Archive for SMR

Are new government anti-money laundering proposals a step too far?

Michael Roach, 12 May 2016

Last month the government unveiled its Action Plan for anti-money laundering and counter-terrorist finance. Describing the proposals as the most significant change to the UK’s anti-money laundering and counter-terrorist finance regime in over a decade, the government aims to send a clear message that the UK will not tolerate money laundering or the funding of terrorism through its institutions A number of the proposals appear to offend against accepted principles of justice.

The Action Plan comes as the UK’s commitment to combatting serious, global financial crime is high on the political agenda, following the release of the Panama papers and its hosting of the International Anti-Corruption Summit this week. However, a number of the proposals appear to offend against accepted principles of justice and therefore warrant careful examination.

The plan proposes a number of measures ranging from fundamental reforms to the Suspicious Activity Reports system to the creation of new regulatory powers and criminal offences. Arguably the three most contentious proposals the creation of unexplained wealth orders (UWOs); a new criminal illicit enrichment offence; and new powers to enable the forfeiture of money held in bank accounts raise serious concerns regarding basic legal principles and guarantees, such as the reversal of the burden of proof.

UWOs are a form of non-conviction based asset confiscation. When served on a person suspected of having wealth or assets that represent the proceeds of unlawful activity, they require the recipient to explain the origin of their assets.

The seizure of assets by the state is an extreme measure that should not be used unless absolutely necessary and the threshold must be correspondingly high. Yet the scope of UWOs – including the proposed threshold test and what constitutes a satisfactory explanation – remains unclear.

A number of the proposed measures are difficult to reconcile with fundamental principles of English law.

In contrast to the section 2 powers available to the Serious Fraud Office, under which it can compel the provision of documents or information, UWOs appear to be designed for use on suspects and do not seem to offer equivalent protections regarding the use to which any compelled information can be put.

Moreover, it is unclear what type of criminal activity would be captured by UWOs. Transparency International has discussed their use as an anti-corruption tool, but UWOs could theoretically be used against those suspected to have unexplained wealth derived from all types of criminal activity. Unless appropriate safeguards are put in place, there is a clear danger that UWOs will facilitate fishing expeditions into people’s private financial affairs.

The criminal offence of illicit enrichment is the government’s response to the UN Convention Against Corruption (UNCAC)’s requirement that states consider the introduction of a national offence. Illicit enrichment is defined in the UNCAC as a significant increase in the assets of a public official that he or she cannot reasonably explain in relation to his or her lawful income and some countries have already criminalised such conduct.

While the Action Plan alludes to the offence being capable of commission only by public officials, it does not make this explicit and so it may be that a wider application is being considered.

The offence would make it easier for prosecutors to recover potentially ill-gotten gains by removing the need to establish that any crime had occurred or that identified assets were gained through criminal activity. Prosecutors would simply be required to show that the defendant had assets that exceeded those possible based on the person’s legitimate source(s) of income, thereby overcoming existing prosecutorial hurdles.
The proposal effectively criminalises the inability to provide an explanation as to a sudden increase in personal income or wealth. This is an unwarranted extension of the criminal law, as well as an unjustified intrusion into the private property rights of individuals.

In reversing the burden of proof, both UWOs and the illicit enrichment offence as currently drafted run contrary to the presumption of innocence, the privilege against self-incrimination and legitimate expectations with regards to fairness and due process. Certain suspects could find themselves in a situation where they risk incriminating themselves by providing an explanation for their asset increase, or alternatively face forfeiture and/or a criminal conviction if they remain silent.

New powers to enable the forfeiture of money held in bank accounts would plug a gap in The Proceeds of Crime Act 2002 (POCA) which requires criminal cash held in bank accounts to be recovered via civil recovery powers a complex and resource-demanding process.

The government has therefore proposed new powers to enable the forfeiture of money held in bank accounts in cases where there is no criminal conviction against the account holder – because, for example, the account was opened under a false identity – and there is a suspicion that the funds are the proceeds of crime.

It also wants to explore whether, following an initial hearing at a Magistrates’ Court, this new power could be used administratively. Such administrative forfeitures would be authorised by a senior law enforcement officer where the value held is below a certain limit, such as £100,000, and the case is uncontested.

While the changes would enable law enforcement agencies to obtain the forfeiture of money held in bank accounts more quickly and effectively, the extent of intrusion is questionable because the pre-emptive forfeiture of assets would take place before the suspect has had an opportunity to explain potentially legitimate sources of wealth. Furthermore, given the draconian nature of these proposed powers, it is concerning that on the current proposals they will only be subject to judicial scrutiny by the Magistrates’ Court.

It may be that the tough-talking Action Plan is little more than a political reaction to recent events, at a time when the government wants to demonstrate its leadership in addressing global corruption and other serious crimes. Taken at face value, however, a number of the proposed measures are difficult to reconcile with fundamental principles of English law. The removal of the presumption of responsibility from the senior managers’ regime provides a recent example of the resistance with which attempts to reverse the burden of proof are often met. It will therefore be interesting to see whether these proposals are eventually adopted and, if they are, whether they are adopted as currently envisioned and to what extent they will face court challenges.

Michael Roach is a lawyer for WilmerHale’s UK Investigations & Criminal Litigation team

Compliance Consutlant can assist you with Financial Crime, Fraud and other crime prevention strategies. Call us on 0207 097 1434 or email info@complianceconsultant.org

Source: http://economia.icaew.com/opinion/may-2016/government-anti-money-laundering-and-counter-terrorist-proposals-a-step-too-far

Bailey identifies cultural failings as a factor in recent cases of non-compliance

In a speech (5-page / 153KB PDF) earlier this week Andrew Bailey, deputy governor for prudential regulation at the Bank of England and chief executive of the Prudential Regulation Authority, said a firms' culture”is of the utmost importance to financial regulators”. 

“Culture has a major influence on the outcomes that matter to us as regulators,” said Bailey, who will become the new chief executive of the Financial Conduct Authority (FCA) in the summer.

“My assessment of recent history is that there has not been a case of a major prudential or conduct failing in a firm which did not have among its root causes a failure of culture as manifested in governance, remuneration, risk management or tone from the top. Culture has thus laid the ground for bad outcomes, for instance where management are so convinced of their rightness that they hurtle for the cliff without questioning the direction of travel,” he said.

Bailey said that the banks and other financial firms can help improve public perception that they exist to exploit customers through changes in culture.

“Firms exist to service customers who make up the public interest, which of course means that service includes the notion of not exploiting customers, a value one might expect to be given in an organisation's culture,” Bailey said.

It is not for regulators to determine the culture of firms but regulators can instead influence the cultures that exist, he said.

“We seek to ensure that firms have robust governance, which includes appropriate challenge from all levels of the organisation; and promote the acceptance that not all news can be good and the willingness to act on and respond promptly to bad news,” Bailey said.”We insist that remuneration is structured to ensure that individuals have skin in the game, namely that a meaningful amount of past remuneration is retained or deferred and for senior people is at risk should problems then emerge. We require that risk management and internal audit in firms are effective and act to root out poor incentives and weak controls.”

“All of this is important and central to what we do as regulators, but let me reinforce the point that culture begins and lives, and I am afraid dies, at home, with firms. It is not for us as regulators to prescribe culture, that would not work,” he said.

The introduction of the Senior Managers and Certification Regime should have a bearing on firms' culture, he said.

“Responsibility is the central plank of the new Senior Managers Regime,” Bailey said.”We do want senior managers to feel this responsibility in all that they do and that includes a responsibility for forming and implementing a positive culture throughout the organisation Responsibility, as embedded in the Senior Managers Regime, is therefore an important hook to assist in firms' shaping their own culture, and also to provide regulators with the powers to conduct supervisory oversight and to act when needed.”

Expert in financial services regulation Chris Davidson of Pinsent Masons, the law firm behind Out-Law.com, backed Bailey's suggestion that there should be greater clarity in terms of the outcomes that firms are seeking from the changes they make, how progress is assessed and whether there is sufficient consistency across the organisation. Davidson said though that there would be a challenge in measuring progress on such issues.

Financial regulation expert Josie Day of Pinsent Masons said:”A firm's culture is pervasive and can be difficult to change. Of course, changing culture is possible with the commitment of the right people, who inevitably include directors and senior managers, and regulators have some influence here as well. To the extent that the public still lacks trust in the way firms behave, then demonstrating cultural change can be a key part of rebuilding that trust, and for giving customers confidence that the ethos in firms has changed for the better.”

Compliance Consultant can help you design, implement, embed and deliver your SM & CR responsibilities – contact us on 0207 097 1434 or email info@complianceconsultant.org 

Source: http://www.out-law.com/en/articles/2016/may/bailey-identifies-cultural-failings-as-a-factor-in-recent-cases-of-non-compliance/

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