(Note: A significant movement in the global financial crime field is the “convergence” of units that financial institutions, other corporations and governments maintain to deal with various financial crime threats. Realizing that the threats, such as corruption, fraud, tax evasion, money laundering and compliance and enforcement countermeasures, have several common elements and that greater effectiveness may be achieved through convergence, these organizations have brought the units under one roof, often using the term “financial crime” under which the converged units now reside.
The basic thesis of the Association of Certified Financial Crime Specialists adheres to this logic.
On October 25, 2013, the Cayman Financial Review published an incisive article by Monica Bond, a forensic accountant and attorney in London, capturing the essence of why convergence is compelling. We reprint it with permission of the Cayman Financial Review. )
By Monica Bond*
Cayman Financial Review, October 25, 2013
The convergence of anti-financial crime compliance is a much welcomed international development. It reflects a collective professional consciousness in this field, regardless of discipline, which is driven by logic and practical necessity.
By way of setting the tone, the Fraud Advisory Panel of the Institute of Chartered Accountants in England & Wales (ICAEW), whilst recognizing that developments have been emerging for years in relation to the convergence of anti-financial crime, recently enunciated that:
There are many reasons for this but which may be briefly summarized as being that, without this convergence, we would be effectively “tying our own hands behind our back” in our fight against crime. In this article, I shall first explore the reasons for this convergence. I will then examine the advantages of taking an inter-related approach to anti-financial crime compliance and summarize how to apply these principles in practice in the best possibly way.
Arriving at trans-national convergence
It is worth trying to analyze why it has taken regulators and commercial entities so long to adopt a more holistic approach to fighting financial crime. One possible explanation is that we have been too focused on precise delineations of different offences of financial crimes, as opposed to tackling them from the root, i.e. from a compliance perspective.
For example, we may focus on the constituent parts of the offence of false accounting (the mens rea, and the actus reus etc.) without focusing instead on whether that is simply a means to an end for the relevant criminal. We should rather seek to take the aforementioned inter-related approach to tackling financial crime.
Specifically, I shall focus on the importance of taking such an approach with reference to politically exposed persons (PEPs), anti-money laundering/counter financing terrorism (AML/CFT), beneficial ownership and anti-bribery and corruption (ABC). There have been recent, critical developments therein which will form synergies that can ensure that we are all “at the top of our game” in fighting financial crime.
Before we examine those developments, however, it is worth noting possible reasons for the convergence phenomenon which has been deemed to be a positive event by many organizations as stated in a recent joint survey by the ICA and Ernst & Young in 2012.1 An interesting result of the survey, however, is that the given reasons for exhibiting such a consensus do not wholly support current academic literature which champions the practical benefits of this convergence.2
The same joint survey states that the biggest driver of internal organizational change, by a factor of 78.1 percent,3 is the need for organizations to keep their reputations intact and/or in a superior position to those of their respective competitors. In contrast with that figure are the overshadowed, and motives of seeking to improve process efficiency (67.5 percent) and enhancing regulatory compliance (70.2 percent).
Regardless of the underlying motives for said organizations’ concern, this author would laud their candor and declare the survey’s findings to be positive in nature − support for convergence of anti-financial crime compliance can only be a positive result. Already, there have been practical manifestations of convergence in recent years amongst commercial and financial institutions; there are two notable examples whose utility this author would impress upon the reader:
i. Centers of excellence
Centers of excellence are units which work to combat financial crime through training and the provision incident response functions inter alia. Such centers employ the requisite specialist skills within this field which are expensive and in heavy demand. Indeed, many large corporations and banks we work for engage the services of such centers on a routine basis in various specialist capacities as they often are proved to be more cost-effective when retained in that manner.
ii. Adoption of central analytical hubs
There has been evidence of a recent tendency to adopt small, multi-disciplined teams as opposed to housing entire departments with singular domains when fighting financial crime. This approach is recommended because it often results in increased operational flexibility. It is generally far better to form a relatively small team of experienced personnel when tackling any major or sensitive matter, because this can ensure effective collation and assimilation of all pertinent information. This inevitably facilitates effective data analysis and the production of results orientated outcomes.4
Having briefly examined the reasons behind the convergence of anti-financial crime controls, I turn now to some of the most noted examples evincing the phenomenon of convergence itself.
Politically exposed persons
The concept of PEPs has evolved over a number of years since it was first coined by the Wolfsberg Group. It has also produced certain superficial similarities amongst its various iterations in every jurisdiction. Notable examples include the reference to senior foreign political figures as referred to in s.312 of the U.S. Patriot Act 2001, in addition to foreign public officials as defined by s.6(5) of the U.K. Bribery Act.
One may note that there are differences amongst relevant items of various national legislations. For example, the FATF in its Recommendations revised its definition of a PEP to include domestic PEPs. Its guidance also recommends that enhanced due diligence measures be undertaken when organizations are involved with domestic PEPs where there are higher risk factors involved.5 In contrast, the references in the U.S. Foreign Corrupt Practices Act 1977 (FCPA) to senior foreign public officials seems to amount to an artificial delineation.
In Europe, however, convergence finds support regarding PEPs within Article 3(8) of the (current) Third EU Money Laundering Directive, which mirrors the approach of the FATF. Moreover, the upcoming Fourth Directive6 will maintain this all-inclusive definition. It will also introduce new requirements for domestic PEPs/PEPs working in International Organisations utilizing risk-sensitive measures − thus maintaining the growing consensus that risk-based approaches are inherently more flexible than rule-based approaches to legislating AML/CFT matters.
Additionally, we have seen a gradual turning away from “one-size fits all” approaches to CDD in high-risk situations − this certainly is the case for entities in Europe who are looking to bring themselves into line with the upcoming Fourth EU Directive.7 In a similar vein to the FATF Recommendations (specifically Recommendations 24 and 25), the upcoming Directive will implement further requirements on member states to enact legislation mandating financial institutions to hold, and produce when required, sufficient and accurate information on their beneficial owners and of their clientele. Tips from the top in implementing this will undoubtedly focus on the strategic deployment of centralized IT systems which also focus on trustees − specifically when they become clients and should therefore declare their status and to whom the proceeds will revert upon the winding up of the trust.
ABC – Bribery Act vs. FCPA
The powerful impact and extensive reach of the U.S. FCPA cannot be stressed enough. Yet it is the recent U.K. Bribery Act that “raises the game” in the fight against corruption even higher.
The Bribery Act introduces one radical change, which is similar to the principle of vicarious liability under U.S. legislation, for a company’s employees’ bribery. This is the so-called ‘corporate offence’. This offence entails liability for companies which fail to prevent its associated person’s bribery. The only defense to this offence is for the ‘commercial organization’ to show that it had adequate procedures in place.
Whilst this offence, and its related defense, may be profoundly innovative for U.K. regulators, law enforcement agencies and the prosecution, the adequate procedures themselves are very similar and sometimes identical to the concept of internal controls. Such internal controls have been long propounded by accountants, in addition to both external and internal auditors. Interestingly, these controls appear to predate the invention of double-entry bookkeeping (Luca Pacioli was the author of the first text in 1494), and can be traced back to the usage of tally sticks over 30,000 years according to research summarized in a recent ACFE article in the Forensic Examiner. We will discuss the defense of adequate procedures in the next article in further detail.
A manifesto for anti-financial crime convergence
Regardless of the differences between jurisdictions on certain issues, it must be stated that the intention of the author is not to draw to the front of the reader’s mind a sense of division. Quite the contrary, my examination of both the reasons for the occurrence of the convergence phenomenon, as well as its positive impacts on the financial services sector, is meant to illustrate that, in fact, the event is well documented and ever growing in strength.
More particularly, with the exception of crimes of passion, all crimes are committed for money. Furthermore, many crimes, including some crimes of “passion”, are facilitated by money.
Money is the lifeblood and the raison d’être of the vast majority of crime.
However, even with crimes of “passion” such as murder and terrorism, money will frequently help the criminal to evade justice. Therefore, any attempt, either internationally or trans-nationally, to produce a cogent set of principles in relation to anti-financial crime practices as demonstrated above is to be welcomed.
*Monica Bond, Principal at Bond Solicitors in London, is a leading fraud and financial crime solicitor and international litigator and fraud investigator who has specialized in complex commercial investigation involving fraud, false accounting, money laundering and corruption for nearly 30 years. Prior to this, she worked in the commercial and business sector in senior roles for her forensic accounting specialist practice which began 25 years ago. Her experience as a Forensic Accountant/Senior Manager in the London office of Deloitte, in particular, provided her expertise in conducting major multi-jurisdictional investigations.
- 1 A copy of which can be found online here
- See for example David Stewart, “Financial Crimes Convergence: Tipping Point”, available online here
- Op cit. Fn. 1 , p. 16.
- Deloitte, in particular, has been vocal in its support of organizations adapting such centralized ‘analytics hubs’. See Deloitte, “Joining the dots: An integrated approach to tackling financial crime”, available online here
- See FATF Recommendation 6, 10 and 12 plus the Interpretive Note to Recommendation 12.
- Scheduled to be formally adopted by the European Council in late 2013/Early 2014. See Williams, “The proposed Fourth EU Anti-Money Laundering Directive – On the prevention of the use of the financial system for the purpose of money laundering and terrorist financing”, available here
- Op cit. fn. 9 pp. 11 & 12.