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.


How much do APAC’s regulators earn?

Regulators’ salaries across Asia Pacific vary enormously:some supervisors earn fortunes and others hit the pay scale at the average to low end.APAC REGULATORs - SALARIES

Some governments believe that paying politicians and civil servants high salaries should reduce the likelihood of them accepting a bribe, offered in cash or disguised as a gift. Others argue that financial regulators will be less likely to jump ship and work for a bank if they are paid competitively by the government. Some countries pay their banking regulators on the same modest scale as other government employees , pitting them against some of the highest paid people in the country – bankers.

Last April, we found out how much the head of the Hong Kong Monetary Authority brings home; Norman Chan Tak-lam was set to earn HKD$9.41m(USD1.2m), making him the highest paid central bank chief in the world.  As the HKMA is also the banking regulator, this makes Chan Tak-lam the biggest earning regulator in the world. Chan Tak-lam’s counterpart in Beijing, Shang Fulin, the head of China Banking Regulatory Commission, earns an estimated  CNY11,271 (USD1,800) per month.

The accompanying infographic details more of APAC banking regulators’ earnings.

Comparing regulators salaries with those of bankers reveals a stark difference. Since the global financial crisis took hold in 2008, we have seen a distinct change of attitude towards financial institutions. Blatant rule breaking by banks – whether money laundering, sanctions busting or tax evasion – is being punished in high-profile cases as regulators finally start to show their teeth. However, the impact on the individuals responsible have been unremarkable; a move to a less high-profile role in the bank, or early retirement as opposed to job loss or, as some have called for, criminal prosecution.

Rather than going after the bankers who allowed criminality to go unchecked at banks, or those who made good from the financial crisis, there is an element of maintaining the status quo vis a vis bankers’ salaries that is out of step with the movement to make change for the better in the financial sector.

In the post global financial crisis and post public bailout economy, can banks justify paying million dollar bonuses?

In February 2015, Ross McEwen, the head of RBS, went on record to defend bonuses for bankers in spite of government bailouts and losses:

“I need to be fair paying for our people so I can actually keep them onboard.”

Although McEwen has opted to hand back his personal GBP1m (USD1.5m) share award to the bank he will still take home an expected GBP2.7m (USD4m) in 2015. Peter Sands, the outgoing boss of Standard Chartered also waived his bonus in 2015.

Looking at Asia Pacific, four of China’s largest five banks made the Banker’s Almanac list of top ten biggest financial institutions. This includes Industrial and Commercial Bank of China, China Construction Bank Corporation, Agricultural Bank of China Limited and Bank of China. China Development Bank Corporation languished at no. 21 on the list.

“According to the half-year annual reports of the listed commercial banks, the average annual payment before deductions for the chairmen of the five biggest Chinese commercial banks was around 2 million yuan ($325,600).”Source:The Global Times 2014.

Piyush Gupta, CEO of DBS bank, Singapore’s largest, made SGD9.2m (USD 6.6m)
The CEOs of United Overseas Bank and Oversea Chinese Banking Corporation were not far behind.

Chief regulators salaries fall far short of those earned by their peers at regulated entities.
It’s unlikely they will ever be measured on the same scale. Regulators, in an ideal world, would be motivated by doing the right thing for the right reasons. That is certainly the message that some regulators are putting across. But banking is all about money, and the more you earn, the higher your status.

First published on the International Compliance Association blog in March 2015. 

The banking sector is still rewarding poor conduct

Senator Elizabeth Warren tore into Federal Reserve officials this week for not jailing a single banking executive in relation to their role in the collapse of the banking system. Senator Warren is making sure that US society, government and the banking sector does not forget that instead of punishing those who caused and oversaw the collapse, we are rewarding them.

The four biggest financial institutions [in the US] are 40% bigger than they were five years ago and the five biggest banking institutions have more than half of all the banking assets in the US, Warren told Bloomberg in this video. JPMorgan Chase CEO Jamie Dimon received a hefty bonus after negotiating a settlement with the feds over his bank’s involvement in the mortgage crisis, the Washington Times reported.

No deterrents

There are no deterrents for poor conduct in banking. You can break the whole system, make a tidy profit for yourself and stay employed. Bankers have got it made; governments gave them the keys to the coffers. Bankers are thought to be arrogant, but is that any wonder when you are in a position of great power and impunity?

I left the UK for Asia a few months after Lehman’s collapsed and I am getting back in touch with the banking world in the UK for the first time in five years. Although some of the edges have been worn off, the swaggering arrogance of banking executives is still apparent.

“Banker bashing must stop now,” one offshore banker determined to push the merits of his financial centre to Russian and Chinese clientèle told a packed conference hall. The people who raised the alarm on the extent of the financial crisis are dubbed ideologists who want simple solutions to complex problems by another British business leader. Their comments encapsulated the struggle that banking will face when trying to change its motivation from money to doing the right thing.

Professional standards

Not all in the banking world have the same attitude. Creating professional standards for bankers and playing up the benefits of doing well by doing good are the new battle cries of the financial services sector in the UK.. Although real changes are afoot, it will take half a generation or around 15 years according to representative from one institution, before we see the benefits of compliance universities and courses on ethics for bankers. We could wonder why it will take so long if we know where we need to go, but when you hear hardcore investment bankers talking about compliance and ethics as intrinsic to restoring confidence in the financial sector, you can’t help but think that enormous fines for criminal and regulatory failures have hit the spot.

Many banking insiders do not want change; they are happy with their set up. And that may be why it will take 15 years to see changes in the industry. Meanwhile, new payment products and services, crypto-currencies and other innovations will keep moving forward and gaining more ground, more users, more market share.

Korea: Gov tightens rules on foreign investors

SEOUL, Sep. 7 (Korea Bizwire) – From now on, government regulation on Korean nationals investing in the domestic stock market disguised as a foreign investor will be strengthened.SKorea flag

In addition, the requirements for financial investment firms to submit accounting audit data with financial regulators will be relaxed while the reentry barriers for financial investment firms would be lowered.

The Financial Services Commission said on September 4 that it would revise rules on financial investment firm establishment and regulatory filing requirements.

This is a follow-up measure to a series of regulatory reform measures announced in June and July. According to the announcement on the 4th, the new revised rule added a provision that would make it possible for the regulator to deny registration of Korean nationals to acquire domestic stocks under a foreign corporation name.

Until now, some of the Korean investors established offshore paper companies as an expedient way to avoid requirements of reporting with Korean financial regulators when taking part in as institutional investors in IPOs or making change in stockholdings. The new provision is intended to fill such loopholes.

Meanwhile, some regulations deemed unnecessary or onerous for financial investment companies to conduct their business have been relaxed. For example, any financial investment firm whose assets are below the level of 100 billion won (US$97.6 million) or that don’t deal with securities and over-the-counter products will from now on have to submit accounting data every six months instead of every quarter previously.

For financial investment firms that have voluntarily closed their operations partially or entirely as part of a business restructuring effort, they will be allowed to resume operations after one year’s time has elapsed.

For those firms whose operations were suspended after being issued a warning, the time to reapply for business registration will be shortened to one year from the current three years. In the case of serious warnings such as registration revocation, however, the current three-year probation period will be retained.

By Sean Chung (

Source: Korea Biz Wire

Philippines: Regulator’s warning highlights gaps in AML

Anti-money laundering (AML) professionals in the Philippines are warning firms against a few tactical errors which could result in legal or regulatory failures. A speech given by a senior compliance officer at the Financial Executives Institute of Cebu meeting last week highlights a few areas, which banks in the country could be struggling with. FCA - Cebu

  • Due diligence: carrying out due diligence on all clients, accounts, transactions and products should shed light on the risks they pose to the institution. There are no excuses for claiming you letting money laundering or terrorist financing occur.
  • Advice: offering a client advise on how to commit money laundering is considered an offence.
  • Reporting: an employee who fails to report on suspicious activity is liable.
  • Legal knowledge: the government expanded the definition of money laundering, to require include more institutions to report suspicions. Jewellers, dealers in precious stones, real estate brokers and similar agencies are now required to report.
  • Account freezing: account managers may not automatically lift freeze orders without getting clearance from compliance. bank managers to approach their compliance officers once periods lapse so the clearance can be secured.



FATF raises profile in 25th year with 8 new objectives

The Financial Action Task Force (FATF) held its annual plenary session in June, announcing the latest additions and deductions to and from its country watch-lists, as well as presenting eight objectives for the coming year.FCA - FATF Logo

Iran and North Korea hold their places firmly in the utterly non-compliant list with the FATF’s 40 recommendations on anti-money laundering and counter-terrorist financing (AML/CTF). AlgeriaEcuadorIndonesia and Myanmar have not made sufficient progress to get themselves off the list of countries under strict supervision by FATF for not making enough progress to change their legal frameworks. Ethiopia, Pakistan, Syria, Turkey and Yemen have and are still being monitored but it appears their efforts are moving in the right direction.

The FATF is no longer monitoring Kenya, Kyrgyzstan, Mongolia, Nepal and Tanzania under the anti-money laundering compliance process.

The objectives

The eight objectives for 2014/15 set out by new FATF President Roger Wylie offer an insight into where the AML/CTF standard setter will focus its resources and could shed light on policy areas relevant to different business sectors.

  1. Raising the profile of the FATF in its 25th year and communicating its continued relevance – we could see the FATF having a stronger voice on the international stage, a sign that governance risk and compliance could be under the spotlight.
  2. Working with the FSRBs to address the issue of regulatory arbitrage – look out for legal changes. As the EU used to call it, ‘harmonisation’ of legal frameworks squeezes out the differences in national policies which makes it easier for an over-arching body to enforce the rules.
  3. Emphasising the effectiveness component of mutual evaluations – it is not what you do, it is the results of what you do that count. The Fourth round of Mutual Evaluations will have an effectiveness pillar; jurisdictions will be assessed on the impact their legal framework is having on achieving the standards set out in the 40 recommendations.
  4. Ensuring quality and consistency in mutual evaluation reports across the global network – FATF Style Regional Bodies (FSRBs), sometimes referred to as ‘associate members’, carry out much of the mutual evaluation legwork and the FATF wants to ensure that they are ‘clear, fair and explicit in their evaluations and reports.’
  5. Promoting meaningful engagement and open communication with the private sector – The FATF has embraced the idea of sharing information with the sector for which it sets the standards. The revision of the 40 recommendations in 2012 was at the behest of the private sector and followed lessons learned by AML/CTF practitioners. The standard setter is also working to a faster pace. Last year’s report on financial crime in new payment products and services took a few years to be researched, produced, approved and published.  In the 12 months since then, the FATF has since published a new report on ‘virtual currencies’ which is a deeper look at a sector that was skimmed in the 2013 report. Look out for more initiatives from the FATF to engage with and learn from the private sector. This training course looks the concept in greater detail.
  6. Working with the G20 on areas of mutual interest, including corruption and beneficial ownership – Financial inclusion is another pillar of the G20 which could come up in the next 12 months. We could see some more work on the financial crime risks associated with new products designed with financial inclusion as an objective.
  7. Considering the risks associated with virtual currency and potential policy responses – Financial Crime Asia goes into more detail here.
  8. Continuing the FATF strategic view discussions, including prioritisation of the FATF’s work – A three year strategy for AML/CTF standards, according to the President’s report.

Planned changes to UAE regulations

The days of transactional financial advice with a one-size-fits-all approach will soon be consigned to history

James Thomas, ACUMA — Independent Financial Advice

Regulation — hardly the most emotive word, but one that should be FCA - UAE tea pot housewelcomed with open arms as it thankfully increases its presence in the finance world here in the UAE. Whether you are a client, an adviser or just believe in fairness, transparency and accountability for all, there are imminent regulatory enhancements to the financial services industry in the UAE looming large on the horizon.

Previously there has been a number of separate regulatory bodies working independently of each other, but this situation is about to change, with new rules, vastly increased capital adequacy levels, and new requirements for minimum qualification levels.

Appropriate, tailored, transparent and easy-to-understand financial advice is of paramount importance to everyone. With this in mind, the fast-approaching regulatory changes and enhancements will be a massive step towards ensuring that you sleep comfortably at night knowing the financial security you crave for you and your loved ones is in safe, professional and supervised hands.

My simple view is that if I ever required some form of surgical procedure, I would ensure that the person operating on me was fully qualified and had the resources to do so effectively. I see no difference in the requirements for ensuring the appropriate and effective management of someone’s personal finances.

As this country continues to grow, emerge and increasingly embrace a pivotal role in the financial services industry, the days of transactional financial advice with a one-size-fits-all approach will soon be consigned to history.

Bank guarantee

As part of this process, the UAE insurance authority notified financial advisory firms late last year that to remain in business in the UAE they would need a paid-up capital of Dh3 million instead of Dh1 million by November, and they would also need to have a further Dh3 million lodged as a bank guarantee. An additional Dh1 million must also be put down for every additional branch they have, while the company that your financial consultant represents will have to adhere to strict regulatory requirements, as well as a robust internal infrastructure via independent, qualified and non-income-generating employees.

The good news for you, the reader and investor, is that no longer will you be just another individual who was promised the earth but found out all too soon that congruency is a rare commodity. Within months rather than years, regular reviews, transparency of remuneration, compulsory licences and qualifications across the board will be essential.

Much like other regulated jurisdictions such as the USA and the UK, the UAE has realised that it needs to update its regulatory framework to offer better levels of consumer protection. However, a word of warning: even with this change of regulation, you should not forget about your own due diligence when choosing a company or financial adviser.

Proof of qualifications

You still need be on your toes when it comes to deciding who will help you achieve the financial independence and security that you desire. Ask for proof of qualifications, testimonials from current clients, number of years in the industry, details of licences; and whether the person sitting opposite you works for an independent company that will work on your behalf to find the most appropriate solution, or is a tied agent and can offer only limited and potentially restricted advice.

While none of these changes will necessarily guarantee that clients get better advice, it should work towards a much more professional environment with a lot less unregulated, unqualified sales people offering poor ill-thought out advice, with their interests first rather than that of the client. Going forwards clients should receive advice from a qualified advisor, who works for a regulated company, with due recourse should this be necessary. A huge step forward, I’m sure you would agree.



Source: gulfnews

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India: ML through trade, now real estate

It looks like India is trying to catch up with the rest of the world on money laundering methods. Last week we saw the emergence of news stories linking trade to money laundering; the anti-money laundering (AML) sector globally and International Chamber of Commerce have been talking about trade based money laundering for years, so much so that the phrase is now abbreviated to TBML.

This week, we read news that the Indian Enforcement Directorate has come around to the idea that construction projects are also a great way to launder and hide the proceeds of crime from prying eyes. A headline in the Financial Express drew attention to the massive potential for laundering cash through the real estate sector in India.

DDA flats next to a slum, New Delhi

DDA flats next to a slum, New Delhi

Public construction works take years to complete in India, as seen prior to the Commonwealth Games 2010, when unfinished projects were hidden behind temporary hoardings as the money to complete them had mysteriously dried up. Some of the temporary hoarding was still there when I left in 2012. A project to concrete over an  open storm drain-cum-open sewer which runs through Defence Colony, one of South Delhi’s fanciest neighbourhoods, was started in the mid 2000s. By 2012, it was still under construction. I saw a group of 20 or so workers at any one time hanging around or working on the project. Most of them lived under blue tarpaulin sheets strung from fences bordering the drain.

But life in India is not always thus for the wealthier residents. Buying property in the political capital – New Delhi – and financial centre – Bombay – is a privilege that only the wealthy can afford. In Delhi, the city government started to build blocks of affordable housing through the Delhi Development Authority (DDA) in the mid 1960s and many middle class families live in these apartments. The DDA plans to launch a new housing scheme in 2014.

Other housing options, New Delhi

Other housing options, New Delhi

Private housing prices are, pardon the pun, through the roof with many transactions being made privately, directly between buyer and seller. Property is often bought for cash which is not banked. Architects are regularly asked to build false walls into properties for hiding cash at home. Building regulations, illegal construction and legal disputes often mean housing stands empty, while the courts process the cases which often take years to settle. A lot of real estate is also built on disputed land in India. In New Delhi, some of the cities most salubrious and extravagant properties are in fact built on disputed land, which will never be challenged as the residents have enough power to ensure it will never be investigated.


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SAC’s Steinberg gets 3-1/2 years prison for insider trading

(Reuters) – Michael Steinberg, a portfolio manager at Steven A. Cohen’s SAC Capital Advisors hedge fund, was sentenced on Friday to 3-1/2 years in prison for insider trading.

The sentence was imposed by U.S. District Judge Richard Sullivan in Manhattan, five months after a federal jury convicted Steinberg on securities fraud and conspiracy charges, in a case stemming from a broad crackdown on insider trading on Wall Street.

Steinberg’s lawyers had asked for no more than two years in prison, while prosecutors had argued for up to 6-1/2 years.

Sullivan also ordered Steinberg to pay a $2 million fine and forfeit $365,142, a sum the government says Steinberg and an SAC analyst were paid from the illegal trading profits.

Dozens of family members and friends attended the sentencing and sent letters to the judge. The letters, Sullivan said, described Steinberg in a positive light that set him apart from other defendants he had sentenced.

“If it were only based on the character of this man, it would be easy, because I do think this is a good man,” he said. “But I do have to consider the crime here.”

Prosecutors accused Steinberg of trading on illegal tips about Dell Inc and Nvidia Corp passed to him by an SAC analyst, who admitted to swapping confidential information among a group of analysts at other hedge funds. Steinberg’s trading resulted in illegal profits of $1.82 million, prosecutors said.

Steinberg, 42, is one of eight current or former SAC Capital employees to be convicted on insider trading charges.

SAC pleaded guilty to fraud charges and has agreed to pay $1.8 billion in criminal and civil settlements.

The Stamford, Connecticut-based firm has rebranded itself Point72 Asset Management as it shifts to being a family office managing Cohen’s fortune.

Sullivan granted Steinberg bail, pending an appeal.

The appeal is expected to focus on Sullivan’s not having required the government to prove that Steinberg knew the insider who originally disclosed non-public information had received a benefit for making the disclosure.

Todd Newman, a former portfolio manager at Diamondback Capital Management, and Anthony Chiasson, co-founder of Level Global Investors, are appealing on similar grounds stemming from convictions in a separate trial Sullivan also oversaw.

During appellate arguments in Newman and Chiasson’s case last month, some judges questioned whether Sullivan’s interpretation of the insider trading law was correct.

Sullivan on Friday noted the arguments, saying the issue appeared to be “a closer call than I thought.”

Steinberg’s sentence was less severe than those of Newman and Chiasson, who in 2013 received terms from Sullivan of 4-1/2 years and 6-1/2 years in prison, respectively.

Cohen has not been criminally charged. The U.S. Securities and Exchange Commission is seeking to bar Cohen from the securities industry for failing to supervise Steinberg and another portfolio manager and prevent insider trading. Cohen denies wrongdoing.

The case is U.S. v. Steinberg, U.S. District Court, Southern District of New York, No. 12-cr-00121.

(Reporting by Nate Raymond in New York, additional reporting by Jonathan Stempel and Joseph Ax, Editing by Franklin Paul and Gunna Dickson)

Source: Reuters

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