Taxlinked (TL): How can we have sufficient AML rules to ensure the world is clean without stifling business transactions?
Garry Clement (GC): It is not just about rules; we need to hold senior executives to account and ensure they put ethics above greed. Many Board of Directors today still do not have individuals with the requisite skills and background in order to provide the appropriate level of oversight on compliance programs and therefore the onus rests with the compliance officer. The Board needs to be able to ask the tough questions and not just accept reports at face value.
TL: How will the recent legislative measures introduced in the United Kingdom such as the provisions of the Criminal Finances Act 2017 and the Money Laundering Regulations 2017 help prevent terrorist financing?
GC: From 30 September 2017, the Criminal Finances Act 2017 will make companies and partnerships criminally liable if they fail to prevent tax evasion by either a member of their staff or an external agent, even where the business was not involved in the act or was unaware of it. The new rules target deliberate and dishonest behaviour.
With respect to the MLR 2017, it effectively:
- Changes the approach to customer due diligence;
- Seeks to prevent new means of terrorist financing, including through e-money and prepaid cards;
- Improves transparency of beneficial ownership of companies and trusts, and;
- Effectively enforces sanctions.
Additionally, organizations have been mandated to carry out detailed enterprise-wide risk assessments and document and ensure they have proportionate measures in place to mitigate the identified risks. Additionally, the foreign politically exposed person (PEPS) requirements now include politically exposed persons in their backyard.
Impact: Although it is too early to demonstrate effectiveness, the changes are in-line with what FATF advocates and show a clear pattern of the need for more prescriptive measures, seeing voluntary measures have failed to have the desired impact. Overall, the need for identifying beneficial owners does strengthen the ability to thwart terrorist and criminal activity. The expanded penalties also clearly put the industry on notice.
TL: How are terrorists using social media platforms to fund their operations?
GC: Terror groups use social media platforms like Twitter, Facebook, YouTube, and Internet forums to spread their messages, recruit members and gather intelligence. They also use both the DarkWeb and the DeepWeb. Terrorist recruiters, very much like cyber social engineers, have become very adept at using social media to recruit and have relied on use of personality traits to target the most vulnerable and pliable.
TL: In the US, what sorts of mechanisms are in place by both the IRS and SEC to counter money laundering? What does the Foreign Corrupt Practices Act entail?
As is evident, the US has continued to enforce the FCPA, which remains a valuable tool in both agencies’ arsenals. Like any financial crime investigation, they are complex and time-consuming but have met with tremendous success. The FCPA had culturally changed the activities of many organizations including those operating in China where recent foreign corrupt law enactments are some of the most stringent in existence.
TL: What have authorities done or are doing to prevent the use of Bitcoin to finance illicit activities or the purchase of illegal goods? What sorts of problems have emerged from the need to regulate a currency that in spirit was designed to avoid regulation?
GC: Bloomberg references the IRS-Coinbase tax case and bitcoin’s usage among ransomware extortionists in his opinion piece, stating
, “the underlying value of Bitcoin really has little if nothing to do with its artificial scarcity or popularity as a medium of speculation.”
In a sweeping statement, Bloomberg added
“On the contrary – the only reason bitcoin has value to anyone is because of the underlying value as a medium of exchange for lawbreakers. If we could flip a switch and eliminate all illegal uses of Bitcoin, there would be nothing left of the cybercurrency.”
Recently I discussed the impact of China clamping down on flight capital and the impact this could have on real estate markets. An individual commented to me that the restrictions imposed in China were easily circumvented using Bitcoin, which is growing.
Although there have been tremendous successes against criminal usage, i.e., “Silk Road,” reality is that criminals are as sophisticated as the legit community and therefore will continue to capitalize on current technology to expand their criminal networks.
With respect to regulation, many countries are attempting to bring crypto-currencies in under their AML regimes; however, there remains a lack of knowledge and expertise to effectively manage this new arena.
TL: How can parliamentarians contribute in the fight against money laundering?
GC: Some would assert that parliamentarians are part of the problem. There needs to be far better understanding and commitment by all governments. Sadly, notwithstanding the trillions of dollars spent to place controls against money laundering, very little, if any impact has been achieved. Therefore, to be successful, governments need to accept there remain considerable legislative gaps, lawyers for one, and that in the interests of finally decreasing the wealth of criminals and criminal organizations, all necessary measures must be considered. Politicians need to become part of the solution rather than remaining on the sidelines and being part of the problem.
TL: What changes were brought about with the EU’s 4th AML Directive?
GC: The directive is the most prescriptive AML legislation in Europe in several years. The risk-based approach requirements are now more onerous on organizations and the ongoing monitoring provisions are far more prescriptive. Organizations must be able to evidence the rationale behind the risk rating applied to each customer. The new Directive will introduce an explicit requirement for legal persons, including companies, to hold adequate, accurate, and current information on their own beneficial ownership. This information will be required to be made readily available to both competent authorities (CBI) and obliged entities on request.
From a customer due diligence perspective, organizations can no longer lump clients into buckets applying basic due diligence. Each client will need to be assessed and the organization will need to evidence why they applied simplified due diligence. Where an enhanced due diligence is deemed necessary, the directive will prescribe the measures that must be followed.
The Directive also expands the definition of Politically Exposed Persons (PEPS) to include Domestic PEPS.
Of special note is the inclusion of data protection, which aligns with the Association of Certified Financial Crime’s approach that organizations need to take an enterprise-wide view of their organization total risks, thereby ensuring that whatever measures are being taken to mitigate risks include cyber, financial crime, corruption, terrorism and money laundering.
TL: Do you have anything additional you'd like to share with our community?
GC: As someone who has worked in the financial crime/money laundering arena since 1983, it is a sad commentary that we have failed to make significant in-roads into the prevention of financial crime and money laundering. Some of the recent FCPA and Regulatory penalties are very reflective of greed trumping ethics amongst our elite business leaders. It is time for everyone to get their heads out of the sand and accept we have a societal obligation to thwart criminal activity and terrorist financing and that only through an accepted collaborative effort we’ll be able to make any substantial gains.