AML feature: Washing it clean

Everyone has to do their laundry, even if that once meant taking your toga down to the river and bashing it against a rock. But when it comes to the laundering of money things are still far from clean and, peculiarly, hygiene standards are different even in the major European countries. Justin Quillinan looks at the latest EU rules, their divergent application, and the effect of the downturn

Most crimes involve money somewhere along the line. Terrorists, drug dealers and fraudsters, such as Bernard Madoff and Allen Stanford, all thrive on it and are motivated by it, but their ill-gotten gains need to be ‘cleansed’ to appear as legitimate income. That is why anti-money laundering (AML) regulations and associated technology is so important in preventing the shadowy corners where criminality flourishes from proliferating.

The credit crunch has seen people trying to comprehend numbers with so many noughts that calculators can’t cope with the strain. At least those huge governmental bailout figures are, arguably, politically legitimate, although the trillion-plus pounds a year that is laundered in the UK alone to help finance terrorists, drug dealers and human traffickers, certainly isn’t. And yes, the Financial Services Authority (FSA) really does think the problem is that big. The problem, like any form of crime, will never go away in its entirety. But strides have been made since December 2007 in the UK when the third European Union (EU) Money Laundering Directive came into force, endorsing guidance from the Joint Money Laundering Steering Group (JMLSG), that a more risk-based approach to AML was permissible, actively targeting potential miscreants rather than following a ‘tick-box’ procedure.

Front line
While the credit crunch has shown financial problems and malfeasance to be a global phenomenon, the UK seems to be in the front line of the battle against AML. Catriona Shaw, financial crime consultant at the British Bankers’ Association, claims that the UK was advanced with systems and controls even before the recent regulations came into force, simply because it is such a global centre for finance that it needs to be prepared. She believes the new regime is working well – in the UK. “But if we broaden it out to other European countries it’s disappointing because as of December 2008 we had seven member states that had not implemented the third EU Money Laundering Directive and these included the big states, such as France, Spain and Italy. “The UK has a tradition of introducing things very comprehensively and quickly, and we get very cross when other people don’t do the same thing,” she says.

But have the new regulations bared their teeth yet in the UK? Sort of, but the FSA has so far only fined one small company a very small amount for having inadequate AML systems in place, although it was enforced even though no direct evidence of money laundering was found at the firm. Sindicatum Holdings was simply fined £49,000 for its lack of controls for verifying and recording clients’ identities. The company’s money laundering reporting officer (MLRO) was fined £17,500 for his role in the affair – the first time the FSA has fined such an individual officer. So the company did breach the rules, but it wasn’t laundering money, and the prosecution of the case had little impact – apart from perhaps providing an example to others – small fry though in a trillion pound illegal industry that taints far bigger fish in the sea.

MLRO ‘headache’
The role of the MLRO has become more important as a result of the regulatory changes over the last few years, says Tony Britten, director of financial crime management at Co-op Financial Services (CFS). “It’s changed to the extent that the job is no longer absolutely prescriptive and gives officers accountability for the new risk-based approach. But it’s given MLROs a bit of a headache.”

The past regime against AML and other fraud was a ‘tick-box’ exercise, rather than one based on risk assessment. “The old way inconvenienced everybody to be honest but our low-risk personal customers are now identified by electronic means, so dragging your ID down to the branch is no longer necessary,” says Britten. Sometimes, however, physical proof of identity is still required, such as passports and other documents showing a photograph, but the new system has speeded things up for most UK citizens, and the overall number of people required to provide such information has fallen. A blend of technology and regulation is the way forward, he believes.

There are a number of specialist technology companies in the field but as Mark Dunleavy, a financial services specialist at the vendor Informatica, comments: “For AML directives to have a real impact banks themselves must prioritise good data because electronic verification systems only work on the data that is fed into them. An off-the-shelf system won’t solve all problems. “If data is inaccurate, then the technology is totally undermined and banks might as well have poured the money they invested in them down the drain.” As an example he cites a person who only uses a credit card for purchases of up to £300 in the UK who has a right to expect their bank to pick up on a transaction for £2,000 in a foreign country. “Data is the missing, yet crucial, link in the battle against AML,” he says.

Negative reaction
There can of course be ‘false positives’ with any AML scoring technology, which mistakenly intercept transactions that appear problematic but are in fact legitimate, leading to negative customer reactions. “On-boarding new corporate customers can also be a major problem,” warns John Everhard, technical director of Pegasystems, a business process management firm. “With increasing pressure to meet their obligations under AML regulations, together with the growing need to protect their investment as the credit crunch bites, financial organisations need to be able to undertake effective yet rapid diligence,” he adds.

Also on the technology front, Tim Shaw, who is product manager at IMX Software, points out that financial regulators are now demanding a more dynamic risk approach that means firms have to demonstrate how they comply with the need to identify potential transgressions such as ‘structuring’ and other money laundering misdemeanours. Regulators are demanding more vigilance than before in the wake of Madoff and Stanford. “This forces banks and other reporting entities to put a lot more thought into how they manage their AML compliance technologically and procedurally,” says Shaw.

Tony Britten at CFS agrees that the role of technology is vital and that his bank’s AML spend is increasingly on dynamic profiling systems that are costly to provide but maintain accurate lists for cross-checking purposes. The impact of the credit crunch on the money laundering market has yet to be measured, if that’s even possible. Two factors though are emerging – the value of UK currency has declined in comparison to other currencies, such as the Euro, making the UK less attractive to swindlers around the world. The second is that property prices in the UK are declining, so mortgage-based fraud is coming more and more into the limelight.

Mortgage fraud
“There is an element of money laundering particular to mortgage fraud, with organised criminals buying up development properties and selling them on to cleanse money,” admits James London, manager of financial crime policy at the FSA. A recent news item in the UK national press for example highlighted police raids on a syndicate suspected of targeting Bradford & Bingley, whose mortgage arm has of course been nationalised, in an alleged £40 million buy-to-let fraud that covered more than 500 properties in the South East. In addition, police are looking closely at other ‘white-collar’ gangs comprising corrupt bank employees, lawyers and property developers who waxed fat during the boom years.

On the face of it, the fact that property prices are falling, firms are not giving out mortgages like they used to, and that more stringent controls are being applied might all sound like good news, says London. “It may be that criminals will have less incentive to launder money in the UK as the currency is worth less. I’m cynical, however, because the proportion of overseas criminals is small and our home-grown criminals are not going to pack up just because the value of Sterling is going down!” Vigilance is still required.

Despite the recent raft of regulations, a survey by the credit reference agency Callcredit that looked at the situation post-crunch, purported to show that a third of their respondents within law firms don’t fully understand what measures to tackle AML are all about. Fortunately, 90.6 per cent of respondents believe that electronic verification has enabled their firm to comply with AML rules and 88.5 per cent say electronic verification has saved their firm time in dealing with Know Your Customer (KYC) regulations – the standard that governs verification procedures. That is all well and good but you have to understand why electronic systems have helped you battle fraud, otherwise a vulnerability in your systems will eventually be found.

PEP files
The telemarketing manager at Callcredit, Helen Mann, believes that one of the most important recent changes has been the mandatory introduction of Political Exposed Persons (PEP) files. These relate to people who are in the public eye and whose details are more attainable than most, making them more likely to be the subject of corrupt intervention, and that goes for their family members and business associates as well.

KYC is essential, she says, because it is vital to do objective checks to find out whether the person a financial institution is dealing with is who they say they are. Following that come subjective checks and ongoing monitoring of the relationship and accounts to build and maintain an accurate profile. She agrees that the role of the MLRO is an “incredibly serious” one with more gravity than before, with officers having to bear the responsibility of ensuring that checks are done, staff are up to speed with complex legislation, and the MLRO has to be able to make a call as to whether there is a risk or not in doing business.

Final and pragmatic thoughts come from Catriona Shaw at the British Bankers’ Association trade body: “Money laundering can finance terrorists, yes, but oddly enough terrorists do get money from donations paid in ‘clean’ money. “Property deals are a source of income for them too and the Land Registry shows that – particularly in the London area – a proportion of deals are done in cash so the money doesn’t go through banks at all. If someone says the money came from their great aunt’s estate, there’s not a lot the banks can do about that.”

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