Global Investigations Review - The law and practice of international investigations

The European, Middle Eastern and African Investigations Review 2016

Cross-border overview: money laundering compliance and investigations across EMEA

14 June 2016

Boies, Schiller & Flexner

The leak of the Panama Papers in 2016 has thrust money laundering – a topic ever present on the radars of regulators worldwide – into the public consciousness. The leak of data from the Panamanian law firm Mossack Fonseca has revealed for all to see the widespread use by individuals and companies of asset ownership through offshore structures, both for legitimate purposes and for illegitimate means such as money laundering. Regulators across the globe are under significant pressure to respond firmly to the public’s outcry resulting from the leak of the Panama Papers.

While the Panama Papers have increased public awareness of the global scale of money laundering, experts have long known that the magnitude of money laundering worldwide is staggering. The United Nations Office on Drugs and Crime estimates the amount of money laundered globally in one year to be 2–5 per cent of global GDP, or US$800 billion–US$2 trillion.1

Even if the Panama Papers’ leak had not occurred, regulators worldwide – including in Europe, the Middle East and Africa (EMEA) – were poised to increase considerably their investigations and prosecutions of money launderers and the financial, legal, and accounting institutions that wilfully or negligently facilitate money laundering. In Europe, the European sovereign debt crisis has focused authorities’ attention on locating potential revenue sources that, to date, have been hidden from them. Likewise, the recent terrorist attacks in Paris and Brussels have led to a renewed focus by European authorities on how terrorists launder money to finance their activities. Similar trends can be seen throughout EMEA.

In this chapter, we provide an overview of recent compliance and enforcement developments concerning money laundering throughout EMEA. We then describe practical steps that financial institutions and professional services firms should take to minimise their risk exposure in an environment where allegations of money laundering or of its facilitation will place a company squarely in the bullseye of significant regulatory and enforcement firepower.

What is money laundering?

Money laundering is the process by which the illicit sources of assets obtained or generated by criminal activity are concealed to obscure the link between the funds and the original criminal activity. Laundered funds frequently are proceeds from crimes such as drug smuggling, human trafficking, illegal arms sales, and sanctions violations.

Money laundering is distinct from, but very often related to, other financial crimes, such as terrorist financing and tax evasion. All three exploit similar vulnerabilities in legal and financial systems to conceal money from regulators and authorities.

Europe

While US regulators traditionally have been viewed as the driving force behind most aggressive, cross-border anti-money laundering investigations and enforcement actions, some European authorities recently have adopted more aggressive, US-style approaches to investigating and prosecuting money launderers and financial institutions and professional service firms that facilitate money laundering.

In the UK, the Financial Conduct Authority (FCA) has highlighted investigating and prosecuting money laundering as one of its key priorities in its 2016/2017 business plan.2 The FCA’s decision to target money launderers and those that facilitate money laundering is not surprising and reflects the increasingly large fines that it has levied on financial institutions in recent years in connection with money laundering investigations. In November 2015, the FCA levied a fine of over £72 million in connection with money laundering systems and control failures. This is the largest fine of this type levied by the FCA to date.

More recently, in April 2016, Home Secretary Theresa May announced that the UK government intends to establish an offence of ‘illicit enrichment’ that targets public officials whose assets have increased significantly without satisfactory explanation. Under the proposed legislation, civil courts would have the power to impose ‘unexplained wealth orders,’ and those who fail to satisfy authorities about the source of their assets may have their property and cash seized.3 In addition, under the proposed legislation, the UK government would be empowered to force banks, law firms and accounting firms to use special measures when transacting business with companies that are designated as being ‘of concern in relation to money laundering.’4 While Mrs May has said that this proposed legislation is not a ‘knee-jerk’ reaction to the Panama Papers, the timing of her announcement suggests that backlash caused by the Panama Papers played a role in at least the timing, if not the substance, of this proposed legislation.5

Prime Minister David Cameron also recently announced that the UK Ministry of Justice will consult on plans to introduce a criminal offence of a corporate ‘failing to prevent’ money laundering.6 Under such an offence, if an employee is charged with money laundering, the company will be deemed liable if it cannot show that it had put in place procedures to prevent money laundering. In addition, in response to concerns that the UK property market is being used to facilitate money laundering, David Cameron also recently announced plans to require all foreign companies buying property in the UK to disclose their true owners in a public register.7 This dovetails with the new requirements to be introduced under the Fourth Money Laundering Directive,8 which must be implemented by European Union member states by June 2017. Companies and other legal entities will be required to hold and make available ‘adequate, accurate and current’ information on their beneficial owners to competent authorities, as well as to ‘any person or organisation that can demonstrate a legitimate interest.’9 This extends to information regarding trusts, although trusts only are obliged to disclose such information to the relevant authorities and not to anyone with a legitimate interest in it.10

Like the UK government, governments of other western European countries – including some known for their historic protection of banking secrecy – also are adopting US-style approaches to targeting money launderers and the financial institutions and firms that facilitate money laundering. For example, in June 2015, the Geneva public prosecutor levied a record 40 million Swiss franc penalty for alleged ‘organisational deficiencies’ that allowed money laundering to occur in a Swiss subsidiary. Although described as a ‘compensation payment’ and not a fine, this constitutes the largest amount ever sought and obtained by the Geneva authorities for deficiencies of this sort. Olivier Jornot, the Geneva chief prosecutor, warned that similar behaviour in the future could result in the filing of criminal charges.

This shift in western Europe towards a US-style approach to targeting money launderers and firms that facilitate money laundering undoubtedly will increase in the immediate future. In light of this, it is not surprising that European regulators were quick to spring into action after the leak of the Panama Papers. The first news stories regarding the leak of the Panama Papers were published on 3 April 2016. The next day, the FCA wrote to approximately 20 banks and financial services firms that it regulates, giving them a deadline of 15 April 2016 to complete initial investigations into their ties (if any) with Mossack Fonseca or to companies formed or managed by Mossack Fonseca. The FCA further requested that, after 15 April 2016, these banks and firms update it regarding any significant issues or relationships identified by them in relation to the Panama Papers. The FCA also instructed these financial institutions to provide it with a full response detailing their findings, once they complete their investigations. Similarly, FINMA, the Swiss banking regulator, has confirmed that it is investigating the extent to which Swiss banks used Mossack Fonesca’s services and whether Swiss laws have been violated. French prosecutors also have opened a preliminary inquiry into money laundering and tax fraud in light of the leak of the Panama Papers, and prosecutors in other European countries almost certainly will follow suit.11

While a shift is occurring in many European countries towards a US-style approach to targeting money launderers and the firms that facilitate money laundering, regional discrepancies in the robustness of anti-money laundering laws and enforcement do exist. In particular, some countries in central and eastern Europe do not have as robust money laundering regimes and enforcement practices as those found in many western European countries.

Middle East

In the Middle East, deficiencies exist with multiple countries’ anti-money laundering regimes. Because the existence of a strong anti-money laundering legal framework is a necessary precursor to the existence of effective anti-money enforcement actions, effective enforcement actions are rarer in the Middle East than in Europe.

Of the 11 countries on the Financial Action Task Force’s (FATF’s) list of countries with strategic deficiencies in their anti-money laundering regimes, four are located in the Middle East.12 Each of these countries – Afghanistan, Iraq, Syria and Yemen – is war-torn and has a weak central government.

The deficiencies identified in these countries’ anti-money laundering regimes are wide-ranging. For example, Afghanistan lacks an adequate anti-money laundering supervisory and oversight programme for its financial sector. The Afghani government also has not fully implemented its legal framework for identifying, tracing and freezing terrorist assets. Effective controls for cross-border cash transactions also are lacking. Likewise, efforts by the Iraqi government to criminalise money laundering and terrorist financing remain incomplete. Financial institutions in Iraq are not necessarily subject to customer due diligence and suspicious transaction reporting requirements, and the country’s financial sector lacks an adequate anti-money laundering supervisory and oversight programme. Iraq also lacks a legal framework and procedures for identifying and freezing terrorist assets.13

The FATF also regards Iran as a high-risk jurisdiction, as Iran has neither effectively implemented suspicious transaction reporting requirements nor criminalised terrorist financing.14

Encouragingly, in some politically unstable countries in the Middle East, steps have been taken recently to implement anti-money laundering regimes. In 2015, the government in Afghanistan issued amended cross-border regulations for declaring the physical transportation of cash and negotiable bearer instruments. Similarly, a new anti-money laundering and terrorism financing law has entered into force in Iraq, although the FATF considers that strategic deficiencies still remain. Yemen also has criminalised money laundering and terrorist financing, established mechanisms to identify and freeze terrorist assets, and improved customer due diligence and suspicious transaction reporting requirements. Its financial sector’s supervisory authorities’ monitoring and supervisory capacity have improved, and a financial intelligence unit has been established and is now operational.15

In stable Middle Eastern jurisdictions that are financial services hubs – such as the United Arab Emirates and Qatar – sophisticated anti-money laundering frameworks exist. For instance, the UAE first passed legislation criminalising money laundering in 2002, recently widened the scope of its money laundering and terrorist financing offences, and imposed higher penalties for related offences.16 Nevertheless, these countries’ geographic proximity to less stable countries in the region makes them vulnerable to efforts to launder money. In addition, the reliance in the region on hawala – informal value transfer systems based on trust where money is exchanged without physically being moved – presents additional challenges from an anti-money laundering standpoint.

Africa

While many African nations are highly susceptible to money laundering, and while enforcement of money laundering regulations is often lacking in the region, some progress recently has been made.

In early 2016, the FATF removed Algeria and Angola from its blacklist of countries that have strategic anti-money laundering deficiencies. As a result, only one African nation – Uganda – is now on the FATF’s list of jurisdictions with strategic deficiencies.17 In addition, the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) – which attempts to implement the FATF’s recommendations while taking into account regional factors – is actively working to combat money laundering in Eastern and Southern Africa by coordinating with other similar international organisations, studying emerging regional typologies, developing institutional and human resource capacities, and coordinating technical assistance where necessary.

Increasing attention also is being paid to anti-money laundering compliance at an institutional level in Africa, particularly in the financial services sector.18 In a 2012 study, 66 per cent of financial institutions in Africa surveyed by KPMG reported that their boards of directors take an active interest in anti-money laundering efforts.19 In South Africa, Angola, Botswana, Mauritius, and Zambia, this number is over 80 per cent.20 Only 2 per cent of financial institutions in Africa reported that their boards took no interest in such matters.21

Of course, developing and passing anti-money laundering laws and enforcing those laws are two different matters. African regulators are not nearly as active as those in western Europe, although regulators in certain African countries, such as South Africa, are improving their anti-money laundering efforts. Nevertheless, while progress has been made in some African countries, more work remains to be done to combat effectively money laundering in the region. This is particularly the case in the money and value transfer services sector and the currency exchange sector, which are particularly active in Africa due to the continent’s widespread cash-based economies and the high-level of remittances from immigrants in the region.22

Robust compliance policies: the first line of defence

The message emanating from across EMEA is clear: the enactment of increasingly stringent anti-money laundering laws, and the robust enforcement of anti-money laundering regulations, is on the rise, and this trend likely will continue for the foreseeable future. In light of this, financial services firms and their advisers should implement robust compliance policies to detect and prevent money laundering and should ensure that they are compliant with all applicable anti-money laundering regulations. Non-compliance with anti-money laundering laws can be very costly. To take one example, authorities in the US imposed a US$1.9 billion fine in 2012 for money-laundering related offences.

Of course, compliance with applicable anti-money laundering regulations is not always straightforward. Regulations change rapidly, as does the landscape that they regulate. New ‘app-based’ banking, contactless payments and virtual currencies, for example, create new compliance challenges.

At a minimum, financial services firms and their advisers should ensure that the following robust systems and controls are in place:

  • AML policies: a firm must ensure that it has a clear, comprehensive and state-of-the-art anti-money laundering policy.
  • Risk-based customer due diligence: a firm should verify the identity of each current and potential client (and, where appropriate, beneficial owner), collect information on the engagement’s purpose and nature, and conduct enhanced due diligence on clients who present higher risks, such as politically exposed persons (PEPs).
  • Suspicious activity reporting: a firm should ensure that it has clear procedures in place about how to identify and report suspicious activity, both internally and to the relevant enforcement authorities. In particular, a firm must ensure that its employees are not reticent to file suspicious activities reports out of concern for harming commercial relationships.
  • Sanctions screening: a firm must ensure that the transactions it effectuates on behalf of its clients do not infringe upon, or seek to evade, applicable sanctions laws.
  • Whistleblower policies: a firm should actively encourage whistleblowing and have policies in place to protect those who come forward to report wrongdoing. Without such policies in place, an employee who does not feel that he or she can report wrongdoing either may remain silent in the face of wrongdoing or may leak information publicly.
  • Regular training: all employees – including senior management – should be informed about, trained regarding, and engaged in their institution’s anti-money laundering policies and procedures.
  • Engagement of senior management: senior managers should engage with anti-money laundering issues and promote a culture of awareness and respect regarding anti-money laundering efforts. Regulators are increasingly mindful of whether an institution fosters a ‘culture of compliance,’ as opposed to shirking compliance to maximise profit margins.
  • Regular review: a firm should ensure that its anti-money laundering policies are regularly evaluated and, if appropriate, tested by an independent, qualified and unbiased third party.

The steps set forth above are only a sampling of the minimum steps that financial institutions and their advisers should take to ensure that they have robust and defensible anti-money laundering compliance programmes in place. Each institution’s actual anti-money laundering policies should be designed with input from experienced legal counsel and should take into account the nature of the institution’s business and the laws applicable to it.

Coordinated global response strategies: the second line of defence

While the existence of a robust compliance policy should reduce a firm’s risk of becoming the target of an anti-money laundering investigation, it will not eliminate this risk altogether, especially with respect to conduct that occurred before implementation of the policy. Firms should therefore be prepared to respond to such investigations. Today, such investigations frequently occur in a cross-border context – often with regulators from more than one country involved – and firms should be ready to deploy a coordinated global response to such investigations.

Although regulators from different countries sometimes have in place mechanisms for sharing information with one another, the coordination of investigations by authorities from different countries often is lacking. As Mark Steward, head of enforcement at the FCA, recently stated: ‘Most [authorities] are set up to do a domestic job, not to do things internationally. Collaboration is easier said than done.’23

One result of the leak of the Panama Papers will be a renewed effort at coordinating investigations among enforcement regulators worldwide. Indeed, shortly following the leak, tax authorities from 28 countries, led by the Joint International Tax Shelter Information and Collaboration network, announced a meeting in Paris to launch an international inquiry into potential crimes set out in the leaked documents. These tax authorities are intending to work together to analyse the leaked documents as part of a new global strategy to crack down on offenders.24 This represents an unprecedented level of international cooperation and is a harbinger for future cooperation of this sort.

While money laundering and tax evasion are distinct legal concepts, as discussed above, the two often overlap because they exploit similar vulnerabilities in legal and financial systems. We expect that as the fallout from the leak of the Panama Papers continues, countries will extend such coordinated international efforts specifically to combating money laundering. This likely will encompass, among other things, the joint sharing among regulators of financial and legal records and similar information.

In addition, we expect to see increased political pressure for coordination and information sharing (eg, the sharing of corporate register information) among those regulators who establish companies, such as Companies House in the UK. A key first step to making such cooperation effective is to ensure that accurate information on beneficial ownership is held by regulators. The beneficial ownership rules being introduced under the Fourth Money Laundering Directive should assist in this regard. Furthermore, a small group of countries including France, Nigeria and the Netherlands will join the UK in committing to set up public registers of beneficial ownership. A further six countries, including Australia, are considering doing the same.25

As regulators coordinate their efforts globally, potential and actual targets of anti-money laundering investigations must be prepared to respond with coordinated global response strategies. Among other things, a target of a cross-border anti-money laundering investigation should, as part of its global response strategy:

  • Retain lead legal counsel: a target firm should retain sophisticated legal counsel with expertise managing complex cross-border anti-money laundering investigations, to coordinate and lead the firm’s global legal defence strategy. Legal counsel with only domestic experience in one jurisdiction likely will not be the best choice for this role.
  • Retain local counsel, as necessary: a target firm should consider retaining local counsel in jurisdictions where it is, or might be, under investigation (and where its lead legal counsel does not have an office), so as to support its lead legal counsel.
  • Develop and implement strategies for handling the numerous complex issues that can arise in a cross-border anti-money laundering investigation: in connection with its legal advisers, a target firm should develop strategies for handling complex cross-border issues that likely will arise. These issues include, among other things, how to manage legal privilege across multiple jurisdictions, information sharing and data privacy across borders, and coordinating settlement strategies across jurisdictions (eg, when a firm is being investigated in two countries, one of which expects a settlement or plea but the other does not and would use a settlement or plea against the firm).
  • Managing public and government relations: as appropriate, a target firm also should be prepared to manage the public relations and government relations aspects of any anti-money laundering investigation against it. Its lead legal counsel, internal public and government relations teams, and potentially external public and government relations advisers should be prepared to coordinate with each other to this end.

The steps outlined above provide a general framework for a global response strategy to a cross-border anti-money laundering investigation. They are, however, only the first of many steps that a target firm should take in response to such an investigation. A firm facing a cross-border anti-money laundering investigation therefore should consult at the earliest possible time with experienced legal counsel to design an appropriate and effective global response strategy.

Conclusion: be prepared for stricter anti-money laundering laws and more active enforcement actions

As set out above, we anticipate in the foreseeable future an increase in anti-money laundering investigations and prosecutions in EMEA, as well as the passage of more stringent anti-money laundering regulations. Financial and professional services firms that might become the target of such investigations should act now to ensure that they have robust compliance regimes in place to identify and prevent money laundering and to ensure that they are in compliance with all applicable laws and regulations. Firms also should be ready to deploy a global response strategy if they become the subject or target of a cross-border anti-money laundering investigation. Having a protocol in place for deploying such a strategy is a first step that firms would be wise to take now, so as to manage proactively the risks of potential future enforcement actions.

Notes

  1. United Nations Office on Drugs and Crime, ‘Money Laundering and Globalization’ (available at www.unodc.org/unodc/en/money-laundering/globalization.html).
  2. Financial Conduct Authority, Business Plan 2016/17, pp. 26-27.
  3. BBC, ‘Money laundering: New law planned to target corrupt officials’, 21 April 2016 (available at www.bbc.co.uk/news/uk-36098769).
  4. The Financial Times, ‘Tighter money laundering rules planned,’ 21 April 2016.
  5. BBC, ‘Money laundering: New law planned to target corrupt officials’, 21 April 2016 (available at www.bbc.co.uk/news/uk-36098769).
  6. www.gov.uk/government/news/new-plans-to-tackle-corporate-fraud.
  7. www.theguardian.com/politics/2016/may/11/david-cameron-corporate-money-laundering-offence-anti-corruption-summit.
  8. Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, amending Regulation (EU) No. 648/2012 of the European Parliament and of the Council, and repealing Directive 2005/60/EC of the European Parliament and of the Council and Commission Directive 2006/70/EC (Text with EEA relevance) (the Fourth Money Laundering Directive).
  9. Article 30, Fourth Money Laundering Directive.
  10. Article 31, Fourth Money Laundering Directive.
  11. The Financial Times, ‘UK regulator sets deadline for Panama Papers reviews’, 7 April 2016.
  12. Financial Action task Force, ‘Improving Global AML/CFT Compliance: on-going process – 19 February 2016’ (available at www.fatf-gafi.org/publications/high-riskandnon-cooperativejurisdictions/documents/fatf-compliance-february-2016.html).
  13. Financial Action task Force, ‘Improving Global AML/CFT Compliance: on-going process – 19 February 2016’ (available at www.fatf-gafi.org/publications/high-riskandnon-cooperativejurisdictions/documents/fatf-compliance-february-2016.html).
  14. Financial Action Task Force, FATF Public Statement – 19 February 2016 (available at www.fatf-gafi.org/publications/high-riskandnon-cooperativejurisdictions/documents/public-statement-february-2016.html).
  15. Financial Action Task Force, ‘Improving Global AML/CFT Compliance: on-going process – 19 February 2016’ (available at www.fatf-gafi.org/publications/high-riskandnon-cooperativejurisdictions/documents/fatf-compliance-february-2016.html).
  16. Federal Law No. 4 of 2002 concerning the Criminalization of Money Laundering, amended by Federal Law No. 9 of 2014; Federal Law No. 7 of 2014.
  17. Financial Action Task Force, ‘Improving Global AML/CFT Compliance: on-going process – 19 February 2016’ (available at www.fatf-gafi.org/publications/high-riskandnon-cooperativejurisdictions/documents/fatf-compliance-february-2016.html); ‘High-risk and non-cooperative jurisdictions’ (available at www.fatf-gafi.org/countries/#high-risk).
  18. KPMG, ‘Africa AML Survey 2012’, 2013, at p. 4.
  19. KPMG, ‘Africa AML Survey 2012’, 2013.
  20. KPMG, ‘Africa AML Survey 2012’, 2013.
  21. KPMG, ‘Africa AML Survey 2012’, 2013.
  22. See, for example, ESAAMG, ‘Typologies report on Money Laundering and Terrorist Financing through the Money Remittance and Currency Exchange Sector in the ESAAMLG Region’.
  23. The Financial Times, ‘Financial watchdog says Panama Papers charges ‘will be difficult’, 20 April 2016.
  24. ‘Panama Papers: global tax officials to launch unprecedented inquiry’, The Guardian, 12 April 2016.
  25. www.theguardian.com/politics/2016/may/11/david-cameron-corporate-money-laundering-offence-anti-corruption-summit.

Previous Chapter:Cross-border overview: investigating accounting irregularities

Next Chapter:Cross-border overview: sanctions enforcement