Papua New Guinea: How good AML is pushing placement back to the gatekeepers

Effective anti-money laundering programmes in banks are moving the gateposts for placing dirty cash into the financial system back a few steps, into the offices of lawyers, accountants and other professional service providers.  Undercover reporters working with Global Witness have video-recorded two prominent lawyers in Papua New Guinea explaining exactly how to channel a large bribe to a government minister.

Corruption reaches “right to the top” in Papua New Guinea, a representative of the national anti-corruption task force states in the video posted above. Being a government minister is the fastest way to becoming a millionaire, one of the lawyers claims.

Papua New Guinea shares a resource rich island of New Guinea with the Indonesian provinces of Papua and West Papua. As noted by Global Witness,  despite its resource wealth, much of the money made from them fails to reach the majority of the population. Plagued by corruption, the people on the lowest rungs of the economy suffer while those at the top line their pockets.

Right to the top

While bribery may be a well-established norm in PNG, the method of channelling funds to corrupt politicians has evolved, largely due to more stringent anti-money laundering rules and closer transaction monitoring.

The days of  “banging a million bucks into a private account in Singapore” are over, one of the lawyers explained to the undercover reporter.

AML in banks is largely effective – huge investment in compliance expertise and monitoring software has pushed the threshold for placing dirty money into the system away from the banker and towards other professional services providers. Today’s enablers are lawyers, accountants, estate agents and others, employed to help disguise the funds before they reach the financial system.

Australia, according to Global Witness researchers, is providing an open door for anyone to place dirty cash in the country’s financial system. The Australian Federal Police have estimated that more than AUS200m (USD147m) laundered from PNG into Australia annually.

During a conversation with a prominent lawyer in Port Moresby, bribes are referred to as “ministerial improvements” and “mobilisation fees”. Paying bribes in large sums is ill-advised, as it attracts too much attention. “Small dribs and drabs”  – what some of us might call structuring – is recommended as an alternative method of getting the cash to the minister unnoticed.

False accounting – using inflated invoices for legal services – are touted as a method for sending bribe money to the intended recipient’s Australian bank account. The false invoicing method is well used to launder money, but this is the first time we’ve heard a law firm offer its own books to move the cash.

Alarmingly, this once again underscores how significant ‘gatekeepers’ – lawyers, estate agents, accountants – are in enabling financial crime. Both lawyers in this film quicky hid behind a veil of hypotheses once questioned by Global Witness after the recordings. They know how to do this, but for how long can they keep getting away with it? Lawyers and law firms for estate agents exposed in the ‘From Russia with Cash’ film know how to use the  law to protect their clients. But there is something more powerful going on here – an absence of ethics or simply the will to do anything for filthy lucre.

Being a politician provides the quickest route to becoming a property millionaire, one lawyer tells the Global Witness reporter. Well. you’ve got to stash the bribe money somewhere eh?



Real estate and the promise of ready money – who cares if the cash is dirty?

The UK welcomes wealthy foreign investors, but does it really care where their money comes from? Estate agents in London’s super expensive neighbourhoods are apparently agreeing to house purchases with ‘corrupt’ Russian politicians.FCA London Property

If you are in the UK, tune in to Channel 4 this evening to watch a revealing documentary about what really goes on between agents and super rich buyers. In ‘From Russia with Cash‘,  undercover reporters pose as an ‘unscrupulous’ Russian government official “Boris’ who wants to buy a house in London for his mistress, ‘Nastya’. Despite ‘Boris’ making is clear to the agents that his funds are not from a legitimate source, the estate agents he deals with are apparently happy to go ahead with the sale and even recommend ways for ‘Boris’ to keep a low profile, according to the Guardian report.

Channel 4’s reporters used hidden cameras to film meetings with estate agents, who talked openly about previous dealings with foreign clients, government ministers – politically exposed persons, and the amount of deals which are made with some degree of anonymity. Politically exposed persons (PEPS) are individuals with access to national coffers, funds which belong to the electorate. They are government officials, their families, their associates and beyond.

Property, or real estate, is widely recognised as the best way to invest. So it should be no surprise that the proceeds of crime have found a natural home in bricks and mortar. Rules on investing and moving dirty cash are well publicised. In the UK and many other countries, Financial institutions, lawyers, accountants, dealers in high value goods and real estate agents are required to report transactions of dubious origin – those which could be hiding the proceeds of crime – to law enforcement. The penalties for not reporting suspicious transactions are severe for the institution and the individual.

Corruption and billionaires  

FCA - TITransparency International’s ‘Unmask the Corrupt‘ campaign looks closely at how UK property launders funds for corrupt individuals, many of whom are politically exposed persons. Funds designated for schools and hospitals – ‘Boris’ claims his money comes from a government health budget – is sent to offshore havens, shrouded in secrecy and then passed on to ‘enablers’ or gatekeepers in the UK who advise and facilitate investment. The thing is, the practice is nothing new. This is how the big money has always moved – the only difference is that now it is under scrutiny.

Forbes, the register of all things super-rich, lists London as third in the world of ‘Billionaire Cities‘.  Five of the remaining nine are Asian cities – Hong Kong, Tokyo, Shanghai, Singapore and Mumbai sit alongside Paris, Moscow, New York and Sydney. If the corrupt are managing to get money into the UK property market, they are certainly managing it in the other countries on this list.

Will the estate agencies and law firms mentioned in this programme be investigated and will this give rise to increased scrutiny of the real estate sector in the UK? Financial Crime Asia is keen to find out.

When Basic AML Training Just Isn’t Enough

Deutsche Bank is reportedly leading an internal investigation into an alleged USD6bn laundry, using ‘relatively FCAbasictrainingsimple transactions’ to clean cash. Simple transactions used to launder money should be easy to identify – if the software does not pick it up, then the employees handling the transactions should be able to spot a suspicion. Basic anti-money laundering training would guide someone to tell their AML team if something in a transaction does not look right. What if it did, and the message is still not getting through?


Regulated financial institutions spend money on ineffective training programmes; employees spend time attending training sessions that offer no new information on the subject or on how to approach the issue at hand. There are a myriad reasons why training programmes do not have the desired effect, but why do firms still use them?

They do so because they have little choice. A robust regulatory environment, a requirement to train all employees on the risks associated with financial crime and the spectre of a large financial penalty for not doing so have backed banks and other regulated firms into a corner. Gone are the days of leaving all knowledge of money laundering, terrorist financing, sanctions busting and bribery to the compliance department. In the present environment, we have to train all employees, management, directors and the C-suite on financial crime risks. And this, as compliance officers know, comes at a great cost to a bank.

Compliance generates no revenue – the compliance department is a straight-up cost centre. Although the argument that having an effective compliance programme in place could save you a few million dollars in regulatory fines is quickly gaining ground, compliance officers – it appears – are still bound by tight budgets. This is sometimes to the detriment of quality training, forcing compliance officers to compromise on the standard of training they want to deliver to employees.

Compliance budgets are larger than they were a few years ago. The coffers are deep enough to attract and retain talented individuals to maintain good compliance procedures in banks, and to ensure that every employee has at least a basic grasp of anti-money laundering, sanctions and anti-bribery and corruption requirements – how it works and who the ‘bad guys’ are. But compliance training where employees sit through another session on placement, layering and integration and learn nothing more relevant to their role, do not encourage anyone to think in terms of risks posed to their business line.

Beyond the money laundering cycle

Basic training has done a great job; meet bank staff from any division in a corporate, retail or investment firm and they will be able to trot out the three stages, and this was not the case five years ago. Except now, the information comes by rote – it is learned, absorbed, recalled when asked but is it really embedded into how bank employees do their jobs?

FCAadvancedtrainingAdvanced or more specific AML/CTF training courses on the market should address the particular risks posed by different areas of banking. Looking into trade based money laundering operations using examples and knowledge from people who have worked in trade financing first hand, not simply adding a few slides to a power point describing false invoicing would be a good start; but this is rarely the case.

It’s about the people, stupid

Global AML efforts are now hinged upon a risk based approach – the basic principle of applying most resources where the greatest risks lie. To do this, employees need to understand the risks – what they look like, where and when they can occur. The emphasis must be on engaging the learners.

“To combat financial crime and terrorist financing, the people who work with clients must be aware of the risks. Not just compliance and the firm’s financial intelligence unit, but front line business people in an institution.” Kim Manchester, a compliance veteran and CEO of ManchesterCF told Financial Crime Asia.

This rings true. The customer facing employees – whether private banking relationship managers or traders creating OTC derivatives – know their client well enough to offer them precisely the right product at the right time. They also should be able to know with the same precision when a deal does not add up. Compliance officers can erroneously believe that ML/TF is not an issue for some of the more sophisticated financial products. Let’s take derivatives as an example. Some compliance officers do not consider AML/CTF something that derivatives traders need to be concerned with and so they did not need training on this area.

This is a huge oversight which could end up costing a financial institution. Mis-priced derivatives contracts can be used as an instrument to launder money and to channel funds to bribe takers. If the traders who engineer these products are able to recognise and report unusual activity – such as a price that does not chime with the market – compliance training is hitting the mark. But if these traders are sitting through a course which spends only a fraction of the time looking at how financial criminals try to manipulate sophisticated products, they might never spot a suspicious transaction. AML/CTF training must reach far beyond the basic stages and into the specific business lines run by banks on the markets. Because this is where the real financial crime takes place.

Football associations don’t kill people….

…..massive construction projects do.

More than 1,200 people killed in the building of Qatar’s World Cup stadia, the vast majority of them Nepalese. Qatar Airways are one of the few international airlines to have direct flights to Kathmandu. It is truly heartbreaking to watch Nepali men waived off by their loving families heading off to Doha for work. Maybe they have no idea what they are getting into; more likely, they do but have little choice if they want to earn money, living in hope of a better contract and a fair employer.

Watch this Channel 4 film on how sponsors are responding to the FIFA scandal.

DOJ indictment of FIFA – a quick reminder of the details

So, this morning the FIFA members are voting on who will be the next president.

In the Blue Corner weighing in at four terms on the throne at football’s governing body, 79 year old Joseph “Sepp” Blatter is expected to take the title by almost 75% of the votes, according to this round-up from the Guardian.

In the Red Corner, the only contender for the crown, Prince Ali bin Hussein of Jordan, a 39 year old royal and president of FIFA Asia. Two days before the US Department of Justice’s swoop on FIFA officials, Prince Ali’s team contacted police in the UK to report an alleged offer of 47 more votes for Ali in the FIFA election. The votes were rejected. Prince Ali’s team engaged a UK based corporate intelligence firm, headed up by a former London police commissioner, to ensure integrity and high ethical standards throughout the campaign.

Falling on their swords?

Falling on their swords?

Blatter appears undeterred by the arrest and indictment of nine FIFA officials this week and apparently has the support of the vast majority of delegates, who when asked by the BBC this morning, seemed to err on the side of caution.

The party line appears to be this: you cannot blame whoever sits at the top of the tree for the actions of the apples hanging from it.

But should he not be responsible for what happened on his watch?

The indictment

The indictment reaches back to 1991, eight years before Blatter ascended to the top job.

According to the DOJ: “The soccer officials are charged with conspiring to solicit and receive well over $150 million in bribes and kickbacks in exchange for their official support of the sports marketing executives who agreed to make the unlawful payments.”

Any money laundering techniques uncovered and publicised during this investigation will provide a blue-print on how to clean your dirty cash. Although, that said, if Jack Warner’s claims are correct, bribery was nothing to be ashamed of, there was nothing to hide, and maybe nobody cared where the money came from.

Jack Warner, the Trinidadian former FIFA vice president, was released from jail yesterday and has proclaimed his innocence to the press. He had resigned from the VP seat in 2011 amid allegations he had bribed Caribbean associates.

‘At the time he said he had been “hung out to dry”, insisting that the giving of gifts had been part of Fifa culture during his 30 years in the organisation.’

Could the Jack be reliving the same nightmare?

Read the full starting nine member of the FIFA executive arrested here. Banks will have screened the names of all nine as soon as the indictment sheet was published. Any half decent data link analysis software will bring up connected entities and transactions. But what will the world’s financial institutions now do with that info?


European Parliament passes Fourth Money Laundering Directive

Members of the European Parliament have added their endorsement to the Fourth Anti-Money Laundering Directive, confirming tougher rules to fight tax evasion and terrorist financing, including a few measures which were not in the European Commission’s initial proposed directive.

Key points of the new directive:

– Ultimate beneficial owners to be listed on a database open to authorities, banks performing due diligence checks and people with a ‘legitimate interest’ – investigative journalists, non-governmental organisations are mentioned. Information to be included: beneficial owner’s name, month and year of birth, nationality, country of residence and details of ownership.

– New rules to ease tracking the flow of funds by financial investigators – a “transfers of funds” regulation, which aims to improve the traceability of payers and payees and their assets.

– Special measures for Politically Exposed Persons – enhanced due diligence to establish the source of funds and source of wealth. While many anti-money laundering professionals may already do this as best practice, the 4MLD clarifies the position.

Member states have two years to transpose the directive into national law.

Read the EP’s press release here.

Are common sense and the risk based approach mutually exclusive?

The UK Financial Conduct Authority (FCA), the financial services regulator, has issued a statement asking banks to use ‘judgement and common sense‘ when applying a risk based approach to anti-money laundering controls.risk

The FCA is concerned that some in the financial services sector have applied ‘wholesale derisking’ to money transmitters, charities and FinTech firms, effectively removing banking services from these organisations due to an un-manageable high risk of money laundering. Feedback from banks to the regulator revealed that not offering financial services to entire categories of customers helps banks to comply with financial services regulations in the UK and overseas.

Money services businesses (MSB) losing banking services is not news. By the late 2000s, the vast majority of MSB business in the UK was managed by Barclays Bank. Last summer, one UK banker told me that no bank was doing business with money remittance firms.  If MSBs were effectively frozen out of the UK financial system, who were they doing business with and how were they doing it?

Anyone following AML in recent years will have seen wholesale derisking on the horizon. As banks reassess risk appetites in the wake of a financial crisis, some ventures will always fall outside of the newly redrawn lines.  It is no surprise that MSBs and, regrettably, charities are being refused services. Both have been labelled as high risks for money laundering and terrorist financing for some time. FinTech or financial technology companies pose higher risks of exposure to cyber crime – the newest spectre on the block and one which has made the headlines of late.

But the risk based approach, in its essence, is designed to allow all forms of business access to banking services, each subject to the appropriate level of risk management. Would a local charity which manages food banks in the south Wales be treated in exactly the same manner as an aid charity which worked entirely with overseas projects in post-conflict zones? The latest missive from the FCA suggests that it would.

Let’s briefly recap on what the regulator says a risk based approach to money laundering should look like:

  • Policies and procedures to identify, assess and manage money-laundering risk which are
  • Comprehensive and proportionate to the nature, scale and complexity of the bank’s activities and able to
  • Identify the risk associated with different types of customers and inform not only the level of customer due diligence measures banks apply but also their decisions about accepting or maintaining individual business relationships and finally they should
  • Recognise that the risk associated with different individual business relationships within a single broad category varies, and to manage that risk appropriately.

This seems clear enough – the regulator’s expectation is that banks will apply the RBA thoughtfully, and perhaps with some consideration of inclusivity rather than using it as a reason to exclude business from the books. No bank wants to lose business, but if the money laundering risk – could we replace that with regulatory risk? – is too great, financial institutions will protect themselves first.

How common sense and nonsense interact

How common sense and nonsense interact

Maybe the FCA’s call for the application of a bit of common sense is not far from the mark, but banks can argue the flip side of the coin. Protecting your business from potential damages from a regulatory hit, which would incur severe reputation loss and large costs also makes common sense.

So if both sides can argue good judgement, how does the regulator get its message across and begin to influence change in financial institutions in terms of the risk based approach to money laundering?

One solution is to offer good training on the basic principles behind anti-money laundering and counter-terrorist financing. But if we are to take the UK regulator’s lead, training should encompass more than this. Perhaps a refounding exercise is needed across the entire sector, by both regulators and financial institutions to realign themselves with common sense and remind themselves of what the goals of AML/CTF really are.

Sino-Spanish laundry brought down in Operation Snake

The combined efforts of Europol and the Spanish Guardia Civil dismantled a six year old money laundering operation earlier this week. Investigators estimate the group sluiced more than EUR300m in the proceeds of crime since 2009. snakesmurfChinese citizens living in Spain operated the laundry, collecting and cleaning the proceeds of crimes from across Southern Europe. The majority of the cleaned money was sent across European borders, Europol said in a statement.

Members of the criminal organisation using the laundry generated funds from importing counterfeit goods into the EU, using false documents. The sales generated an estimated EUR14m in untaxed profits which was cleaned using ‘low-level’ associates who ‘smurfed’ the money back to China. Smurfing is the process of breaking down a large sum of money into smaller and less remarkable amounts, using many different people to transfer funds through personal bank accounts – which are also generally thought to be low risk and off the radar.

As they developed a robust system for moving their own dirty cash out of Europe, via smurfs, establishing complex corporate structures and relying on front men and third parties for transactions, the Chinese group offered their services out to other organised crime groups. In exchange for a percentage of the laundered funds the Spanish network cleaned filthy lucre for contacts in Belgium, Italy, the Netherlands, Portugal and the UK. The going rate for laundering someone else’s money used to be a flat ten per cent, but stories from the past few years claim this has decreased to five per cent.

Proving that criminal networks will lend a hand to anything that turns them a profit, no matter how reprehensible, the group also ran clothing factories in Madrid which exploited Chinese workers.

Police officers arrested 32 people in Operation Snake, searching 65 private residences and company premises in Madrid, Barcelona and Valencia and seizing of 20 high-value vehicles and more than EUR1m in cash.

‘The Operation is still on-going and new arrests and seizures are expected to take place over the next hours and days,’ read the Europol statement.

A good result for the Guardia Civil, which has never shied away from getting its hands dirty in organised crime Eurosinvestigations. Although the EUR1m haul represents a fraction of the total figure estimated. It will be interesting to know how much this operation cost Europol and the Guardia Civil. While there is no doubt that criminal enterprises that make fortunes from exploiting people must be stopped, and cost should not deter law enforcement agencies from doing their jobs, it is worth considering where the rest of the money has gone, via which financial channels, and whether it will ever be recovered.

Ex-hairdresser and football chairman’s court appeal is a blow out

Carson Yeung, the former chairman of the UK’s Birmingham City Football Club and hairdresser to Hong Kong’s rich and famous, has lost his appeal against a money laundering conviction in a Hong Kong court.

Carson Yeung at Birmingham City

Carson Yeung at Birmingham City

Yeung Ka-sing, his Cantonese name, received a six year jail term in March 2014 after being found guilty on five counts of laundering between 2001 and 2007. He claimed in court to have earned HKD20m (USD2.5m) from a lucrative hairdressing business, and a further HKD300m(USD38.7m) from the stock exchange and HKD30m (USD3.8m) more from playing the tables in Macau like he was ‘running a business.’

The Hong Kong court did not accept these explanations of his source of wealth and Judge Douglas Yau ruled that there were reasonable grounds to believe that Yeung’s wealth ‘represented the proceeds of an indictable offence.’ There was no further comment of what that indictable offence may be.

The former hairdresser resigned as the chairman of Birmingham City Football Club (BCFC) in February 2014, a month prior to his conviction. His acquisition of the club in 2009 dubbed ‘a riddle wrapped in a mystery‘ by the Guardian.

He first bid for the BCFC in 2007, but missed the deadline to handover the money. He went on to ‘quietly acquire‘ a 29.9% stake in the club and launched a successful takeover bid in 2009 when a company owned by Yeung called Grandtop International Holdings, which later became Birmingham International Holdings Limited (BIHL), bought the football club.

Yeung’s business dealings have moved through a hairdressing salon, to stock markets, to gambling, a failed takeover, followed by a successful one and a change in name of holding companies. That may not be unusual for high-flying entrepreneurs, when opportunities to make gains present themselves in many different packages. The results are the same.

One final point to close off. Carson Yeung was approved by the UK Premier League as a ‘fit and proper person‘ to lead the GBP81.9m (USD129.4m) takeover of Birmingham City in 2009. At this time he was under investigation in Hong Kong and any attempts to perform due diligence should have revealed this.

David Conn’s article in the Guardian from March 2014 highlights some of the key points in the case. This entire story should serve as a reminder to anti-money laundering professionals of how the big game is played. Big money laundering, or the offences to which the law can apply money laundering charges, are not only about petty drug traffickers smurfing a few thousand dollars across a border. It is about major multi-million dollar deals, often carried out in plain view and yet there are no details of how any money was laundered in this case.

LA police force breaks USD100m laundry ring

The Los Angeles police force’s latest raid on a money laundering network hidden in the fashion business offers a few insights into the world of ML.

Firstly, the old style laundry is still happening, although the garment emporia fronting the operation were all about selling clothes and not cleaning them. Mexican cartels used the clothing stores to store, hide and launder the cash, investigators believe. The businesses in this operation were involved in an old-style laundering typology – the Black Market Peso Exchange (BMPE), which is a form of trade based money laundering.

  • A peso broker works with a drug trafficker, for example, who has dollars in the US that he needs to bring to Mexico and convert into pesos.
  • The broker finds business owners in Mexico who buy goods from vendors in the US and who need dollars to pay for those goods.
  • The broker arranges for the dirty dollars to be delivered to the US vendors, the garment stores and they use these illegally obtained dollars to pay for the goods purchased by the foreign customers.
  • Once the goods are shipped to Mexico and sold by the business owner in exchange for pesos, the pesos are turned over to the broker, who then pays trafficker in the pesos.

The money is laundered, everybody gets paid, everyone is a winner. Until they get caught.

It looks like the drug trafficking capital of the world may have shifted base from Miami to Los Angeles, as police made raids this week on a series of fashion industry businesses and found USD100m in cash.

According to this video from NBC News, officers found cardboard boxes stuffed with cash, somet with USD1m written on the side. Each box weighed 40lb (18kg). So, now we know how heavy USD1m is.

Lastly, and humourously, it looks like the brains behind this operation was making a tongue in cheek reference to another famous drug related business. In the TV show Weeds, the cartel opened a maternity clothes shop on the California side of the border, dug a tunnel underneath it across to the Mexican side through which it transported drugs north and money south. In the LA ‘Fashion Police‘ operation, one of the shops used to front the laundry was a maternity store.

Does crime imitate art, or are launderers not as smart as they used to be? Watch the video here.

Read the US Department of Justice‘ press release on the raid and the suspected use of a Black Market Peso Exchange here.