Quarter 1 2016

7th April 2016

Summary of Relevant Output on Money Laundering and Financial Crime


Period 1st January 2016 to 31st  March 2016


Sites Reviewed for this bulletin:


Financial Conduct Authority (FCA)

Prudential Regulation Authority (PRA)

British Bankers’ Association (BBA)

European Securities and Markets Authority (ESMA) 

Commodities Futures Trading Commission (CFTC)

Financial Action Task Force (FATF)

HM Treasury (HMT)  

Joint Money Laundering Steering Group (JMLSG)

National Crime Agency (NCA)

Transparency International (TI)

Deloitte Forensic Centre (DFC)

Credit Industry Fraud Avoidance System (CIFAS) 

Financial Fraud Action UK (FFA)

International Compliance Association (ICA)

Emerald: Journal of Financial Crime (JFC)

Financial Fraud Action, Police: The DCPCU

BBC Business

Telegraph Finance

Financial Times

New York Times









Each quarter, CPA Audit looks for the most interesting, relevant and pressing financial crime news, in order to engage your interest and open your eyes to potential risks your firm might face. Some of these cases you may have heard about on the news, whilst others may be more obscure.




The aim of this summary is to give you a picture of financial crime across the first period of 2015 – the cases below demonstrate the vital importance of having systems and controls in place to protect against financial crime potentially impacting your own business.




Under the spotlight: Panama Papers release exposes fatal flaws in financial crime prevention efforts




This April, the BBC, the Guardian, and a number of other global news organisations dramatically publicised the largest leak of confidential information in history – an explosive cache of more than 11.5 million documents obtained from the highly secretive Panamanian law firm Mossack Fonseca. Since early 2015, when the documents were first passed from an unknown source to a German newspaper, a team of journalists from across the globe had been secretly sifting through the huge volume of documentation to reveal a complex and wide-reaching web of tax evasion, money laundering, fraud and regulatory arbitrage, aided and abetted by Mossack Fonseca’s lawyers and accountants. In total, 143 high-profile politicians have been implicated in the leak, along with countless private individuals who were often using Mossack Fonseca’s discreet services to hide money and assets from their home jurisdictions.




The Panama Papers already claimed their first victim this week, Icelandic Prime Minister Sigmundur Gunnlaugsonn, who was forced to resign after the leaks revealed that his wife held millions of dollars’ worth of shares in Icelandic banks through a shell company – banks that the prime minister had helped to save through government programmes. Gunlaugsonn is not the only politician feeling the heat from the revelations, with UK PM David Cameron facing intense media pressure to publicise his tax returns following revelations that his father was a Mossack Fonseca client who used the firm to help set up an investment fund in the country.  




Much of the media attention in the UK has been focused on Panama’s status as a tax haven, allowing wealthy individuals to move money out of the UK and take advantage of the small Central American country’s favourable income tax laws. Whilst this clearly causes ethical and moral concerns, perhaps the more disquieting revelation is how lax regulation and excessive secrecy can enable criminals and their associates to hide huge amounts of money and assets, despite the best efforts of global authorities.




Nowhere was this more clearly demonstrated than the $2bn trail that led directly to Russian president Vladimir Putin’s inner circle. The documents revealed that Sergei Roldugin, a long-standing friend and close associate of Vladimir Putin, helped to facilitate transactions of millions of dollars at a time to secretive shell companies based in the British Virgin Islands, often with no apparent legitimate business purpose. On one occasion, a company was loaned $200m, with the rights to the loan subsequently bought by a Roldugin company for $1 – effectively gifting the shell company the entire sum.




Whilst there is nothing inherently illegitimate about offshore companies, their use in this way would strongly suggest that they were used as vehicles to hide huge amounts of money from the public and relevant authorities. Creating shell companies and moving money between them in the form of loans and invoices for non-existing services rendered is a popular method of “layering”; that is, putting money through a series of conversions or movements to distance it from its original source.




Indeed, other revelations show that at the highest level, Mossack Fonseca’s lawyers knew that they were helping to conceal the proceeds of crime. In 1983, the Brink’s Mat depot near Heathrow Airport was raided by a gang of criminals who made off with £26m worth of gold bullion. More than two-thirds of this has never been recovered by the authorities, and now it is clear why; the Panama Papers reveal that the firm’s founder Jurgen Mossack was helping fugitive robber Gordon Parry re-invest the proceeds into a number of front companies in secrecy jurisdictions such as Switzerland, Liechtenstein, Jersey and the Isle of Man.




The UK, the EEA, and many other jurisdictions worldwide have robust AML procedures that are intended to detect the kind of suspicious activity the Panama Papers uncovered. Opening a business relationship with a financial services firm will normally require applicants to disclose evidence of their identity and the identity of companies’ ultimate beneficial owners as part of the KYC process. Whilst many firms and individuals find this process burdensome, this is a vital tool for maintaining the integrity of the UK financial system and makes it more difficult for criminals to hide trails of money from the authorities.




However, the Panama Papers clearly demonstrate that robust AML and financial crime programmes are fatally weakened by jurisdictions and firms that do not take their responsibilities seriously. Mossack Fonseca was able to leverage the comparatively lax regulatory regimes of Panama and elsewhere to allow individuals to hide huge sums of money; schemes which may never have come to light if the country’s AML regime was working effectively.




Despite the best efforts of countries with robust AML laws, at the moment it is clearly too easy for criminals to circumvent the whole process by going offshore to secrecy jurisdictions in order to hide their money. After money has been distanced from its original source in this way, it can re-enter financial systems in the UK and elsewhere with the appearance of being perfectly legitimate.




Clearly, more needs to be done to plug the gap and force jurisdictions such as Panama to legislate for greater openness in business. Otherwise, criminals will continue to leverage offshore jurisdictions as a key element in their money laundering, terrorist financing and tax evasion toolkit.






FCA dropping reviews of banks could negate efforts to prevent financial crime




Since the financial crisis, both the FSA and FCA have acknowledged that the culture at financial services firms played a significant role in the system’s demise. As such, many of the FCA’s principles and policies have specifically emphasised the importance of ethical behaviour of employees and management at firms. Consequently, the FCA announced in its 2015/16 Business Plan that it would be conducting a thematic review on whether culture change programmes are encouraging the right behaviour at firms. However, the decision to carry this out was dropped in December 2015, to the outcry of many. Though the prevention of financial crime was not a specific aim of the culture review, firms are expected to have effective, proportionate and risk-based systems and controls in place to ensure their business cannot be used for financial crime. Thus, the culture review would have allowed the FCA to expose weaknesses in such systems and controls which allowed firms to commit financial crime.  In fact, the Business Plan itself highlights that firms which ‘fail to place adequate emphasis on implementing necessary systems and controls are more vulnerable to being used to further financial crime’. This, at least in theory, shows the two objectives are inherently linked.




Perhaps the best demonstration of the importance of a firm’s culture in preventing financial crime in practice would be a case study of HSBC’s relationship with financial crime in the past year. In June 2015, the bank was fined a record £28 million fine to settle a probe into alleged aggravated money laundering by prosecutors in Geneva. The premises of the group’s Swiss private bank entity were investigated by authorities after a former employee leaked a list of thousands of suspected tax evaders to French authorities in 2008. This led to allegations that the banks aided in the hiding of millions of dollars for arms dealers while also helping others avoid taxes. In its statement, HSBC said its Swiss private bank “has acknowledged that the compliance culture and standards of due diligence in place in the bank in the past were not as robust as they are today”.




At the occurrence of the event, the FCA claimed it was looking into the practices within the bank, after acknowledging that it had only become aware of the activities in the Swiss bank from reports in news publications.  However, despite the failures, it was revealed in January that HSBC would not be subject to any action from the FCA as the regulator quietly dropped the investigation months before its formal announcement.




Unfortunately, HSBC is not the only example of the failure of systems and procedures in relation to preventing financial crime. Another demonstration is Barclays £72m fine in 2015 in relation to due diligence failures on ultra-high net worth clients.   The failings related to a £1.88 billion pound transaction that Barclays arranged and executed in 2011 and 2012 for a subject number of clients. The clients involved were politically exposed persons (PEPs) and should therefore have been to enhanced levels of due diligence and monitoring by Barclays. Though on paper the failure is one of systems and procedures, the role of culture here is inherent when due diligence for such critical persons is completely overlooked.  




In light of this, the fact that the FCA has avoided intrusively investigating the culture at banks raises questions of the regulator’s approach to supervising financial services firms and whether it is returning to a ‘light touch’ approach of which its predecessor FSA was accused.




Navinder Sarao potential extradition to the US for role in triggering ‘Flash Crash’




The flash crash occurred on May 6th 2010 when the United States experienced a trillion dollar stock market crash which lasted for about thirty six minutes causing $1 trillion in market value to disappear temporarily. It took the US authorities fives years to point to a cause of this crash, ultimately leading to allegations aimed at Navinder Sarao for ‘spoofing’.  




US authorities claim that during the flash crash, Navinder Sarao allegedly made $878,000 by pushing the price of S&P E-mini contracts lower and then entering the market with orders under the current price, which were frequently modified and cancelled. This was followed by the placement of genuine orders to affect an advantage of the price drop. Essentially, Sarao is alleged to have a modified computer software to “spoof” the market by placing huge orders on the Chicago Mercantile Exchange which he never intended to execute and were later cancelled. The United States has recognised this act of spoofing as illegal for which Navinder Sarao is facing twenty two charges which carry sentences totalling a maximum of 380 years. As such, the US is in the process of seeking Navinder Sarao’s extradition.




However, a closer analysis of the situation reveals a much more complicated image as extradition can only occur when a crime is considered illegal in both countries: the country the individual is being extradited from and the country the individual is being extradited to. Indeed this is the crutch of the argument currently being made by Navinder Sarao’s lawyers as they put forward the argument that the offences he is accused of committing are crimes under UK legislation. James Lewis QC, a representative of Mr Sarao, said: “The key question for this court is whether the conduct of Mr Sarao amounts to a crime in the UK. Quite simply it does not. There’s no English crime of spoofing.” This is based on the fact that Navinder Sarao was placing genuine orders that exposed him to risk if they were executed.




However, on March 23rd the District judge Quentin Purdy at Westminster magistrate’s court ruled that Sarao’s alleged actions between 2009 and 2014 did in fact constitute a crime in the UK. Interestingly though, despite reaching the judgment that Sarao should face trial in the US, Purdy claimed that he could not have been “wholly or mostly” at fault for causing the flash crash in its entirety.  




The case, however, is far from over: Theresa May has two months to consider whether or not Sarao’s extradition is justified, after which Sarao’s legal team will have two weeks to lodge an appeal.




Bribery Act’s extra-territorial reach demonstrated by Sweett Group PLC corporate conviction




In July 2014, the Serious Fraud Office (SFO) began an investigation into the Sweett Group PLC. This led to the discovery that a Middle Eastern subsidiary of the Sweett Group was paying bribes to Al Badie, a senior official at Al Ain Ahlia Insurance Company, in order to secure a contract to consult on the development of the Rotana Hotel in Abu Dhabi. In total, £680,000 in bribes were paid through Cyril Sweett International in order to win a contract regarding a £63m luxury hotel located in Dubai. The SFO found that the money was paid through a subcontract to a company controlled by Khaled Al Badie which then granted the contract for project management and cost consulting to Sweett.




Whilst sentencing the company, Judge Martin Beddoe spoke of taking in account the fact that “corrupt payments were made under that corrupt agreement for no less than 18 months” and that the company intentionally attempted to mislead the SFO after the agency had opened an investigation.


In that hearing, lawyers for Sweett argued they would not be able to afford to pay more than about £2m. The company said at an earlier hearing it has paid as much as £3m investigating the case.




Douglas McCormick, CEO of Sweett, said: “We have strengthened our internal systems, controls and risk procedures, and refined our strategy, to ensure this company should never again fall victim to such conduct.” In contrast, a spokesman of Al Badie said “Mr Al Badie strongly denies any wrongdoing. Any engagement was under a properly constituted legal contract”.




This case and its outcome reveal a victory for the fight against financial crime. Firstly, it demonstrates the legal and practical ability of the SFO to successfully pursue acts of bribery occurring extraterritorially. Another significant aspect of this is that the SFO and legal prosecutors in the UK remain unaffected by whether or not the payments to Al Badie would be considered bribes or facilitation payments, thus highlighting the fact that UK companies cannot use the laws of another jurisdiction as a shield in the UK.




However, this success should not overshadow the fact that the Sweett Group attempted to mislead the SFO. This shows that once again the failure is not only one of systems and procedures, but also a result of the prevailing culture in businesses.








The above is just a brief snapshot of financial crime in the first quarter of 2016 – as ever, financial crime is a huge and complex topic and much more could have been brought to your attention.




If you have any concerns about how your own firm is acting to minimise the risk of financial crime, please do not hesitate to talk to any member of the CPA compliance team.




A final word on training  




As ever, the online training materials provided on our website represent the quickest and easiest way to get everyone in your firm up to date on the latest regulatory developments.




Alternatively, if you wish to discuss other training options, speak to a member of the CPA team.


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