Head of Financial Crime, Livia Benisty shares her financial crime highlights from the week of June 17th, 2019.
Back At It Again with the Money Laundering
Swedbank has fired the Chief Exec and Finance director of its Estonian operation, Nordea’s Copenhagen office was raided, and Danske is in the spotlight for money laundering once again but for a different instance entirely.
The raid on Nordea was by the Danish State Prosecutor for Serious Economic and International Crime. It was triggered, apparently, by ‘new information about possible breaches’.
Danske has temporarily managed to shift focus from its Estonian operations due to suspicions that a money exchange company laundered more than $25 million through a bank account held by Loomis. Not quite at the same scale as the last scandal, but police have named the case Operation Greed nonetheless.
These developments are just the newest details in what is beginning to feel like a never-ending story. Although also not new, more interesting (for me) are comments around money spent, people hired and the role of technology.
Nordea has put more than $800 million into risk and compliance since they were fined in 2015 for AML failings. Nordea and Danske have added headcount but both say the extra numbers are temporary.
Mekael Bjertrup, head of Nordea’s financial crime prevention unit said that while 20% of suspicious alerts are currently closed by algorithms and 80% by humans he wants to see that number reversed.
In the same article, he implied they currently have 1500 employees dealing with financial crime. Swedbank plans to spend an additional $69 million this year on AML, although this apparently includes severance for the former CEO so it’s not really a reliable number.
All of these attempts at progress fail to recognize one key thing. It’s repeating the same cycle of high investment followed by intensive cuts that banks always make after an investigation and fines. Just throwing resources at the problem won’t work, they need to find the right solutions to their problems and focus on implementing those.
Weighing Up Libra
To add to the deluge of commentary available already; Facebook is launching what they are calling a new decentralized blockchain, the Libra Blockchain, and a low volatility cryptocurrency, the Libra Coin. The Libra coin is backed by ‘a basket of bank deposits and short term government securities’, the Libra Reserve. The governing entity, the Libra Association, is an independent not-for-profit membership organization based in Geneva.
Calibra is the wallet component, the regulated subsidiary created to ensure separation between social and financial data, although it looks like Calibra is a subsidiary of Facebook, unlike the independent association for the network. Raising questions, and eyebrows, around the security and privacy of user data.
So much has been and will continue to be written about this. There is still up to two years before it’s operational and clearly many things still need to be established/figured out/made public. From a compliance perspective, two key issues are AML/CFT controls and privacy.
Calibra is registered as an MSB with FinCEN in all US states. Meaning it must abide by money transmitter legislation including KYC, screening and ongoing monitoring. It also means abiding by ‘the travel rule’ requiring information on senders and beneficiaries to be transmitted together with the payment, an issue at the center of discussions between virtual asset service providers as FATF prepares to issue its guidance on the topic. In addition to the requirements on Calibra, several of the partners in the Libra network (e.g. Mastercard, Visa, PayPal, Stripe, etc.) are regulated financial institutions with their own regulatory obligations.
Privacy concerns are at the center of most of the articles I’ve read, particularly given all the other reasons Facebook has been in the news recently. The KYC requirement means Facebook will now have government IDs used for validation, which takes privacy concerns regarding the social media giant to a new level.
Regulators have been quick to comment following the announcement. French finance minister Bruno Le Maire said it was ‘out of the question’ that Libra could be a fully fledged currency. Germany’s Markus Ferber warned Facebook could become a ‘shadow bank’. Chair of the House Financial Services Committee in the US, Maxine Waters, called on Facebook to put a stop on the project until Congress and regulators could review it. Zuckerberg had spoken previously to the head of the Federal Reserve and head of the Bank of England, Mark Carney, said if the initiative was successful “It would instantly become systemic”.
The one thing I read which surprised me was that Facebook is disappointed by the reaction and that they’d hoped that they wouldn’t face so much scrutiny. No matter what you think of the company, it is impossible they thought this would go down easily. But whatever happens, as Mr. Carney alluded to, if crypto is ever going to become mainstream, it’s likely to be through this kind of platform.
SAR Reform is on the Horizon
The UK Law Commission has released the results of its review into Suspicious Activity Reports (SARs). With record numbers of SARs being filed last year, many of which provided information of little or no value, there is no doubt over the need for reform.
The commission issued 19 recommendations in total. What’s key from the outset is the recommendation that the consent regime is retained, but that improvements were made to enhance efficiency and effectiveness.
Understandably, an element of the review was around what constitutes ‘suspicion’ as that raises the obligation to file a SAR. Not only can this be a rather subjective term but it is not linked to the gravity of the underlying crime.
Introducing statutory guidance on key legal concepts such as ‘suspicion’, ‘appropriate consent’ and ‘reasonable excuse’ is one of the Commission’s recommendations. Others include the creation of a public-private sector advisory board to ensure continued effectiveness and provide guidance on emerging threats, as well as conducting further research into the value of targeted reporting (i.e. requiring reporting in specific circumstances, not necessarily linked to suspicion).
There was also a suggestion to prescribe the form a SAR should take and use new technology to take the process online. This would mean disclosures were more consistent, accessible and effective. The goal is that by inputting information in a more consistent format, the UKFIU and law enforcement agents will be able to ascertain more quickly the nature of the reporters’ suspicion and key details underpinning it.
Overall I was left with the awareness that while this is a start there is so much more to be done. As a reporting officer, it can sometimes be difficult to believe that SARs are being read or used. When you consider how many are filed on an annual basis and the level of staffing and budget at the NCA it becomes even more concerning. Ultimately the consistency of the SAR filing will be a key element towards organizing the data contained in these reports and will be fundamental in enabling technology to come in and make sense of that information.
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