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Summary of relevant output on money laundering and financial crime

Period 1st January to 31st March 2011

Sites Reviewed

British Bankers' Association (BBA) www.bba.org.uk
Committee of European Securities Regulators (CESR) was www.cesr-eu.org
Commodities Futures Trading Commission (CFTC) www.cftc.gov
Financial Action Task Force (FATF) www.fatf-gafi.org
Financial Services Authority (FSA) www.fsa.gov.uk
HM Treasury (HMT) www.hm-treasury.gov.uk
Joint Money Laundering Steering Group (JMLSG) www.jmlsg.org.uk
National Criminal Intelligence Service (NCIS) www.ncis.co.uk
Serious Organised Crime Agency (SOCA) www.soca.gov.uk
Transparency International (TI) www.transparency.org.uk
Deloitte Forensic Center dfc@deloitte.com

Issues from this quarter

How your firm might be affected by financial crime

There are a number of ways your firm could be affected by financial crime, for example:

a criminal using your firm's services to disguise the source of illicit funds; a customer defrauding your firm;
a customer being defrauded by a third party because of your firm's actions (for example unintentionally allowing the customer's details into other people's hands);
helping a customer to defraud a third party, such as HM Revenue and Customs, knowingly or not; and
a staff member defrauding your firm.

If you know about or suspect money laundering or terrorist financing, it should be reported to the Serious Organised Crime Agency (SOCA). More information is available on the SOCA website.

What you need to do

There were weaknesses across the small firms in the implementation of systems and controls to reduce the risks from financial crime. Firms need to:

ensure they have assessed the financial crime risks their firm faces;
have proportionate risk management systems and controls in place to address the risk of financial crime;
be able to demonstrate that the risk assessment is reviewed regularly; and
senior managers should understand the identified risks and take appropriate and proportionate action to mitigate them.

Examples of good and poor practice as identified by the FSA

Good practice

Data security
A firm produced a data security review of its business, which had been promoted by their external consultants, which they largely modelled on the FSA factsheet - data security.
Training
A firm used an on-line training website. The firm believe that the training was of good quality and included separate models on financial crime which were compulsory for staff to complete. Staff were also required to complete refresher training. An audit of all training completed was stored on-line.
Data disposal
A firm used a third party company for all paper disposals, using securely locked bins provided. All paper in the firm was treated as confidential and 'secure paper management' was encouraged throughout the firm, enhanced by a clear desk policy.
Physical controls
Staff were prohibited from using the internet and personal email accounts. USB ports had been disabled and laptops were encrypted.

Poor practice

Fraud
A firm had little knowledge of fraud, had undertaken no fraud risk assessment yet considered the business to be low risk.
Records
A file review conducted revealed disorganised files and missing KYC documentation in three of the five files reviews. Files did not always include a checklist.
Responsibilities and risk assessments
A risk assessment had been undertaken by a firm's compliance consultant but the firm did not show any real appreciation of the financial crime risks in it business. The risk assessment was not tailored to the risks inherent in the business.
Suspicious Activity Reporting (SAR)
A Money Laundering Reporting Officer (MLRO) did not demonstrate any knowledge of how to report SAR to SOCA, what to report to SOCA or how to draft a SAR. The firm's policies and procedures contained a proforma SAR but this was not a document the MLRO was familiar with.

Source: FSA/PN/001/2011 06 January 2011

Further FSA news on financial crime:

The Financial Services Authority (FSA) has fined Barry Williams £25,000 and banned him from working in regulated financial services for his part in a scheme that defrauded leading London market insurers of more than £2 million.
Whilst not a participant in the fraud, as a director of Surety Guarantee Consultants Limited (SGC), Williams deliberately ignored his responsibilities as an approved person, turning a blind eye despite clear warnings about the true nature of the scheme.
SGC was established in 2004 to write a form of insurance known as surety bonds. Between January 2005 and August 2006 SGC held binding authorities with London market insurers, Markel and QBE (through its agent Amalfi) and wrote business that exceeded its authorised limits, exposing Markel and QBE to greater liabilities than they had agreed. In doing so, SGC made secret profits and withheld over £2 million that should have been paid to the insurers.
When SGC was audited by the insurers it produced false documents intended to show that it had kept within the terms of the binding authorities.
Williams did not profit directly from the fraud, however, he deliberately ignored serious concerns about signing surety bonds on behalf of the insurers in excess of the agreed limits. He was also found to have lied to the insurers to hide the scheme, allowing himself to become involved in the fraud.
Margaret Cole, FSA director of enforcement and financial crime, said:

"In believing that he could be a 'sleeping director' without incurring any responsibility, Williams did not take his accountability as an approved person seriously. He recklessly abused the trust and confidence placed in him by leading London market insurers and by doing so enabled secret profits to be made from the fraud by his colleagues.

"The London market relies on the trust and integrity of those who work in it. This sort of breach of fiduciary duty and lack of integrity amounts to very serious misconduct and will not be tolerated in the insurance industry or anywhere else in financial services. We will continue to take action against anybody else tempted to act in this way."

From a proposed fine of £50,000, The Upper Tribunal (Tax and Chancery Chamber) reduced the penalty to £25,000 in light of Williams' personal circumstances. It upheld the decision to ban Williams and withdraw his existing approval.
In July last year Timothy Higgins and Clifford Felstead of SGC and Ralph Brunswick of Templeton Insurance were banned from working in regulated financial services for their role in the fraud. The action against Barry Williams brings the FSA's enforcement action against all those active in the fraud to a close.

New sanctions against Iran (Source HM Treasury)

New EU sanctions were recently introduced against Iran. These place restrictions on insurers, reinsurers and intermediaries and their dealings with Iranian public or private bodies. We have summarised some key aspects here.

What is not allowed?

Providing insurance and reinsurance to:
- Iran and its government, public bodies, corporations and agencies;
- an Iranian person, entity or body other than a natural person; or
- a person acting on behalf or at the direction of a person referred to under (i) and (ii), which includes company subsidiaries located outside of Iran.
Making funds available to specific individuals and organisations, subject to the freezing of funds and economic resources listed in Annex VII of the regulation (e.g. the Islamic Republic of Iran Shipping Line, Persia International Bank plc, etc) without approval from the UK government.
funds to and from an Iranian person, entity or body, unless the transfer is notified to the Treasury (if €10,000 or above) and (if not for Transferring foodstuffs, healthcare, medical equipment or for humanitarian purposes) submitted for prior authorisation (if €40,000 or above).
Opening subsidiaries, branches, joint ventures or representative offices in Iran.
Providing access to the EU bond market to: i) Iran, its government and its public bodies; ii) Iranian credit and financial institutions and their branches and subsidiaries wherever located; iii) any person acting on behalf of Iran or an Iranian credit or financial institution; and iv) any legal person owned or controlled by anyone falling within the previous categories.
Knowingly or intentionally circumventing the prohibitions.

What is still allowed?

Continuing with contracts entered into before 27 October 2010, including paying claims (although contracts may not be renewed after expiry).
Providing insurance/reinsurance to Iranian private individuals located in Iran or elsewhere (unless they are acting on behalf of an Iranian organisation, e.g. an employee of an Iranian company acting in his official capacity).
Providing third party or compulsory cover (e.g. employers' liability cover, motor cover) to Iranians based in the EU.
Providing insurance/reinsurance to the non-Iranian owners of a ship/plane/vehicle chartered by Iranians.
Providing insurance/reinsurance to non-Iranian owners of ships and planes when they are in Iranian waters or airspace.

What firms should do

You should take note of these changes and review your business to ensure you are complying with the new requirements.

Firms that place business via insurance and reinsurance pools should also make a particular effort to ensure that they are aware of who is participating in these pools, and that the participants are not subject to financial sanctions.

The Treasury's guidance on the new Iranian sanctions is available on their website

News clip from The Times February 2011

A conman known as Mini Madoff after he swindled investors in a £14m fraud was jailed in February for eight years. Terry Freeman convinced clients of GFX Capital Markets the he was a wizard who could make money even as markets plummeted. He convinced hundreds of ordinary investors to entrust him with their money and leaves behind over three hundred victims. Freeman had a serious criminal record. Bob Wishart from the City of London police's Economic Crime Directorate said "In these times of uncertainty and low interest rates we would urge investors to be mindful of criminals offering above average high yields of return." The Times 15 February 2011.

British Bankers Association

Worth reading is the BBA response to the bribery Act having worked woith the Law Commission during its review of bribery law. The BBA fully supports the bribery act and says: Clean markets are a vital basis for the continued and future prosperity of the City of London and wider European and global financial markets. In spite of concerns from senior business figures in the City about the vagueness of some of the guidance to this act it is not going to go away and any day soon the final guidance will be published and the law will be enforced where necessary. It is vital that everyone understands where to draw the line between corporate hospitality and bribery.

A reminder to FSA regulated firms after recent events in the Middle East

Recent developments in the Middle East have served to highlight the continuing need for vigilance and robust systems and controls in dealing with actual or potential politically exposed persons. Financial institutions should be aware of the possible impact these events may have on patterns of financial activity, when they assess risks related to particular customers and flows of funds.

SOCA report the conviction of three Midlands based money launderers. (February 2011)

Three men have been jailed for their roles in an international money laundering racket which moved over a million pounds of drugs money every month. The trio travelled around the UK collecting up to £160,000 at a time in plastic carrier bags from criminal associates. They made sure their meetings took place on residential street corners with no CCTV coverage and lasted no longer than 60 seconds in an attempt to avoid attention. Unbeknown to them, officers from SOCA were watching their every move.

The men used a method of money laundering known as "cuckoo smurfing". Criminals replace legitimately obtained money, intended for legal transfer into bank accounts, with the proceeds of crime. The original untainted money can then be used overseas.

In this case, the men would receive text messages from criminal associates in Dubai, Afghanistan and Iran with instructions for picking up drugs money. Follow up faxes would detail how much to pay into the bank accounts of foreign students who were expecting money from back home. Their parents were unaware that the remitters they used to transfer money were corrupt.

Transparency International are calling for urgent changes in legislation to enable the freezing of assets following the events in the Middle East. The Executive Director of TI said in a recent statement

"Recent events in the Middle East have thrown into sharp relief the need for urgent action by the UK to freeze stolen assets and help to return them, as well as prevent more dirty money from entering the UK. The UK has a moral obligation to co-operate in freezing and repatriating such illicit assets, because they should never have found a safe haven here in the first place. Our plan, and coordinated action with other jurisdictions, will show the citizens of victim countries that we have moved beyond rhetoric and are doing something concrete to help them'."

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