PEPs and the Corrosion of Democracy – The Weekly Round-Up

May 24, 2019 6 minute read

Head of Financial Crime, Livia Benisty shares her financial crime highlights from the week that’s passed.


Deutsche Bank is having a bit of a week

On Wednesday it was reported a ‘software glitch’ at Deutsche Bank prevented suspicious transactions from being flagged for almost a decade. Apparently “two of the 121 parameters…were defined incorrectly”. It’s not the most forthcoming of explanations. The news is an unfortunate follow-up to the New York Times report earlier this week, stating that Deutsche Bank executives overruled guidance from AML staff to report suspicious transactions involving legal entities controlled by Donald Trump and Jared Kushner. This activity was detected by the bank’s transaction monitoring system (clearly from one of the other 119 parameters) and led to staff preparing Suspicious Activity Reports (SARs).

Usually, in a bank, the decision to file the SAR would sit with the BSA Officer / MLRO, a member of the compliance team which is independent of the business. For reasons that seem inexplicable right now, these reports went to managers of the private bank who decided not to file, presumably because the relationship was too important to put at risk.

One set of transactions allegedly involved the movement of funds from Kushner companies to Russian individuals. After Trump became president, Deutsche’s Special Investigations Unit conducted an apparent retrospective and produced multiple SARs involving entities Trump owned or controlled. The Bank ultimately decided against filing those reports. To add a sense of scale to the relationship, when Trump became president he owed the bank over $300 million.

The bank is facing congressional subpoenas requiring them to submit Trump’s detailed financial records. This week two federal judges, one in Manhattan and one in Washington, ruled against a request from Trump to block Deutsche from complying.

OCC focuses on risks of increased competition from emerging technology

On Monday, the Office of the Comptroller of the Currency (OCC) released its semiannual risk perspective. In addition to compliance risks related to Bank Secrecy Act / AML remaining high, the committee noted that “strong competitive pressures from nonbanks…and evolving technology in the financial services sector” were among additional challenges posing risks to the industry. Competition could cause an increase in strategic risk, which change customers’ expectations around the delivery of financial services. The report noted that compliance teams faced challenges “because of new products, services, and technologies, and maintaining sufficient staffing and expertise to address these risks.”

The report seems to be warning against two possible sets of risks emerging from the shifting industry landscape. The first is that newer entrants might lack the expertise needed to operate safely in this environment, a debate we’ve seen raised several times over the last few months as fintechs become the subject of regulatory inquiry. The second risk is that incumbents might respond to the increased competition by trying to move too fast themselves, perhaps without going through the appropriate checks and balances. It’s an interesting decision by the OCC in light of recent moves to allow fintechs to operate in the US with national charters. Possibly a sign that while the regulatory body wants to encourage innovation, they also want to show strength in the face of criticism from state regulators that fintechs are going to destabilise financial markets.

Anyone that has worked in a large financial institution will know the somewhat lengthy process involved in bringing a new product to market or getting a new vendor through procurement. Undoubtedly, something has to change if banks are going to operate and innovate at the pace they need to. Substantial change could be implemented without creating a riskier environment, but it is possible banks will read this and see it as a warning against making the necessary changes to their infrastructure, landing them in a difficult position akin to the space between a rock and the place where incumbents become obsolete.

Sanctions possible over money laundering through Venezuela’s food-aid program

The US Treasury is alleging that Venezuelan officials and private contractors have laundered billions of dollars in state funds meant for Venezuela’s military-run emergency food program.

This is a poignant example of how corrupt officials may have been able to exploit state-run infrastructures for their own gain. The allegations suggest the Venezuelan government signs overpriced no-bid contracts with suppliers who produce food. Suppliers are paid through a federally run bank and overpayments are distributed to bank accounts, real estate and other investments controlled by the alleged conspirators. There are further allegations regarding siphoning off billions of dollars from state-run oil, gold-mining and currency-trading operations.

These cases highlight why politically exposed persons are viewed as higher risk for financial crime. The access to state funds, procurement contracts and government-run financial institutions offer a means of masking illicit flows on a large scale. It also demonstrates the human cost associated with financial crime. The use of humanitarian assistance to evade sanctions and the corresponding corrosion of democratic institutions is felt most strongly by the people who need them the most. The emergency food program is the main food source for an estimated 15% of Venezuelans and a critical supplement to many more.

The US is considering criminal charges and sanctions against those involved.

Ongoing debate around beneficial ownership spans the Atlantic

In the UK, a joint parliamentary Committee has commented on the draft Registration of Overseas Entities Bill. The Bill aims to establish a publicly-accessible register of overseas companies and individuals who own property in the UK.

The Committee said, “there are still some loopholes in the draft Bill which, if unaddressed, could jeopardise the effectiveness of this important piece of legislation”. These ‘loopholes’ include the lack of verification checks to prevent criminals from submitting false information. In addition, the legislation doesn’t cover trusts which could be used to circumvent the law, whilst MPs are concerned about enforceability, industry groups have said it violates basic privacy rights.

This is another piece to the ongoing debate around registries of beneficial ownership, and the question around the powers of registers like Companies House to validate the information submitted to them.

In the US, the Senate Banking Committee held a hearing on Tuesday about combating money laundering and illicit financing by anonymous shell companies. Acting Deputy Assistant Director of the Criminal Investigative Division of the FBI, Steven M. D’Antuono, gave a great summary of the problem which you can find here.

According to Transparency International, in 2018 suspicious offshore shell companies and similar entities put more than £4 billion ($5.1 billion) into real estate in London and elsewhere in Britain.

Scotland Yard unveils financial crime network enabled by money remitters

Staying in the UK for our final story, money service businesses are under fire again. Scotland Yard released details of a money laundering and terrorist finance network which shipped £310 million of criminal profits overseas in a year – using high street money transfer services in London. The money was used primarily for drug trafficking and to pay for bulk imports.