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Why money laundering checks and sanctions screening really matters

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Regulations aimed at detecting and preventing fraud, money laundering, terrorist financing and financial crime have more than tripled in recent years. While banks and corporates battle to stay ahead of the growing domestic and cross-border risks associated with the proceeds of crime, none can afford the financial and reputational cost of not adhering to these changing regulations and being caught in an illicit funds transfer.

This episode on the Payments Podcast features Sukh Vairea, Market development manager for risk and fraud explaining how to efficiently identify and mitigate money laundering and compliance risk, as well as providing guidance on what needs to be done in order to combat the ongoing threat.

 

Show notes transcript:

Rich Williams: Regulations aimed at detecting and preventing fraud, money laundering, terrorist financing, and financial crime, have more than tripled in recent years. It’s more important than ever that organisations are not only ensuring they’re complying with these regulations, but they understand exactly what they are, and the damage they can cause. If they don’t, they risk huge financial penalties.

I’m Rich Williams, the host of the payments podcast, and with me today is Sukh Vairea, Market Development Manager for Risk and Fraud. So Sukh, I think it’s probably a good place to start with an explanation of what the current challenges in the field of financial crime are?

Sukh Vairea: Yes absolutely. So, there’s a lot of challenges in financial crime, both domestically and internationally. If we look at the global picture, it’s estimated that over $2tn dollars is laundered every year, and in the European Union, the authorities estimate that only 1% of illegal funds are frozen or seized. Only 1%. So, 99% of illegal funds continue to flow through the financial system. It’s very complex, in terms of combatting financial crime, crime is constantly evolving.

Our perception, and how we respond to crime, has changed over the years. When your legal funds are generated through illegal means, and you’re exploiting and causing harm to others, it’s a big issue for society, it impacts all of us. People think well this hasn’t happened to me, it’s not my problem, why should I bother? Well, it’s happening to a lot of people. A lot of companies are being affected, a lot of banks have been fined, and a lot of people are at the centre of suffering, because of financial related activities, criminal activities.

Here in the UK, serious and organised crime is costing the UK economy over £37bn a year.

Human trafficking has gone up by 37% over the last year. So, that highlights the scale of the issue. There is a greater need for banks, regulators, law enforcement, to work to combat these hideous crimes.

Rich Williams: So, you mentioned that only about 1% of these elicit funds are being seized? Why is that number so little?

Sukh Vairea: Yes, a very good question. So, I always look back at the story of Hercules. In the lake lived a water snake, named the Hydra, and Hercules one day went out to seek out the Hydra. So, he fired burning arrows to draw out the Hydra from its hiding place, and then with his sword, started cutting off the Hydra’s head. Every time he cut off one head, two grew back in its place. He was only able to actually eventually take down the Hydra, with help from his cousin. So, in other words, he needed an ally.

I think this example shows that society is at a very similar crossroads. The fight against financial crime requires multiple players to work with each other, to prevent the laundering of proceeds of criminal activity. If you take down one threat, two emerge in its place. Governments aren’t doing enough, there needs to be a greater willingness to act. If we look at the Serious Fraud Office funding for this financial year, it’s only £57m. Now when I say only £57m, people will think, well hang on, well that’s quite a lot of money.

Well, in terms of complex cases, there can be the funding required to take a company, and prosecute a company, due to breaches of money laundering, or sanctions, or corrupt activities. There requires a huge investment, and a willingness to act.

So, in essence you need banks, you need more funding from the Government, you need banks to be working with regulators and more intelligence agencies, and we know that there’s a fractured relationship there, because banks are constantly being fined by the regulators. So, you’re asking them to kind of build bridges, and try to combat this crime, as a cohesive unit, and not as a standalone or a single entity.

Rich Williams: So, it’s interesting to think that this is all happening in the background somewhere every day, and we don’t really hear about all of it, or even most of it. So, what compliance breaches are happening at the moment, and getting the most attention?

Sukh Vairea: The Danske Bank money laundering scandal. It’s estimated that over US$250bn, not even million, US$bn, in funds, went through Danske Bank’s branch in Estonia. Two correspondent banks in the US who were supposed to be the last checkpoint, but ultimately failed, and then the legal funds just went into the global financial system.

Now the whistleblower recently said that there’s no chance in the world, that any of this money is ever going to be tracked down, and that criminals won’t lose a single scent, a single scent of $250bn, that’s frightening to hear.

So, in this scandal, one of the most profitable accounts was actually a company registered in the UK, under Companies House, named British Limited Liability Partnership. This was a fake account, it was a fake company, that had been set up to facilitate money laundering. In the UK, far too many companies have been getting away with this.

So, the question begs, what due diligence does Companies House perform? Well, when I look at their annual report, they only employ 950 people. There’s over four million companies registered in the UK. Last year alone, over 650,000 companies were set up. How do Companies House even have the manpower to conduct effective due diligence on companies, their shareholders, directors, and who is ultimately controlling, or has significant voting rights, over this corporate entity?

It’s a huge, huge issue. Only one person has actually been prosecuted, due to falsifying, and filing, inaccurate company information to the Companies House, only one person. That’s shocking.

Rich Williams: And who else has been in the spotlight?

Sukh Vairea: There has also been J.P. Morgan. So, they have recently settled a fine for over US$5m with the US Department of Treasury, and that was due to breaching sanctions. So, it was a worrying case actually. They didn’t have the right… or they didn’t have sophisticated technology, that was picking up on names, including hyphens, abbreviations, full stops, and as a result of that, J.P. Morgan were fined.

Now most people will probably hear that and say, “Well I’m not a big bank, I don’t need to worry, I’m not a J.P. Morgan.” But clearly, this is a big issue for a lot of banks. You have different name spelling variations on sanctions list.

If you look at the UK sanctions list, you have a person by the name of Joseph Kony, who is the leader of Lord’s Resistance Army, a gorilla group, formed in Uganda. Joseph Kony has killed thousands of people, in Uganda, and South Sudan, he’s wanted for over 12 accounts of crimes against humanity, and he appears 240 times on the UK sanctions list due to name spelling variations, and about 230 different dates of birth. Now that’s shocking.

One person has 230 dates of birth, in the sanctions list, potentially 240 matches for one person. How are you supposed to effectively conduct any form of screening and due diligence on him, and that’s one sanctions list.

What happens if you’re screening against four, or ten, or 15, or 20 different sanction lists, how many alerts are you going to get? How are you going to manage duplicates? The quality of data from the authorities is not good enough.

Rich Williams: So, the big question here then Sukh, what happens if organisations don’t comply?

Sukh Vairea: Fines, reputation damage, CEO will most likely be fired, shareholders and directors won’t be happy, share price will go down, you’ll lose money. The question is, is that a strong enough deterrent? Here in the UK you have the senior management certification regime which holds senior managers personally liable, and accountable, for market abuse. Expect to see tougher action. Do you want to go home, or do you want to go to jail?

Well banks, you may also have your licence revoked. In Singapore, a Swiss private bank, by the name of Falcon Bank, had its bank status withdrawn by the authorities, and had financial penalties imposed, due to lapses in AML.

There is also a question which begs around whistleblowers, and incentivising whistleblowers. So, we’re going to see more whistleblowing and reporting of corrupt practices. Whistleblowing has been at the core of reported market abuse, and the question begs, is it more profitable to service your clients, or to blow the whistle on corrupt activities?

If you’re a private banker, and I believe there was a case in the US where a whistleblower was paid about US$105m for blowing the lid on fraudulent activities. So, here in the UK, there will probably be greater incentives for whistleblowing, and for reporting criminal activities.

Rich Williams: So, this has been hugely impactful Sukh, thank you so much for that. I think it’s also important information for businesses to hear about. You also mentioned the fines that companies such as J.P. Morgan have faced for not being compliant, and the fact that it can happen to any organisation. So, with that being the case, what kind of things should organisations be focusing on, to stay ahead of all of this?

Sukh Vairea: So, firstly to ensure you have robust processes, procedures and controls in place. You want to anticipate any changes in the regulatory landscape. There’s a lot of geopolitical fluctuations that affect sanctions law. To give you an example, so the US Congress has asked the US Department of Treasury to provide a report on the current state of Chinese enforcement actions relating to sanctions in North Korea. So, a list of companies, banks, officials, that have been involved in trading with North Korea.

Now if sanctions are imposed, and I’m not saying they’re going to be, but these are all geopolitical fluctuations that may happen in the foreseeable future, sanctioning any Chinese companies, well we know that there’s over 4,500 State owned, or State controlled corporations in China. What happens if they are subject to sanctions? It becomes a compliance nightmare, and a big burden, for companies to perform effective due diligence.

So, organisations have to anticipate changes in the regulatory landscape, to ensure they have the correct processes, procedures and controls, to ensure those are effective, nimble, flexible, and to really be able to ensure they’re understanding where the risks are, how do they effectively mitigate those risks, and at the same time balance risk versus profitability?

Compliance, there’s a huge cost to compliance, there’s an even bigger cost of non-compliance. We’re going to see bigger fines, we’re going to see more individuals held accountable, sent to jail, in order to avoid this companies really need to ensure that there’s a tone from the top of the organisation, everyone understands their compliance obligations, and you have the correct infrastructure, and people, to really manage risks in a more effective manner.

Rich Williams: Sukh, thank you very much for your time today.

Sukh Vairea: Thank you very much.

73% of financial risk management professionals report that their organisations experienced attempted or actual payment fraud in 2016. Learn what you can do to win the fight

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