MONEY LAUNDERING BULLETIN - DLA Piper

JULY 2012

MONEY LAUNDERING BULLETIN Regulatory News Update from DLA Piper

01 | The Regulatory News Update from DLA Piper

CONTENTS UK. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 News. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Court Proceedings & Enforcements . . . . . . . . . . 6 International. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 News. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Court proceedings. . . . . . . . . . . . . . . . . . . . . . . . 13 Key Contacts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14


Welcome DLA Piper’s Financial Services Regulatory team welcomes you to the summer edition of our Money Laundering Bulletin. In this issue we look at the High Court decision in Shah v HSBC and the FSA’s fine of Coutts & Co for AML failings. We also provide updates of AML issues in the UK and internationally. I hope that you find this update helpful. Your feedback is important to us so if you have any comments or would like further information, please contact one of our specialists detailed at the end of the bulletin.

Michael McKee Head of Financial Services Regulatory Partner London T +44 (0)20 7153 7468 [email protected]

The Regulatory News Update from DLA Piper | 03

uk news UK’S RESPONSE TO APPLICATION REPORT FROM EUROPEAN COMMISSION ON REVISIONS TO MLD III On 13 June 2012 HM Treasury has published a report to the European Parliament and Council on the application of the 3rd Money Laundering Directive (“the Directive”). The UK Government considers it important that the Directive aligns as closely as possible with the revised FATF Standards and encourages consistency with them. In particular, the UK Government stresses the importance for the Directive to provide sufficient flexibility for Member States to adopt a risk-based approach at national level, as it sees a risk-based approach as the most effective way to combat money laundering. The UK Government strongly suggests that gaps in AML defences are “not the result of minimum harmonisation and associated levels of national discretion, but instead of legal uncertainty in relation to some of the Directive’s key provisions.” The UK report also contains responses to the European Commission’s proposals on: ■■

National/supranational risk assessments;

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Criminalisation;

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Real estate/letting agents;


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Customer Due Diligence (CDD);

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Politically Exposed Persons (PEPs);

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Beneficial Ownership;

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Financial Agents;

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Supervision;

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Sanctions;

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Third Country Equivalence;

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Data protection;

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Reliance;

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Self-regulatory bodies;

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Definition of a ‘transaction’;

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Pooled accounts;

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Group-wide AML policies;

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Thresholds; and

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Financial Intelligence Unit (FIU) Co-operation.

OFFICE OF FAIR TRADING LAUNCHES ONLINE REGISTER OF SUPERVISED BUSINESSES On 10 April 2012, the Office of Fair Trading (OFT) launched a searchable online register of businesses it supervises under the Money Laundering Regulations 2007. Such businesses include estate agents and consumer credit financial institutions (CCFIs). Although a non-public register has been in place since 2009, the OFT believes making it public will put pressure on unregistered businesses to register and allow the public, the

industry as a whole and regulators to notify the OFT if businesses are not registered. Penalties for those failing to register include fines by the OFT or prosecution. A 2011 investigation by the OFT anti-money laundering compliance team found 192 unregistered businesses in England, Wales and Scotland. All of these businesses are now registered, with the OFT imposing £11,500 in fines on 5 unregistered businesses as a result.

MEMORANDUM OF UNDERSTANDING BETWEEN FSA AND HMRC On 1 June 2012, the FSA published a Memorandum of Understanding (MoU) between itself and Her Majesty’s Revenue and Customs (“HMRC”) for the exchange of information and conducting joint visits under the Money Laundering Regulations 2007 and the Payment Services Regulations 2009 (“the Regulations”). The MoU provides a framework for joint working and the disclosure of information between the two parties and reflects the requirement that the FSA and HMRC co-operate and communicate constructively to carry out their functions under the Regulations. The MoU is a statement of intent from the FSA and HMRC and does not create any enforceable rights. It applies to information held by the FSA and HMRC for their functions under the Regulations and does not affect the matters agreed between the two parties previously in relation to disclosure of information under the Financial Services and Markets Act 2000.

Under the Regulations, HMRC is responsible for the registration and supervision of persons as Money Service Businesses, including (for the purpose of the MoU) those Money Services Businesses that provide money transmission services (MTS). Under the Regulations, the FSA is responsible for the authorisation, registration and supervision of persons who provide payment services (including Money Remitters). On a case by case basis, the FSA and HMRC will each appoint an individual ‘joint visit coordinator’ responsible for identifying which MTS warrant a joint visit and arranging a joint visit. The MoU replaces the original ‘Practical Arrangements for Disclosing Information Relating to Payment Services Providers’ agreed on in June 2009.


COURT PROCEEDINGS & ENFORCEMENTS ZIMBABWEAN BUSINESSMAN FAILS IN US$300 MILLION LAWSUIT AGAINST HSBC PRIVATE BANK On 16 May 2012, the High Court in London ruled in favour of HSBC Private Bank (UK) Limited (“HSBC”), defending a claim filed by Jayesh Shah and his wife Shaleetha Mahabeer in 2007 for US$300 million in damages after HSBC failed to follow the claimants’ instructions to process various transactions. HSBC had suspected that the funds in Mr Shah’s account were proceeds of crime and they were therefore obliged under Part VII of the Proceeds of Crime Act 2002 (“POCA”) to make a suspicious activity report (“SAR”) to the Serious Organised Crime Agency (“SOCA”) and await SOCA’s consent before carrying out any further account activity (s.355 POCA). HSBC refused four transaction requests by Shah, including the transfer of US$28 million to his account held with Crédit Agricole in August 2006 and US$7.3 million to a former employee in September 2006, justifying that it was “complying with its UK statutory obligations”. No further explanation was provided to the claimants. Consent was given by SOCA on all transfer requests with delays of between three and fifteen days from when the SAR was made, after no evidence of money laundering could be uncovered. Shah claimed that as well as financial damage arising from these delays, the Zimbabwean authorities became suspicious of money laundering by Shah because of the SARs made by HSBC and that they froze and seized substantial investments of Shah’s, allegedly causing huge losses of US$300 million. HSBC defended the claimants’ allegations by stating that it could not comply with Shah’s requests immediately without breaching POCA. Nor could it disclose to Shah the nature of the delay without breaching ‘tipping off’ and ‘prejudicing an investigation’ provisions of POCA (s.333 & 342 POCA).


The bank also made reference to an implied term in its contract with Shah that it would be entitled to refuse to process payment instructions in circumstances where it suspected money laundering and SOCA consent had not been granted. The Honourable Mr Justice Supperstone found in favour of HSBC on all counts and that the bank legitimately acted in accordance with its statutory obligations under POCA. Mr Shah’s allegations that HSBC’s SARs to SOCA were unreasonable and should not have been made, as no evidence of money laundering could be found, was rejected by the court, stating that reasonableness is not taken into account, as only a suspicion of money laundering suffices to make a disclosure. Mr Justice Supperstone also found that Mr Shah was able to, but did not, take reasonable steps to mitigate or avoid his losses, most notably not paying his former employee with funds from another account. In the court’s opinion, it was not HSBC’s delay in executing the payment instructions, nor its failure to provide more information to the claimants, but the Zimbabwean authorities’ own pre-existing concerns that led to the apparent losses incurred by Mr Shah and his wife. With over 250,000 SARs filed each year in the UK, the majority by banks, the ruling in Shah v HSBC will come as a relief to financial institutions, which, on the one hand, will carry on filing SARs with SOCA, whilst, on the other, would have had to worry about being liable to claims from their customers if those SARs were deemed unreasonable. However, after this ruling, at least for now, such institutions will not need to justify reasonableness if a suit is filed by their customers.

COUTTS FINED £8.75m FOR AML FAILINGS On 23 March 2012, the FSA issued a final notice on Coutts & Company (Coutts) imposing a penalty amounting to £8.75m for ‘serious and systemic’ breaches of anti-money laundering regulations between 15 November 2007 and 15 November 2010. The fine, down from £12.5m due to a 30% discount for early settlement, was attributed primarily to breaching Principle 3 of the FSA’s Principles for Businesses by failing to take reasonable care to establish and maintain effective anti-money laundering systems and controls in relation to customers that posed a high money laundering risk. The FSA recognised that during this 3 year period, Coutts, a wholly owned subsidiary of the Royal Bank of Scotland Group, was actively seeking to expand its customer base and offering staff incentives to achieve this. This included taking on a large number of high risk and politically exposed (PEP) clients. The FSA stated that, as a result, Coutts should have ensured that appropriate systems and controls were in place to prevent financial crime. The FSA defines a PEP as ‘an individual who is or has, at any time in the preceding year, been entrusted with a prominent public function’ outside of the UK.

The weaknesses in Coutts’ controls identified by the FSA, included failings in the following areas: ■■ gathering sufficient information to establish source of wealth and source of funds of its prospective PEP and other high risk customers; ■■ identifying and/or assessing adverse intelligence about prospective and existing high risk customers properly and taking appropriate steps in relation to such intelligence; ■■ keeping the information held on its existing PEP and other high risk customers up-to-date; and ■■ scrutinising transactions made through PEP and other high risk customer accounts appropriately. In addition, the FSA found breaches of SYSC 6.1.1R and SYSC 6.3.1R of the FSA Handbook, regarding the failure to establish, implement and maintain adequate policies and procedures to counter the risk of financial crime, with specific consideration to money laundering. At the beginning of May 2012, RBS began adapting the roles carried out by its private bankers and wealth managers as part of a restructure of its Coutts division in the light of the recent FSA fine and the impending Retail Distribution Review.

CHIEF IBORI SENTENCED TO 13 YEARS AFTER PLEADING GUILTY TO MONEY LAUNDERING On 17 April 2012, Southwark Crown Court in London sentenced Chief James Ibori, former governor of Nigeria’s Delta State, to thirteen years imprisonment after he pleaded guilty to embezzling £50 million at the expense of the people of Nigeria. The presiding judge suggested that even though it was one of the biggest money laundering cases seen in Britain, the £50 million Ibori had admitted to stealing is probably “ludicrously low” compared to the actual figure, that may well be in excess of £200 million. Ibori served two four-year terms as governor, which, under Nigerian law, made him immune to prosecution during that time. Then when the time came for him to step down, Ibori was able to use his considerable power

and influence to keep any authorities looking to prosecute him at arm’s length. This included getting 170 charges of fraud and money laundering dropped against him by obtaining a transfer of his court case to the Delta State capital Asaba, where his cousin was the presiding judge. After the London Metropolitan Police spent seven years preparing the case, on 27 February 2012 Ibori pleaded guilty to ten of the twenty three charges against him, allowing two trials to be cancelled. It is likely than Ibori will only spend another four and a half more years in jail, due to the fact that he has already served two years and he will be eligible for parole halfway through his thirteen year sentence. The Regulatory News Update from DLA Piper | 07

TWO FOUND GUILTY OF MONEY LAUNDERING CHARGES AGAINST THE OLYMPIC DELIVERY AUTHORITY On 24 April 2012, two men were found guilty of money laundering offences after illegally conning £2.3 million out of the Olympic Delivery Authority (ODA) for the London 2012 Games. Ayodele Odukoya and Abayomi Olowo were sentenced to three years nine months and four and a half years respectively. Their scheme involved contacting the ODA, responsible for developing and building the new venues and infrastructure for the Games, claiming to work for an existing contractor of

the ODA. The conmen then instructed the body to redirect all future payments to a new bank account, which, in fact, belonged to Odukoya and Olowo. Despite attempts to hide the money paid into the new account, prosecutors were able to seize over £2 million, however, around £68,000 remains at large. In light of these events the ODA is seeking to immediately strengthen its payments system.

HABIB BANK AG Zurich FINED ALONG WITH MLRO FOR AML FAILINGS On 15 May 2012, the FSA announced that it had fined Habib Bank AG Zurich (Habib) £525,000 and its former MLRO, Syed Itrat Hussain, £17,500 for failing to take reasonable care to establish and maintain adequate AML systems and controls.

its customers. In particular, Habib maintained a high risk country list which excluded certain high risk countries on the basis that it had group offices in them and believed local knowledge would suffice in consideration of adequate anti-money laundering measures.

Habib is a privately owned Swiss bank with twelve branches in the UK and approximately 15,500 customers. Approximately 45% of its customers were based outside the UK and about half of its deposits came from jurisdictions which, according to independent international organisations, had less stringent AML requirements than the UK.

As MLRO, Hussain was responsible for oversight of Habib’s AML systems and controls, which were deemed inadequate by the FSA. As a result the FSA also imposed a fine on Hussain, amounting to £17,500. Hussain has now retired from the financial services industry.

Taking this into consideration, the FSA deemed that Habib failed to establish and maintain adequate controls for assessing the level of money laundering risk posed by


The FSA stated that “Habib’s belief that local knowledge of a country through a group office mitigated the higher money laundering risk posed by that country was entirely misconceived.”

MAN CONVICTED OF LAUNDERING BOILER ROOM FRAUDS AFTER JOINT FSA AND CITY OF LONDON POLICE INVESTIGATION On 30 April 2012, Michael McInerney of North Yorkshire was convicted of three counts of money laundering by Southwark Crown Court and sentenced to four and a half years imprisonment, along with a seven year disqualification from being a company director. The conviction came after a successful joint investigation between the FSA and The City of London Police, known as ‘Operation Slick’, uncovered McInerney’s fraudulent dealings with Kevin, Tomas and Christopher Wilmot. The Wilmots were sentenced to a combined total of nineteen years imprisonment back in August 2011 for multiple fraud and money laundering offences. McInerney was found to have laundered the proceeds of the Wilmot controlled syndicate of boiler rooms that defrauded around 1,700 investors out of £27.5 million. Share fraudsters, commonly known as

boiler rooms, usually contact people by telephone and use high pressure sales tactics to con investors into buying non-tradable, overpriced or even non-existent shares. Boiler rooms are unauthorised, overseas-based companies with fake UK addresses and phone lines routed abroad. In her sentencing, Judge Taylor declared the syndicate a “serious and sustained criminal enterprise” where McInerney played a “sustained and vital part” with “no doubt of the type of investor or of the losses they would have suffered.” Tracy McDermott, acting head of Enforcement at the FSA, stated that “this sentence sends a clear message that the courts take boiler room offences seriously and will hand down significant sentences to those involved in them.”


INTERNATIONAL News EUROPEAN COMMISSION UNDERTAKES REVIEW ON THIRD MONEY LAUNDERING DIRECTIVE The European Commission (Commission) has been undertaking a review of the Third Money Laundering Directive (MLD III) and has begun a consultation in line with the new standards set out by the Financial Action Task Force (FATF) in their Recommendations, published in February 2012. The report on the Commission’s findings, dated 16 April 2012, concludes that MLD III ‘appears to work relatively well, and no fundamental shortcomings have

been identified which would require far-reaching changes’ to the Directive. However, the Commission has identified that the Directive will need to be revised in order to update it in line with the FATF Recommendations, with consideration to be taken regarding the level of harmonisation of the future EU framework. The consultation ran until 13 June 2012, after which the Commission will be adopting legislative proposals.

JMLSG FINALISES REVISED AML GUIDANCE FOR ELECTRONIC MONEY ISSUERS On 18 April 2012, the Joint Money Laundering Steering Group (JMLSG) published revised guidance on anti-money laundering in order to provide clarification to electronic money issuers on customer due diligence and related measures required by law. The guidance is to be read in conjunction with the main AML guidance set out in Part I and the specialist guidance set out in Part III.

2000 to issue electronic money. It may also be relevant for EEA authorised electronic money issuers who distribute their products in the UK.

The guidance should be used by all electronic money issuers (as defined in Regulation 2(1) of the Electronic Money Regulations 2011), including authorised electronic money institutions, registered small electronic money institutions, and credit institutions with a Part IV permission under the Financial Services and Markets Act

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The guidance includes: ■■

The definition of electronic money and what it encompasses; Money laundering and terrorist financing risks related to electronic money;

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Customer due diligence;

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Wire transfer regulation; and

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Use of agents and distributors.

MINISTERS RENEW FATF MANDATE UNTIL 2020 Following the revised FATF Recommendations published in February 2012, the FATF ministers have renewed its mandate for another 8 years from 20 April 2012, and will be valid until 31 December 2020. The FATF sees the Recommendations as the international standard for combatting money laundering and the financing of terrorism, forming the basis for a coordinated response to threats to the integrity of the financial system and helping to ensure a level playing field.

The mandate will serve as the framework for FATF activities until its expiration in 2020, and includes: ■■

Objectives, functions and tasks;

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Composition and participation;

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Organisation; and

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Legal effect and duration of the mandate; accountability.

ITALY SEES HUGE RISE IN MONEY LAUNDERING REPORTS In the wake of the recent financial crisis, the Bank of Italy stated that reports of suspected money laundering through financial institutions rose 147% in 2010-2011 from the previous two years and are still on the rise. Claiming that “money laundering is anti-cyclical, and so increases in times of crisis”, the bank provided that about 800 of the total reports involved offenders with mafia ties.

According to a report from the Italian anti-crime group SOS Impresa, organised crime generated an annual turnover of roughly €140 billion, or about 7% of the Italian GDP. The mafia also was said to have about €65 million in cash on hand, making it the nation’s number one bank.

CHAIRMAN OF VATICAN CITY BANK OUSTED FOLLOWING MONEY LAUNDERING INVESTIGATION The Vatican bank, formally called the Institute for the Works of Religion, but more commonly known by its Italian initials IOR, has given a vote of no confidence to its chairman Ettore Gotti Tedeschi for failing “to carry out various duties of primary importance.” IOR, set up in 1942 to manage the Vatican’s finances and which reports directly to the pope, has recently been under investigation by Italian authorities on suspicion of the bank’s involvement in breaking money

laundering regulations. This investigation has stained the tenure of Tedeschi, appointed in 2009 by Pope Benedict to bring IOR in line with international financial norms and to tighten internal controls. In 2010, Italian prosecutors seized €23 million from a bank account registered to IOR amid suspicions of money laundering violations. Tedeschi was then placed under investigation for allegedly omitting data in wire transfers from an Italian account. The investigation The Regulatory News Update from DLA Piper | 11

raises previous concerns about the transparency of the Vatican bank and has triggered calls to bring the city-state in line with European financial regulations. IOR was put under further pressure when Italian prosecutors made a formal request for the account details and transaction history of Father Ninni Treppiedi, a Vatican priest serving in what is said to be the richest parish on the supposed mafia island

stronghold of Sicily. It is alleged that around a million euros has passed through his account, with sufficient paperwork explaining its origin missing. The Vatican has suspended Father Treppiedi, but IOR has yet to release any details from his account to the authorities, further adding to the speculation that the bank is involved in aspects of money laundering.

PHILIPPINES AT RISK OF JOINING MONEY LAUNDERING BLACKLIST The Philippines is facing the possibility of being put on the international anti-money laundering blacklist controlled by FATF. It comes as the Philippines failed to meet all the required amendments to legislation on the illegal movement of money. A decision by FATF is expected at the end of June 2012, with the executive director of the Anti-Money Laundering Council,


Vicente Aquino, calling for more time for the Philippines to comply with the requirements. If the Philippines were to be placed on the blacklist, it would seriously impair the ability of Filipino businesses to attract foreign investment, as well as making it very difficult for Filipinos abroad to send money home.

Court proceedings SETTLEMENT AGREEMENT BETWEEN CENTRAL BANK OF IRELAND AND UBS INTERNATIONAL LIFE LTD On 19 June 2012, the Central Bank of Ireland (“Central Bank”) entered into a Settlement Agreement with UBS International Life Limited, a regulated financial service provider, in relation to various breaches of the Criminal Justice (Money Laundering and Terrorist Financing) Act 2010 (“CJA 2010”). The agreement comes with a fine of €65,000 for breaches of sections 40(3), 54(2) and 54(6)(a) of the CJA 2010, discovered during an inspection of the firm in December 2010.

The Central Bank’s examination identified UBS International Life Limited’s failure to take into account and implement new legislative changes imposed by the CJA 2010, particularly in the areas of instruction on the law, third party reliance requirements and the adoption of adequate written policies and procedures in relation to the identification and reporting of suspicious transactions. Directors of the firm were not told about the legislation until April 2011. UBS International Life Limited also failed to meet customer identification and verification requirements.

FRENCH AND US AUTHORITIES CLOSE IN ON SON OF EQUATORIAL GUINEA PRESIDENT Teodoro Nguema Obiang Mangue, son of the president of Equatorial Guinea and agricultural minister of the small oil-rich African country, is the target of a major investigation, by French and US officials, into money laundering offences and misuse of public funds. A search of the minister’s central Paris 101 room home was conducted in February 2012, resulting in the police seizing an astounding collection of rare and luxury items. The five-storey house was said to have had a disco, cinema, steam baths, sauna, hair salon, gold and jewel encrusted taps, a lift and a pink marble dining room with coral pillars and a 20-yard glass table, all overlooking the Arc de Triumph. Assets seized included 16 luxury supercars, 10 Fabergé eggs, 300 bottles of Château Pétrus wine (worth €2.8m), €18.5m worth of art and €40m worth of furniture, amongst other things.

French judges announced that they are now seeking an arrest warrant on money laundering charges and US authorities have filed to seize his $38m private jet, alleging it was bought with embezzled cash. Government officials from Equatorial Guinea have claimed the legal action is a politically motivated strategy to de-stabilise the country, and Teodoro and his family have denied any wrongdoing, insisting he has just been “lucky in business”. The minister’s $6,799 monthly salary would only be enough to keep his Gulfstream G-V Jet in the air for 2 hours 15 minutes. However, further action against Teodoro may soon prove substantially more difficult, as last November, Equatorial Guinea began the process of appointing the minister as its representative at the world cultural body UNESCO, a move that could give him diplomatic immunity. The Regulatory News Update from DLA Piper | 13

KEY CONTACTS For further information or advice please contact: Michael McKee Head of Financial Services Regulatory Partner London T +44 (0)20 7153 7468 [email protected] Richard Smyth Partner Manchester T +44 (0)161 235 4555 [email protected] Stephen Greenhalgh Editor London T +44 (0)20 7153 7823 [email protected]


FINANCIAL SERVICES TEAM DLA Piper’s dedicated Financial Services team offers specialist legal expertise and practical advice on a wide range of contentious and advisory issues. The team has an experienced advisory practice which gives practical advice on all aspects of financial services regulation and anti-money laundering. The team can also assist clients on contentious legal matters including: internal and regulatory investigations, enforcement actions and court proceedings in the financial services sector.

This publication is a general overview and discussion of the subjects dealt with and is up to date as at the end of June 2012. It should not be used as a substitute for taking legal advice in any specific situation. DLA Piper UK LLP and DLA Piper Scotland LLP accept no responsibility for any actions taken or not taken in reliance on it. Where references or links (which may not be active links) are made to external publications or websites, the views expressed are those of the authors of those publications or websites which are not necessarily those of DLA Piper UK LLP or DLA Piper Scotland LLP. DLA Piper UK LLP and DLA Piper Scotland LLP accept no responsibility for the contents or accuracy of those publications or websites.


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