering, bribery & corruption, sanctions regimes, tax evasion and fraud. At the same time, the global enforcement regime to ensure compliance with such requirements is increasingly proactive as regulators and law enforcement agencies encourage the sharing of intelligence and mutual legal assistance in order to improve their chances of securing successful prosecutions. Regulated companies need to be certain that their systems & controls are robust and agile enough to withstand this increased scrutiny while still enabling their organisations to efficiently execute strategic business objectives and maintain their competitive edge.



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