We share our financial crime highlights from the week of 15th July, 2019.

Losing the Flag of Convenience

Last week we talked about the stand-off going on in the Gulf between the British Navy and allegedly Iranian vessels. The not quite a conflict has reached as far afield as Panama, the island nation has decided to remove its flag from vessels that ignore sanctions.

The tiny island nation of 3 million has the largest merchant shipping fleet in the world, dwarfing the combined total of the USA and China. And it’s not just because Panama guards one of the world’s most important trade routes, the Panama Canal, linking the Atlantic and Pacific oceans.

Panama has open-registry, companies wishing to avoid their own countries’ strict marine regulations can register under the Panamanian flag and gain benefits including, no payable income tax, cheaper labor and easy online registration.

59 tankers were chosen to be removed from Panama’s registry in 2018 following the USA’s decision to reimpose sanctions on Iran. The vessels were owned by Iranian state-run companies.

The decision didn’t stop some of the ships from traveling using the Panama name to their advantage. One supertanker arrived in Gibraltar on July 1, captured by the British Navy, loaded with crude oil and thought to be bound for Syria with the Panama name on its hull – which had been removed on May 29.

Losing a flag generally means an instant loss of insurance if the vessel doesn’t get another flag immediately. The flag losses are likely a result of the USA pressuring allies to help enforce sanctions.

Rafael Cigarruista, general director of Merchant Marine from Panama’s Maritime Authority, commented: “Our intention is to improve our fleet’s percentage of compliance, not only regarding sanctions by international organizations, but also Panama’s current legislation and maritime security rules.”

However, Panama’s fleet has been shrinking, the Marshall Islands has 4100 registered ships and Liberia has approximately 3,800 registered vessels. It’s yet to be seen if they’ll follow suit and strip sanctioned countries vessels of their flags too.

If flags of convenience are lost to any and all sanctioned entities it could be a considerable blow to money laundering and terrorist financing activities blows globally by forcing out a part of the dirty money supply chain.

Big Fish Slipping Through the Net

Published last Friday, the UK government’s Economic Crime Plan has a focus on suspicious activity reports (SARs) and recovering ill-gotten gains, two areas that are currently below international standards.

The UK government is investing £48 million ($60 million) over its 2019/20 efforts into tackling financial crime. A paltry sum compared to the £100 billion-plus ($125 billion) that’s laundered into the UK economy each year. There were 460,000 SARs in 2018/19 which formed part of 20 million financial crime alerts and investigations, record highs in reporting and investigations but only £34 million ($42.5 million) was recovered and 150 arrests made.

To say that the UK government’s new plan to tackle economic crime has been harshly criticized would be an understatement. Campaigners have suggested that instead of addressing how to hold companies criminally liable for their actions the government has given banks a great deal of power through giving banks a role on a new board for oversight on economic crime policy.

It’s worth noting that policy that’s impossible for large banks to implement would render the plan and the board inconsequential, banks need to be consulted so that effective policies can be created. Public-private consultation is key and this is one way of achieving it.

Critics have targeted the lack of corporate-criminal liability as a failing in the plan as only bribery and tax evasion are addressed. Lack of ambition and scope in relation to the size of the problem is a common thread throughout criticisms of the plan. Sue Hawley of Corruption Watch commented: “You can’t tackle economic crime fairly and justly in the UK without making sure that the big financial actors in this country can be held accountable before the law equally to the rest of us.”

In a fisherman’s nightmare of a net, small businesses are easily caught through the new plan but large institutions such as banks slip through without concern. This unfortunate outcome is due to the multiple layers of complexity and decision-ownership that multi-nationals have in place.

Currently, companies can only be held criminally liable as an entity if someone senior enough in the company can be shown to have been aware of involved in criminal activity. Something that’s much easier to prove when there are few to no layers of structural complexity around decisions.

Sajid Javid, Home Secretary, said: “Our new plan represents a step-change in our response, bringing together the public and private sectors to relentlessly pursue the perpetrators and their dirty money.” But his words don’t quite seem to gel with the government’s actions when dirty money is outperforming government-spend by orders of magnitude.

That’s not to say that the plan is without merit, Christopher David, counsel at the law firm Wilmer Cutler Pickering Hale and Dorr commented: “It’s the first time they pulled together a coherent strategy for tackling economic crimes, which covers a lot of aspects and areas.” It’s a step in the right direction to meeting the expectations of global regulators.

Refilling 1MDB

Singapore is set to return S$50 million ($36.8 million) to Malaysia, the money was all seized and related to 1MDB. The money is being returned in two tranches, one granted last year in September and another in May 2019, part of the money has already been returned while the rest is being processed for repatriation through the banks.

Around $225 million of 1MDB cash that’s flowed into Singapore has been restored to Malaysia so far across various currencies. Malaysia is attempting to recover $5 billion of foreign assets connected to 1MDB, nearly equivalent to the $4.5 billion believed to have been misappropriated by officials and associates of the fund between 2009 and 2014.

The 1MDB scandal has rocked the entire financial world and is a perfect example of how intricate money laundering circles can encompass the globe. The money flowed from Malaysia’s Sovereign Wealth Fund out into Singapore, the USA, Australia, hotels, media production companies and numerous other locations.

In the face of that scale, AML processes and plans need to be incredibly robust and require significant investment to stand any chance of uprooting and challenging the issue.

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