AML & ABC the 2014 requirements Simon Morris & Omar Qureshi - - PowerPoint PPT Presentation

AML & ABC – the 2014 requirements

Simon Morris & Omar Qureshi May 2014

Looking at …

1. The FCA policy 2. When the FCA takes action 3. What good can look like 4. The Serious Fraud Office: role & focus 5. Recent developments and trends 6. The SFO’s approach to ABC controls

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1. The FCA policy

We will continue to assess anti-money laundering (AML) processes and controls in major banks and those staff responsible for them. We will extend this during 2014/15 to some smaller firms that might present high levels of money laundering risk, as well as carrying out focused thematic work … We will have the following priorities … effectiveness of systems and controls within the regulated community …

FCA Business Plan 2014/15

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Looking broadly

Our top financial crime concerns at the moment

• Money laundering risk
• Corruption risk
• Investment fraud against consumers
• Insider dealing

Our focus is on

• Firms’ systems and controls
• Firms’ operating culture
• Behaviour of people whose job is business acquisition
• Those who run the business

Bob Ferguson FSA speech 13 September 2012

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What’s the requirement?

PRIN 3 Management and control

A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems

SYSC 6.3.1 [CMS version]

A firm must ensure its compliance policies and procedures include systems and controls that:

(1) enable it to identify, assess, monitor and manage financial crime risk; and (2) are comprehensive and proportionate to the nature, scale and complexity of its activities.

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The breadth of the regulatory concern

1. Focus – we focus our resources on firms that are particularly exposed to financial crime risk. 2. Priority – we prioritise protecting consumers rather than regulated firms. 3. Target – we seek out firms that are being used for financial crime, particularly money laundering and bribery/corruption. 4. Alert – for current and emerging financial crime risks, and ensuring firms are aware of the implications and how to mitigate. 5. Approach – intensive and intrusive, emphasising early intervention and credible deterrence where serious risks are identified ...

FCA: Anti-money laundering annual report 2012/13 (July 2013)

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The FCA’s supervisory approach

1. Specialist financial crime supervision team supports supervisors 2. Receives intelligence from a range of sources 3. Deals with c100 cases of money laundering risk annually 4. Conducts Systematic Anti-Money Laundering Programme assessments of 14 major banks 5. Carries out thematic reviews on high risk issues, assessing around 20 firms each time 6. The specialist team’s work assesses financial crime systems and controls in around 150 firms a year

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With more to come …

... we are exploring the extent to which our approach, including our SAMLP reviews, can be refined to allow us to use our existing resources to examine a larger sample of firms and/or review firms more frequently, particularly smaller firms that might present high levels of money laundering risk ... We will also continue our thematic work, with reviews of e-money/new payment methods planned, along with some follow up work on anti-money laundering controls over high risk/ PEP customers in smaller banks.

FCA: Anti-money laundering annual report 2012/13 (July 2013)

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2. When does the FCA take action?

Willis Habib Turkish EFG Guaranty JLT Standard

7.2011 5.2012 7.2012 3.2013 8.2013 12.2013 1.2014

ABC AML AML AML AML ABC AML No rationale Poor Procedure Poor procedure Poor procedure Poor procedure Not assess risk Poor DD Poor EDD Poor CDD Poor EDD Poor CDD Poor EDD Not review Not review S&C Not get approval Poor DD No training No training Not monitor Poor records Poor monitoring Not follow policies Poor monitoring

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Or in words …

Coutts failed to ...

• 1. assess the risks
• 2. gather sufficient information about its prospective customers to

establish their sources of wealth and income;

• 3. establish the source of the funds;
• 4. constantly apply monitoring;
• 5. keep the information up-to-date; and
• 6. scrutinise transactions appropriately.

Coutts (Final Notice March 2012)

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And liability for the MLRO?

He ... breached APER 7 by failing to take reasonable steps to ensure that firm had adequate processes and procedures for: 1. assessing the money laundering and financial crime risks; 2. ensuring his function was adequately resourced; 3. carrying out checks to screen customers; 4. carrying out customer due diligence procedures; 5. adequately carrying out on-going monitoring; and 6. adequately training. Sudipto Chattopadhyay (Final Notice May 2010)

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And again ...

Mr Finger failed to:

• 1. identify the potentially suspicious nature of multiple payments

effected by a client despite being presented with clear indicators;

• 2. undertake adequate assessment as to whether the activities could

constitute any sort of suspicious activity; and

• 3. properly consider his responsibilities in relation to this activity

and report it to the necessary authorities on a timely basis. Laurence Finger (Final Notice December 2010)

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3. So what are the elements of good practice?

A wide range of sources 1. JMLSG 2. Small Firm Financial Crime Review FSA May 2010 3. ABC in commercial insurance broking FSA May 2010 4. Good practice in banks’ defences against investment fraud FSA June 2012 5. AML & ABC for Asset Managers FCA October 2013 6. FCA’s Financial Crime: a guide for firms April 2014 7. BBA Anti-Bribery and Corruption Guidance May 2014

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What can good look like?

1. Senior management leads

a. Oversees b. Understands c. Ensures quick response d. Up to date e. Defines responsibilities f. Gets internal & external MI g. Sets the tone

I. Remuneration II. Incentives III. Approves relationships

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2. AML/ABC properly resourced

a. Financial crime risks coordinated b. Information is shared c. Properly resourced d. Responsibility apportioned e. Issues escalated f. Business engaged with

3. Gap analysis performed

a. Regular & informed b. Challenged & benchmarked c. Implemented & reviewed

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4. Compliance & GIA

a. Trained & effective

5. Policies & procedures

a. Comprehensive b. Up to date c. Adequate d. Reviewed e. Accessible f. Monitored against

6. Training

a. Tailored & tested against

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7. Staff

a. Vetted, repeatedly b. Agencies checked c. Changes noted

8. AML/ABC

a. MLRO & resources adequate b. Clear risk-attuned procedures c. Trained & monitored d. Clear reasoned records of take on & thereafter

9. ABC

(a) risk based procedures; (b) train; (c) DD; (d) monitor; (e) records

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The SFO focus and approach to anti-bribery controls

Omar Qureshi T: +44 (0) 207 367 2573 E: omar.qureshi@cms-cmck.com

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• 4. The SFO

− Mission statement:

“to investigate and, where appropriate, to prosecute cases of serious or complex fraud, bribery and corruption and to assist overseas jurisdictions with their investigations into serious or complex fraud and corruption” (SFO Annual Report and Accounts 2012-13)

− Acceptance criteria:

• Cases which undermine UK commercial/financial PLC in general and the

City of London in particular

• Cases where the actual or potential loss involved is high
• Cases where there is a very significant public interest element
• Cases involving new species of fraud

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The SFO’s operations

− Seven operational divisions:

• Two deal with fraud – e.g.

− Fraud by false representation/ failing to disclose information/ abuse of position (Fraud Act 2006)

• Dishonestly … intending to make a gain for himself or another or cause loss to another
• Two deal with bribery and corruption – i.e.

− Offer/promise/give or request/accept/agree to receive a advantage involving improper performance of a relevant function/activity − Offer/promise/pay an advantage to a foreign public official intending to influence and obtain/retain business or a business advantage − Corporate failing to prevent bribery by someone acting on its behalf (subject to “adequate procedures” defence)

• One deals with proceeds of crime (i.e. money laundering/ restraint/ confiscation etc)
• One deals with intelligence
• One deals with strategic relations (including requests from foreign jurisdictions asking for

investigative assistance)

− Interacts with the NCA, police, overseas authorities and regulators

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The SFO – intelligence gathering

− Dedicated intelligence unit − “We are greatly enhancing our intelligence capacity. If corporations do not self-report when they have discovered past misconduct, we may well find

• ut anyway and call them in.” (David Green, director, SFO – 26 March

2013) − Gathers information from numerous sources including:

• SARs (NCA’s FIU)
• Other law enforcement agencies
• FCA (and other regulators)
• Overseas authorities
• Whistleblowers
• Press
• Self-reports

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• 5. Recent developments at the SFO

− New director, David Green QC, appointed in April 2012 − Role and purpose of the SFO as investigators and prosecutors has been restated − Recalibration of acceptance criteria to focus on topmost tier of serious and complex fraud, bribery and corruption − Enhanced intelligence capability − Removal of old guidance on self-reporting and facilitation payments − Secured “blockbuster” funding with the HM Treasury (e.g. LIBOR and Rolls Royce) − Introduction of deferred prosecution agreements (DPAs) as part of new toolkit for dealing with corporate offenders − BUT: no corporate prosecutions yet

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The SFO – recent trends

− As at March 2013, SFO had 65 live cases:

• 23 criminal investigations
• 14 post charge, either awaiting trial or in trial
• 13 post trial; confiscation or awaiting appeal
• 15 under development in the intelligence section (which included

projects which predate and post-date the Bribery Act 2010)

− For 2012-2013 period:

• 12 trials for 20 defendants
• 14 convictions (70% success rate)
• Average length of sentence – 71.3 months
• 2 CROs
• Total recoveries = £11.4m

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The SFO – recent investigation trends

No public statements as to specific targets/focus but recent (open) investigations include: − Money laundering concerns arising out of suspicions of corruption in Ukraine (US$ 23m of assets in the UK frozen) (April 2014) − Allegations of bribery and corruption against Rolls Royce (December 2013) − Allegations of bribery and corruption against G4S and Serco in relation to electronic monitoring contracts (November 2013) − Allegations of corrupt arrangements between Barclays Bank and Qatar Holdings in Qatar as part of the bank’s emergency cash call in 2008 (August 2012)

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The SFO – recent prosecution trends

Recent/ ongoing prosecutions include: − Numerous individuals in connection with LIBOR (from Barclays, RP Martin Holdings Limited, UBS and Citigroup) (conspiracy to defraud) (June 2013 – February 2014) − Two individuals who created and marketed various unregulated financial products to individual investors through regulated IFAs (fraud by misrepresentation and forgery) (Kathryn Clark and Richard Clay, former partners of Arck LLP) (November 2013) − A UK based printing company specialising in security documents such as ballot papers (Smith & Ouzman Ltd) and four individuals (two directors, an employee and an agent) charged with offences (corruptly agreeing to make payments – s. 1 Prevention of Corruption Act 1906) (October 2013) − Four individuals (three officers of Sustainable AgroEnergy plc and an IFA) regarding the promotion and selling of “biofuel” investment products to UK investors (conspiracy to commit fraud by false representation/to furnish false information and

• ss. 1(1) and 2(1) of the Bribery Act) (August 2013)

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The SFO – recent developments - DPAs

− Available only for corporate economic crime offences − Discretionary tool, only available if:

• Prosecutor is satisfied that there is:

− (1) sufficient evidence to establish a realistic prospect of conviction; or − (2) reasonable suspicion of offence based on admissible evidence and reasonable grounds to believe further evidence would be found in time to meet the test in (1); and − (3) it is in the public interest to enter a DPA. (If not, then continue investigating or consider a CRO.)

• Full extent of offending has been identified

− DPA must be in the interests of justice, with the terms of the DPA being fair, reasonable and proportionate − Financial penalties to be “broadly comparable to a fine that the court would have imposed on conviction for the alleged offence … following a guilty plea.”

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The SFO – recent developments - DPAs

Is it in the public interest?

− The more serious the offence, the more likely prosecution required − Normally prosecute unless public interest factors against prosecution clearly outweigh those in favour of prosecution − Prosecutor must consider all relevant Codes/Guidance including:

• The DPA Code of Practice/ Code for Crown Prosecutors
• Joint Prosecution Guidance on: (1) Corporate Prosecutions (2) Bribery Act 2010

− SFO expects early and full disclosure of information to receive credit for self-reporting:

“self-report means telling us something we do not already know…a company which only provides information to us after we have raised concerns with it cannot derive the same level of credit - if any - as a company which, of its own volition, notified us of something which we did not already know about.” (Alun Milford, GC, SFO – 26 March 2014)

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The SFO – recent developments - DPAs

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• 6. The SFO’s approach to ABC controls

− SFO does not supervise, advise or monitor controls – it investigates and prosecutes bribery and other serious and complex fraud − No requirement under the Bribery Act to have systems and controls in place to prevent bribery BUT can be:

• a defence to the corporate offence (s. 7 Bribery Act); and/or
• a mitigating factor against prosecution (all economic crimes); and/or
• a factor in deciding whether to invite the offender to negotiation a DPA

(all economic crimes); and/or

• a mitigating factor for sentencing purposes (all economic crimes)

− Potential for “failure to prevent” offence being extended to other economic crimes e.g. fraud and money laundering, with expectation

• f a similar “adequate procedures” defence

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“Adequate procedures” defence

− Ministry of Justice Guidance about procedures which relevant commercial

• rganisations can put into place to prevent persons associated with them

from bribing (the MoJ Guidance – March 2011)

• Broadly adopts similar approach to FCA
• Notes that regulators and relevant trade bodies might highlight examples
• f good or bad practice in their publications
• Six principles:

− Proportionate procedures − Top-level commitment − Risk assessment − Due diligence − Communication (including training) − Monitoring and review

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“Adequate procedures” defence

− However:

• No judicial consideration/ determination to date of what constitutes “adequate

procedures”

• Comments made by some members of the judiciary cast doubt on how much

weight will be attributed to the MoJ Guidance: − “a company could be convicted under the [Bribery] Act even if it acts in accordance with the [MoJ Guidance]” − The MoJ Guidance was issued by Parliament and was of comparable authority to an academic text (OECD Working Group: “Phase 3 Report on implementing the OECD’s Anti- Bribery Convention in the United Kingdom” – March 2012)

• There have been very few pre-Bribery Act corporate prosecutions – all pleaded

guilty and no significant judicial consideration of internal controls as mitigating factor

• The courts also appeared unconvinced of the efficacy of monitors (Innospec)

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“Adequate procedures” defence

− Very little commentary from the SFO as to what may constitute “adequate procedures”

• “The Guidance is designed to be of general application…The question of

whether an organisation had adequate procedures in place to prevent bribery in the context of a particular prosecution is a matter than can only be resolved by the Courts taking into account the particular facts and circumstances of the case.” (Chris Walker, Head of Policy, SFO – 15 February 2011)

• “We welcome the development of case law and we will bring test cases

where possible. As for the meaning of “adequate procedures”…it cannot mean procedures which will always prevent bribery, but surely requires a proportionate approach.” (David Green, Director, SFO – 26 June 2012)

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Conclusions

The SFO

• No requirement to have controls in

place under the Bribery Act but no defence without

• Implementing some level of

controls may be a mitigating factor, even if they are not as comprehensive as may be expected

• Disparities between corporates’,

SFO’s and FCA’s expectations about what may be required

• Guidance from the court is needed

to clarify the position

The FCA

• You are expected to do your

homework

• And a gap analysis
• And act, especially on
• Management
• Resource
• procedures
• Training
• Monitoring

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Any Questions?

Simon Morris T: +44 (0) 207 367 2702 E: simon.morris@cms-cmck.com Omar Qureshi T: +44 (0) 207 367 2573 E: omar.qureshi@cms-cmck.com

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