Asia

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?

Cornered?

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.

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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.

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.

Financial exclusion keeps Asia’s poor shackled to debt

Would you ever use a loan shark to borrow money? If you have a bank account, a credit rating, an address and an identity card, the chances are you will never need to. Many people in Asia, however, have no choice and the consequences of using illegal and unscrupulous lenders are catastrophic, resulting in spiralling and impossible to pay interest payments, violence and, tragically, slavery. Providing access to fair and transparent lending schemes is slowly gaining ground in Asia. FCA-loanshark

In Northern Thailand, loan sharks prey on the stateless groups living along the Thai/Burma border. The Children of the Forest project in Sangkhlaburi, north western Thailand, works with stateless children and mothers and have seen the horrendous consequences of dealing with loan sharks.

“Many of the Burmese refugee camps are just across the border in Thailand, set in dense jungle where mosquito borne diseases such as malaria and dengue are rife. If someone in a family without papers catches dengue and requires hospitalisation they must pay the hospital in full as they cannot access the cheaper health care offered to Thai identity card holders. Without the funds to pay, people turn to the local money lender who demands swift repayment and adds high interest. When the family cannot meet the payments, which is often the case, a so-called friend of the lender will step in and offer the eldest child in the family a job in Bangkok, in exchange for clearing the debt. They may even throw in the first month’s salary as a goodwill gesture to the parents. In most cases, the ‘friend’ is a child trafficker who sends children to work in bonded labour or into sexual exploitation,”one worker told me.

This happens simply because the family had no choice but to turn to an unregistered, illegal money lender. Organisations like Children of the Forest are able to step in and rescue children if they have the right information and are there at the right time to intervene.

According to the World Bank, approximately 2.5bn people, have no access to the supervised banking sector, leaving them open to exploitation by illegal lenders. Global campaigns to promote financial inclusion – bringing fair and transparent financial services to the world’s poor – are taking off in Asia, as well as in Africa and South America. Financial inclusion is a global, G-20 endorsed campaign which aims to improve livelihoods and ultimately, to squeeze out the loan sharks who prey on the poor. The inclusion campaign is relatively new – its founding Principles were developed by the G-20 in 2010 – but it is working on improving the ability of the global poor to save, borrow and protect themselves from crime and natural disaster by developing new financial systems.

Financial inclusion means provided appropriate saving and lending services of small amounts on a large scale. It calls for innovative solutions that reach local communities without the burden of strict regulations, which exclude the poor from the banking sector. It means finding a compromise for the people who lack formal identification, have no fixed abode and may not know their date of birth.

The amounts of money earned, saved and transacted by those in need of financial inclusion are small, which makes them unattractive clients for traditional banking services. The risk/reward ratio does not make sense. So, smaller banking-lite services, such as mobile-money, micro-lending, some pre-paid debit cards and financial education projects are already working towards providing fair services to those who need them.

The Sold Project in north Thailand runs a scheme providing educational scholarships to families. The money is held in an account by the project and can only be used to pay for education, schooling, clothes, transport. The families can access their scholarship account to follow their spending.

A Sold Project worker told us:“This works really well. People are happy if the scholarship account has more money and add money to it themselves. They are encouraged to apply for other scholarships and loans and not rely on us.”

Providing some small amount of financial education and a secure savings option changes how people manage money, and in this case, changes the lives of future generations.

Back in July, Police officers in Phuket took a swing at illegal lending They arrested five enforcers of a loan shark ring, which had been charging 20 percent interest per month and intimidating people who did not pay on time. The same thing happens across the continent. Where there are people in need and little government oversight, someone will step into corner the market.

The arrests in Phuket show that Thai police are paying attention, although their reputation has not always been one of pure intentions. Often, they provide the best debt collection services. You can sell your loan to the police, minus a 20 per cent cut and allow them to recoup the monies owed, using their influence and uniform to make bad debtors cough up.

With a little more awareness, however, the campaign for financial inclusion could be hugely effective across Asia, reducing the misery brought about by poverty and creating brighter futures for Asia’s youth.

This article first appeared on AsianCorrespondent.com

Thailand: AML laws used on small corrupt businesses

The Anti-Money Laundering police division in Phuket has flexed its muscles to seize cash from allegedly corrupt taxi and tuk-tuk firms around the island.

English: Thai students going to school by tuk ...

English: Thai students going to school by tuk tuk. Italiano: Studenti thailandesi che stanno andando a scuola con il tuk tuk. (Photo credit: Wikipedia)

The crack down on Phuket’s tuk-tuk ‘mafia’ began in earnest after the Thai army took control of the country in May when Phuket police, with the support of the Army, dismantled numerous illegal taxi stands in the province in response to the taxi drivers’ cartel-like grip over transport in Phuket. Taxi, tuk-tuk and motorbike drivers across Thailand should follow pricing guidelines issued to them by the regional authorities. Some even display them in their cabs and charge customers accordingly. Unfortunately, others see a foreigner approaching and immediately rack up the price.

Police in Phuket seized an estimated 200,000THB (6,300USD) from the bank account of a taxi and tuk-tuk cooperative in the Karon-Kata area of Phuket. Although this is small time compared to the estimated sums extorted from businesses and tourists annually across Thailand – you only have to spend a few months in country before you start hearing the same tales of protection payments and overcharging – it is a step in the right direction and should send out a warning shot to other travel and transport cartels.

Financial Crime Asia is surprised to find out that Phuket Police had its own AML department, but pleased to read that it is being used to root out corruption.

Source: Phuketwan

Questions on ML a priority for US prosecutors

OLYMPUS DIGITAL CAMERAUS investigators at the Justice Department‘s Money Laundering and Bank Integrity Unit (MLBIU) are directing prosecutors to add a question to their interrogations which has, according to this exclusive interview in Reuters, produced favourable results.

Investigators are asking suspects and convicted criminals this:

“Who is moving your money?”

A simple, direct approach to finding out the information they want to know; so simple that it is a wonder they have never asked anyone this before.

The US justice system favours the carrot and stick, and this case is no exception.

Any suspect or con who is willing and able to reveal the name of the institution which holds their assets, or those of their associates, can enter into a plea agreement or receive a reduced sentence for their information.

This is a useful piece of guidance for any anti-money laundering law enforcement officers or prosecutors in Asia although they are probably already asking this question, maybe they do not have the supporting legal framework to sweeten the deal.

US IRS agents pay a visit to Macau

Agents from the US Internal Revenue Service travelled to Macau – the favourite haunt of China’s avid gamblers – in May. Read this report from Brett Wolf at Reuters for an update.

Source: Reuters

ANTI-CORRUPTION SCHOOL OPENS ITS DOORS IN ALMATY, KAZAKHSTAN

On 23 April 2014, Almaty’s first nationwide Anti-Corruption School opens its doors for students, civil society representatives, journalists and all citizens who wish to

John Cole Cartoon satirising corruption in Luzerne Schools

John Cole Cartoon satirising corruption in Luzerne Schools

learn how to counteract corruption in daily life.

Transparency International Kazakhstan – with support from the Soros Foundation-Kazakhstan and in partnership with the Agency for Fighting against Economic and Corruption Crimes (the Financial Police), the Financial Police Academy, Turan University, the Kazakhstan Association of Higher Education, and the Republican State Enterprise “Kazakhstan Temir Zholy” – will present a completely new educational format that provides students with anti-corruption instruments and tools, with step-by-step recommendations on how to apply them.

The Anti-Corruption School project aims at promoting the theory and practice of anti-corruption. Over the course of seven days, all students will get the opportunity to work with leading anti-corruption experts, government representatives, businessmen and scientists. They will also get the opportunity to see real-life examples of how to effectively fight corruption. The school’s programme includes four training modules that combine both theoretical and practical courses on topics, such as corruption research and public sector, private sector and civil society participation in combating corruption.

Within the framework of this project, we have also launched an informational campaign “I have a dream” – focusing on children’s dreams about a clean, transparent and just Kazakhstan. All of the words presented in our posters are real expressions of children from Almaty kindergartens. The dreams of these young citizens of Kazakhstan are rather small and these dreams cannot be executed by fairies or by cyber toys. Only we, adults, can make these dreams come true.

We argue that corruption is a part of a culture or lifestyle; that corruption is an integral part of doing business and that ordinary people cannot resist corruption. Corruption is a two-way street – those who give bribes have to be responsible for their actions as well as those who receive bribes.

Source: Transparency International

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Regulators Step Up Probe Into Bank Hiring Overseas

The US Securities and Exchange Commission is widening its investigation into whether banks in Asia have cropped-fca-singapore.jpgbreached anti-bribery laws by employing the relatives of high-ranking public officials.

The SEC sent letters in March to Credit Suisse Group, Goldman Sachs Group, Morgan Stanley, Citigroup Inc and UBS AG requesting more information on hiring practices, according to reports. The regulator started to investigate JP Morgan‘s hiring history in 2013.

None of the insitutions have been accused of wrongdoing.

Investigators are examining possible connections between employees hired as a result of referrals from foreign officials and clients, the Wall Street Journal reported, and consequently whether there were connections between hiring  “an unsuitable employee to the bank’s winning a contract or other new business.”

Attempting to influence a foreign official with a view to winning business is a breach of the US Foreign Corrupt Practices Act.

Source: WSJ

 

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