The fight against crime is too important to leave the status quo as it stands.

The elephant in the room!

I have observed with increasing unease and frustration for some time now how despite the very honest and diligent efforts of the band of brothers and sisters in the financial crime compliance profession around the world we appear to be losing the war on illicit finance, and how in our desire to explain why this is the case we appear to be overlooking two crucial factors that I believe may explain our suggested inadequacies.

The first is that we continue to under estimate the intelligence, drive and guile of professional enablers and illicit actors to protect and preserve their wealth. I do not respect or in any way wish to trumpet the competence of criminals, but the simple truth is that they continue to lead the way in how to structure new, but often wonderfully simple ways, to move value using new technologies and products in a way that the product designers and developers simply did not anticipate.

Whether laundering value by selling ‘authored’ books through Amazon, or by utilising this ‘new’ technology called cryptocurrency (including Bitcoin that has now been with us for almost a decade) or the more obvious use of traditional international trade and finance, we continue to miss the substantial part of this global and transnational criminal enterprise.

At times I believe that we appear too honest, almost unwilling to think like a criminal. More often than not in training workshops, I meet with right-minded compliance professionals who simply cannot construct even the most basic criminal money laundering case studies.

My long-held belief is that you need to think like a poacher to be a better game-keeper and until that happens we will continue to be on the back foot, responding to reports of historical criminal conduct, rather than actively seeking to anticipate and disrupt this threat.

My second and more substantive concern, and one that I feel has not yet been addressed by the wider financial crime compliance community with sufficient enthusiasm due to prejudicial thinking is what I characterise as an ‘uncomfortable truth’.

This is the continuing failure to shine a light on those OECD jurisdictions that warrant closer and more forensic examination relating to the failure to apply enhanced rigour around customer due diligence and beneficial ownership rules.

Just how many OECD countries are listed as ‘high risk’ on firm’s country risk assessments? When was the last occasion that FATF listed a ‘primary’ member as higher risk due a persistent failure to comply with the FATF Recommendations that have been with us since 1989?

Let’s call one of these jurisdictions ‘XXX’, for no other reason that I watched a Vin Diesel movie last week and it has star appeal.

This is the report card for jurisdiction XXX that has been taken (rather selectively I concede, but nonetheless honestly) from a series of authoritative papers and journals that have been published between 2009 and 2018:

1999 – ‘Private Banking and Money Laundering: A Case Study of Opportunities and Vulnerabilities‘2 a report to the Committee on Governmental Affairs:

“Despite increasing international attention and stronger anti-money laundering controls, some current estimates are that $500 billion to $1 trillion in criminal proceeds are laundered through banks worldwide each year, with about half of that amount moved through XXX banks.”

2014 – ‘Global Shell Games’ – a look at the misuse of incorporation services to disguise illicit activities and the results of an approach made to 4,000 services in over 180 countries to discover just how easy it is to form an untraceable company using corporate service providers:

“Against the conventional policy wisdom, those selling shell companies from tax havens were significantly more likely to comply with the rules than providers in OECD countries like XXX”

2015 – National Risk Assessment for XXX, the following financial crime risks were reported:

‘About $300 billion is generated annually in illicit proceeds. Fraud and drug trafficking offenses generate most of those proceeds”

2016 – Financial Action Task Force Mutual Evaluation Report:

“…the lack of comprehensive AML/CFT supervision for other designated non-financial businesses and professions is a significant supervisory gap. The authorities have a good understanding of the risks of complex structures of legal persons and arrangements being used to hide ownership and launder money. However, serious gaps in the legal framework prevent access to accurate beneficial ownership information in a timely manner. Fundamental improvements are needed in these areas.”

2018 February 6 Acting Deputy Assistant Attorney General M. Kendall Day of the Department of Justice, Criminal Division, testifyingbefore the Senate Committee on the Judiciary stated that:

“[t]he pervasive use of front companies, shell companies, nominees, or other means to conceal the true beneficial owners of assets is one of the greatest loopholes in this country’s AML regime.”

On 11th May 2018 ‘new and enhanced’ customer due diligence measures (CDD Rule 17) were introduced in country XXX that require that all NEW account applications must be supported by the identification of 25% plus beneficial owners, and one other ‘significant person’. There is no requirement to seek to identify the ownership of any other existing account holder unless the firm is suspicious.

(Note, this was announced at least 18 months previously, thereby giving notice not only to the regulated sector but also to our risk-averse and bright criminals, who will have no doubt have taken the opportunity to manage their transaction flows to ensure that there is no change or unusual activity post May 2018 that might prompt a fresh investigation on who owns the business.)

11th June, ‘Counter Terror and Illicit Finance Act’ – In the very latest attempt to close these loopholes, new legislation has been presented at a Federal level that originally included measures to enhance beneficial ownership transparency, however it appears that after some very effective lobbying by some key affected parties, these measures have been diluted to the following:

“SEC. 10. STUDIES AND REPORTS. 11 (a) BENEFICIAL OWNERSHIP —Not later than 2 years after the date of enactment of this Act, the Comptroller General of the United States shall conduct a study and submit to the Congress a report— evaluating the effectiveness of the collection of beneficial ownership information under the CDD 17 rule.”

So, there we have it. Eighteen years after the risk was first brought to the attention of the world and the government of XXX, we shall have to wait another two years for a ‘study’ to be performed, no doubt subject to extensive review and ‘refinement’, that may see the light of day in the 2020’s. Who continues to benefit from this unsatisfactory position?

To say that this faltering performance is disappointing might be considered to be a carefully guarded understatement at a time when there has never been a more important time to apply global standards.

Jurisdiction XXX has size, scale and a clearly documented persistent higher risk of handling the proceeds of crime, yet I have observed little or no commentary at a supranational level, much less at FATF, that would indicate that there is any appetite to move jurisdiction XXX to the so-called grey-list, or to a higher risk status.

Why is this the case in the face of significant and meaningful data that would support such a move?

The simple and honest assessment is that jurisdiction XXX has financial size and scale, and there is no appetite to compromise commercial opportunity and established relationships by addressing some of the most fundamental challenges that we face in the financial crime compliance industry.

If jurisdiction XXX was anything other than the most powerful OECD jurisdiction, then this jurisdiction would have been swiftly placed on to the Patriot Act Section 311 ‘Primary Money Laundering List’, but it can’t be because jurisdiction XXX is the very same jurisdiction that lists these threats!

We continue to witness much smaller ‘offshore’ jurisdictions being lambasted and made pariah states, because of the inference that their under-performance is the key to unlocking the glaring inadequacies of the current global regime.

The current list of ‘non-co-operative’ tax jurisdictions that has been put-together with a level of thought and analysis that does not stand up to any close scrutiny, and that reads like a teacher conveniently picking on the ‘rather portly chap in the playground’ on school sports day, is yet another example of how it appears that the fight against criminal conduct has regrettably been reduced to political posturing.

The factors that drive jurisdiction risk continue to be driven by factors such as; sanctions; crime; terrorism and almost inevitably to those states that are listed at the ‘red-end’ of the Transparency International Corruptions Perceptions Index, where war, famine, chronic economic instability and weak judiciary lead public officials to continue to be susceptible to an offer of a bribe.

The fight against crime is too important to leave the status quo as it stands. We need to challenge ourselves, our people and our leaders to think more actively and to address the elephant in the room. We need to think like a criminal, and to truly address the risks that will have the greatest impact on the detection and seizure of illicit activity.

There is a wonderful phrase that I observed being used previously, also by GFI. It reads simply ‘hiding in plain sight’!

(Please note that my view of my dear old United Kingdom, and to that matter several of the other OECD nations is the same as for XXX. There is no prejudice in my views on this point!)



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