Fincrime Briefing: Australian regulator sues bank on breaches, Warren unveils corruption agenda, FATF chides Russia, Turkey on fincrime gaps, and more

By Brian Monroe
bmonroe@acfcs.org
December 17, 2019

Quote of the Day: “You are not here merely to make a living. You are here in order to enable the world to live more amply, with greater vision, with a finer spirit of hope and achievement. You are here to enrich the world, and you impoverish yourself if you forget the errand.” – Woodrow Wilson.

In today’s briefing, an Australian regulator sues one of the country’s largest banks for thousands of breaches, compliance stumbles, Elizabeth Warren details countering corruption at home, abroad, FATF dings Russia on tackling large, complex cases, Turkey on countering terror, proliferation threats, and more.

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ENFORCEMENT

Regulator sues National Australia Bank for ‘thousands’ of breaches tied to taking advantage of customers, compliance failures

National Australia Bank Ltd. is being sued by the country’s securities regulator for “several thousand” breaches of company law, in another blow to the scandal-tainted Australian banking sector – opening the institution to the specter of massive penalties.

In a filing on Tuesday, the Australian Securities & Investments Commission (ASIC) said the Melbourne-based lender charged customers for financial planning services they never received, failed to maintain adequate compliance systems and contravened its obligation to act efficiently, honestly and fairly.

The lawsuit adds to the litany of legal cases facing Australia’s large banks, which came in for withering criticism in an independent inquiry into financial sector misconduct early this year. The revelations that banks charged fees for services they didn’t provide was one of the inquiry’s central findings.

The former chairman and chief executive officer of National Australia both resigned in February, soon after being singled out for blame by the Royal Commission. The bank began compensation efforts last year and expects to complete that process by June 2020.

In its documents, ASIC stated the bank had already set aside a substantial figure for expected penalties and remediation engagements.

The maximum civil penalty for contraventions alleged against NAB are:

  • $250,000 per contravention for breaches of s962P (charging ongoing fees after the termination of an ongoing fee arrangement) and s962S (failing to provide a timely FDS);
  • $1.7 to $2.1 million maximum penalty (depending on the time period) per contravention for breaches of s12CB (unconscionable conduct) and s12DB (false or misleading representations).

NAB received more than $650 million in ongoing service fees from 2009 to 2018. NAB has stated that it has provisioned more than $2 billion for customer-related remediation including Fee for No Service remediation across all of its advice licensees, (via Bloomberg) and (via ASIC).

Monroe’s Musings: What is happening in Australia in many ways mirrors what happened in recent years in the United States, where investigators and regulators uncovered that many large household name banks where taking advantage of customers, charging them for services they never asked for to hit unrealistic sales quota goals.

When everything came to a head, the fake accounts scandals claimed top executives, cost the institutions hundreds of millions of dollars in real and reputational penalties and, for one institution, resulted in many of the brightest minds and legends of compliance to be shown an unceremonious exit.

The tacit meaning for the compliance officer of today – whether you are in the U.S., Australia or anywhere else – is that you had better be just as aware of the insider threats at your institution as the external threats made up of money launderers, organized criminals, terrorists, crypto fraudsters and the like.

They can all cost you, and your institution, big. 

CORRUPTION

Warren unveils broad plans to counter domestic, foreign corruption by strengthening AML rules, bank penalties for failures

Democratic presidential hopeful Senator Elizabeth Warren unveiled broad and sweeping reforms to counter corruption at home and abroad, with many of the cornerstones being bolstering financial crime compliance rules, evaporating beneficial ownership bastions and expanding enforcement for institutions tied to laundering scandals.

Here are some of the key tenets of how a Warren administration would go after graft on a grand scale:

  • Cracking down on money laundering through beneficial ownership legislation
  • Gathering better data on cross-border financial flows
  • Expanding anti-bribery law authorities
  • Promoting international cooperation to combat tax evasion
  • Strengthening real estate disclosure requirements to keep corrupt oligarchs from driving up prices and driving out honest purchasers
  • Updating campaign finance laws to limit foreign interference and eliminate dark money in politics
  • Prioritizing enforcement against financial institutions that knowingly facilitate illicit transactions
  • Clamping down on the lawyers, accountants, and others that enable the flow of dark money
  • Targeting corrupt kleptocrats who steal from their home countries and stash the money overseas

Strengthening anti-money laundering (AML) laws related to banks and engaging in more aggressive enforcement for compliance failures are key cornerstones of Warren’s future efforts to counter grand corruption domestically and internationally.

Here are some snapshots:

Stronger AML regulations

I’ll work with Congress to enact anti-money laundering reforms and update basic financial integrity requirements designed to fight illicit financial transactions, including collecting standardized identifying information about the ultimate beneficial ownership of every corporate entity created across the country.

This will increase law enforcement’s understanding of the web of companies operating in the United States, and help to end our country’s status as a global facilitator of money laundering. And while we should encourage innovation in financial technologies, like cryptocurrencies, we must also ensure they are not used for money laundering.

Expand enforcement against financial institutions

For too long, we’ve threatened to punish major international banks, but failed to follow through when clear evidence of wrongdoing surfaced. Settlements are often just slaps on the wrist – when Mexican drug cartels allegedly used accounts at Wachovia to launder at least $373 billion, for example, the bank only had to pay $160 million, less than half of one percent of the money laundered.

Banks, regulators: no more revolving doors

My anti-corruption plan will shut the revolving door between financial institutions and the regulators who are supposed to oversee U.S. transparency and money-laundering efforts.

Giant banks will be banned from hiring senior government officials for four years after those officials leave office.

My plan will also prevent financial institutions from using industry-funded fake research to mislead federal regulators during the rulemaking process – and subject them to potential prosecution if they mislead regulators with “research” they know to be false.

And I’ll make enforcing existing transparency and anti-money laundering laws a major priority for a Warren Treasury and DOJ. 

Clamp down on dark money enablers

U.S.-based enablers are often just as responsible for corruption as the kleptocrats whose money they manage.

The international flow of illicit money thrives thanks to the lawyers, financial services providers, accountants, and real estate services providers who bridge the divide between the dark economy and the clean one.

They do so through “layering,” creating a maze of bank accounts and shell companies offshore and in the United States, until the original source of the funds is entirely obscured.

For example, when the anti-corruption watchdog Global Witness asked several law firms how to anonymously move significant sums of money in ways that should have raised major red flags, in all but one case the lawyers offered suggestions on how to do it.

Moreover, big financial players like hedge funds and private equity firms are untouched by many anti-money laundering regulations – as are real estate service providers servicing all cash deals and company formation agents, (via Elizabeth Warren) and (via the River Bender).

Monroe’s Musings: Whether these moves ever come to pass is one issue, but what compliance professionals should not miss is that critical to countering corruption was aggressively re-tuning AML rules and engaging in a more draconian penalty ethos – in a sense a return to from the past decade that has waned recently as regulators tout an “era of innovation.”

FATF

In latest mutual evaluations, FATF chides Russia on tackling larger, more complex financial crime investigations, dings Turkey on countering terror, proliferation threats

A global watchdog group has chastised Russia for failing to be aggressive enough in tackling large, complex financial crime cases while at the same time noting “serious shortcomings” in how Turkey identifies, investigates and prosecutes terror and weapons proliferations threats.  

Those are just some of the findings from two mutual evaluations by the Paris-based Financial Action Task Force (FATF), which engaged in broad updated reviews of Russia and Turkey, focusing more closely on the effectiveness of compliance and counter-crime efforts, rather than just technical compliance with laws on the books.

Here are some snapshots:

Russia

The Russian Federation (Russia) has an in-depth understanding of its money laundering and terrorist financing risks and has established policies and laws to address these risks, but it should enhance its approach to supervision and prioritize the investigation and prosecution of complex money laundering cases, especially concerning money being laundered abroad.

Russia recognizes that it faces significant money laundering risks as a result of the proceeds of crimes committed within the country, in particular those related to corruption and its role as both a transit and destination country for narcotics trafficking.

A national risk assessment, complemented by in-depth knowledge of relevant law enforcement agencies, has allowed the country to identify and understand its risks, including terrorist financing risks. 

Russia’s legal framework appropriately addresses these risks and the country has formal policies in place, supported by strong domestic co-ordination and co-operation, to combat money laundering and terrorist financing.

 However, the country needs to address gaps in its ability to freeze, without delay, assets linked to terrorism, financing of terrorism and proliferation of weapons of mass destruction, and ensure that this freezing obligation extends to all natural and legal persons.

While the country has prioritised getting money back for the victims of crimes – around EUR 816 million per year – it needs to focus more on the investigation and prosecution of complex money laundering cases, especially concerning money being laundered abroad.

Russia has strengthened its oversight of the banking sector and has now mitigated the risks of criminals being the owners or controllers of financial institutions. However, deficiencies in licensing remain and the sanctions for banks that do not comply with AML/CFT requirements are not effective or dissuasive.

In general, financial and certain non-financial entities such as accountants and auditors, have a good understanding of how their services could be used to launder the proceeds of criminal activity or terrorist financing, but given that Russia is a significant centre for mining precious metals and stones, this sector’s understanding of risk is not in line with the country’s risk assessment.  

Since its last assessment in 2008, Russia has strengthened its understanding of the money laundering and terrorist financing risks it faces and has developed a robust legal framework to address them.

The country has taken a number of actions that have delivered concrete results. But, the country needs to address the areas of weakness this report has identified. 

Turkey

Turkey has understood the risks it faces from money laundering and terrorist financing but serious shortcomings remain, including the need to improve measures for freezing assets linked to terrorism and proliferation of weapons of mass destruction.

Turkey completed a national risk assessment in 2018. Due to its geographic location, the country faces the greatest money laundering risks from drug trafficking, migrant smuggling, human trafficking and fuel smuggling. The country also faces significant terrorist financing risks from both national and international threats.

In recent years, Turkey has significantly strengthened relevant laws and regulations. They form the foundation for positive action to address these risks and detect and prevent criminals and terrorist from misusing the financial system. However, it needs to swiftly improve implementation in a number of areas to boost effectiveness.

When investigating terrorist financing cases, Turkey’s authorities focus largely on identifying the assets held by terror suspects, rather than expanding the scope to include the collection, movement, and use of funds or other assets. 

Turkey also needs to fundamentally improve its ability to freeze, without delay, assets linked to terrorism, financing of terrorism and proliferation of weapons of mass destruction.

Turkey’s authorities demonstrated a substantial level of effectiveness in their co-operation with foreign counterparts on a variety of requests and sharing information both spontaneously and on requests.

The Turkish banking sector has a good understanding of its potential exposure to transactions with links to crime, but less understanding of their exposure to terrorist financing. 

Non-financial entities, such as real estate agents, dealers in precious metal and stones have a less comprehensive and sometimes limited understanding of the risks they face. Supervision of the financial and other relevant sectors is generally well-developed but sanctions for non-compliance are not always effective, proportionate and dissuasive.

To read FATF’s mutual evaluation of Russia, click here.

To read FATF’s mutual evaluation of Turkey, click here.

Monroe’s Musings: The heavily negotiated and muted language in the evaluations can’t hide the fact that these are two huge U.S. flashpoint locales and international hotspots for a wide array of financial crime threats and vulnerabilities – and that is even without FATF touching on potential Russian interference into U.S. elections.

Russia is well known to be rife with corruption, with U.S. sanctions specifically tied to the Magnitsky affair, with the country being likened by many pundits and watchdogs as a region run by gangsters only concerned with amassing the most wealth by any means possible.

Russia has been trying to exert its influence more aggressively in Eastern Europe, the Middle East and forge stronger ties with Asia, but likely won’t be working with these regions to raise counter-crime and compliance standards – its aims are chiefly economic and perception-oriented in the eyes of the world.

Turkey, due to its propinquity to Iran and other roiling regions, has struggled to build legal, regulatory and investigative capacities to create strong laws against laundering, corruption and, possibly even more important, terror financing.

The country also must take a harder stance against Iran to better root out the endless creative ways the Islamic Theocracy has learned to evade U.S. and international sanctions – with the acknowledgement these entities were designated due to their illicit and nefarious activities and proclivity to sow terror and seed destruction. 

GATEKEEPERS

Legal sector watchdog chases law firms over AML compliance lapses, where solicitors struggled to properly risk assess clients

The solicitor’s watchdog is pursuing law firms that have failed to fulfil anti-money laundering rules after evidence showed high levels of non-compliance, particularly in core, foundational areas of countering financial crime: the client risk assessment.

It has written to 6,500 compliance officers for legal practices asking them to make a declaration that they have a firm-wide money laundering risk assessment in place.

All firms that handle client money must have a risk assessment in place and complete the Solicitors Regulation Authority’s declaration by January 31, 2020, or risk further action.

In October a review carried out by the regulator revealed that a fifth of law firms were failing to comply with anti-money laundering rules, as it pledged to clamp down on non-compliance.

Earlier in the year the regulator had asked 400 firms to complete risk assessments to demonstrate compliance with 2017 money laundering regulations.

The results showed that 83, or 21 per cent, failed to comply with the rules, with 43 firms not addressing all the risk areas required and 40 not returning the correct documents.

The watchdog also revealed that it had opened 172 investigations linked to anti-money laundering compliance this year, (via The Times).