October Analytics - Pinstripes for Prison Stripes

In the past, major international banks operating in the United States have paid billions of dollars in fines and penalties for various failures in their anti-money laundering (AML) and anti-terrorist financing (ATF) compliance regimes. Shareholders have always ended up footing the bill for the indiscretions or outright malfeasance of employees and senior management. Recent events suggest the tide is now turning. Regulators are now naming names. Employees are paying the price of non-compliance with fines, their employment contracts, or both. Nowadays, it’s personal.

From an employment perspec tive, the position of compliance officer has the lowest risk-adjusted return of any career within a financial institution. Those who remain in the profession have either negotiated a spectacular package or do not fully comprehend the career calculus of 2014 and beyond.

The US Senate investigation into HSBC in 2012 highlighted the views of the Office of the Comptroller of the Currency (OCC), which called for HSBC manager Lesley Midzain to be replaced because of her “lack of AML expertise”. The bank’s regional compliance head, Janet Burak, was also criticised for “weak leadership”.

Subsequent job interviews for this pair would be complicated slightly by the official record.

The recent regulatory action against BNP Paribas (BNPP) yielded USD8.9736 billion for the US government. In addition to this, BNPP agreed to “terminate or separate from the bank 13 employees, including the Group Chief Operating Officer and other senior executives”1. This also included Georges Chodron de Courcel (Group Chief Operating Officer), Vivien Levy-Garboua (Former Group Head of Compliance), Christopher Marks (Group Head of Debt Capital Markets), Dominique Remy (Group Head of

Structured Finance) and Stephen Strombelline (Head of Ethics and Compliance for North America).

In February 2014, the former G lo b a l A M L C o m pl ian c e Officer Harold Crawford was fined USD25,000 by FINRA for AML failures at Brown Brothers

Harriman2. In October 2008, Michael Wheelhouse of Sindicatum Ltd. was personally fined £17,500 by the UK Financial Services Authority for failures in “overseeing and implementing the anti-money laundering systems and controls”3.

Reuters has reported that Thomas Haider, the former chief compliance officer of MoneyGram International, is potentially facing a personal fine of USD5m for compliance failures at the money services business4. Rumours abound that Commerzbank, the second-largest bank in Germany, is facing a large regulatory sanction by the United States that may involve the scalps of certain employees and a USD650m penalty5.

ManchesterCF provides financial crime risk management training programs, advisory services and project management to financial institutions, financial intelligence units and public-sector agencies around the globe.

ManchesterCFSuite 501125-720 King Street WestToronto, Ontario Canada M5V [email protected]@ManchesterCF

Pinstripes for Prison Stripes

A man’s life in these parts often depends on a mere scrap of information. The Man with No Name (Clint Eastwood), A Fistful of Dollars, 1964

ManchesterCF Analytics October 2014 1 of 3

ANALYTICS OCTOber2014

“Regulators are now naming names. Employees are paying the price of non-compliance with fines, their employment contracts, or both. Nowadays, it’s personal.”

Given current trends, it won’t be long before a senior banker or compliance manager located in a major international f inancial centre is marched out of the office in handcuffs. Money laundering? Criminal negligence? Possession o f t he p roce eds o f c r ime? Providing material support to terrorists? Scapegoat in a tit-for-tat exchange between governments?

At that watershed moment, the entire battle against money laundering and terrorist financing will undertake a dramatic turn in the wrong direction, wreaking havoc on the profession of financial intelligence. This statement is not intended to shock industry players or discourage the enforcement of laws. This statement is to prepare financial institutions for the ensuing negative consequences that will impact their ability to maintain an effective compliance regime and a clear conscience.

Financial intelligence unit s (FIUs), law enforcement and the intelligence community rely on financial institutions to supply them with transactional data (such as large cash transactions and high-value international wire transfers) and reports of suspicious activity based on their professional judgement.

Transactional information supplied to FIUs is transmit ted in high volumes and largely driven by sophisticated computer systems. The Holy Grail of transactional information systems is straight-through-processing (STP) from a financial institution to an FIU. The financial transaction STP telemetry from major international banks can involve substantial data processing and network bandwidth. On the other hand, suspicious activity/transaction reports are generated by informed and empowered staff within a financial institution. Both forms of financial intelligence can figure prominently in money laundering and terrorist financing investigations.

Within the realm of financial intelligence reporting, the human element is dependent upon several factors, including experience, training and authorisation. All factors are dependent upon the

political and economic climate of the time as well as certain cultural habits that seem to thrive in regional financial markets.An employee’s level of experience in the financial services industry will influence their ability to identify suspicious behaviour that may indicate possible money laundering or terrorist financing activity. Limitations do exist. Twenty years of experience as a bank

teller does not carry equal value when applied to the task of trading credit derivatives. Yet there is no substitute for experience. Veterans of various business lines will be able to spot suspicious transactions within a matter of moments.

No financial institution can operate in the modern regulatory environment with a mediocre AML/ATF enterprise-wide training program that transmits the same message to all. The Financial Action Task Force (FATF) states clearly that implementing the risk-based approach requires specific training tailored to the money laundering and terrorist financing risks faced by the line of business6. Employees aware of money laundering and terrorist financing patterns will be able to report up their chain of command. Expecting employees to report such patterns without first informing them of the characteristics of these patterns is

simply a fool’s errand. There is no substitute for robust and specialised AML /ATF t raining programs.

If a financial institution’s staf f are provided the authorisation to report their suspicions, the anti-money laundering compliance team will hear from them. If the tone from senior management is to ignore AML/ATF obligations,

promulgate a corporate culture of corruption and moral ambiguity, then little information will be reported. Staff encouraged to report their suspicions through policy, management support and transparency will create a compliance culture more acceptable to regulators. The opposite environment can result in heavy sanctions when assessed by competent supervisory authorities.

Once the handcuffs have been snapped shut around the wrists of an errant compliance officer, financial institutions can expect its employees to change their behaviour in fundamental ways.


“Once the handcuffs have been snapped shut around the wrists of an errant compliance officer, financial institutions can expect its employees to change their behaviour in fundamental ways.”

“The entire battle against money laundering and terrorist financing will undertake a dramatic turn in the wrong direction.

2 of 3ManchesterCF Analytics October 2014

After the initial exodus to other functions of the bank or business lines has subsided, the remaining compliance officers will demand a new version of directors and officers (D&O) liability insurance.

These new insurance policies will cover all legal fees incurred by the individual throughout the execution of their daily responsibilities, assuming little egregious behaviour on their part. The insurance policies will need to cover large severance packages associated with immediate retirement, plus support from professional counselling and public relations firms as senior executives are thrust before the glare of televised public t e s t imonials and paparazzi ambushes between the limousine door and the front door entrance of the bank.

M ora l ha za rd wil l s t i l l dominate the compliance function. If D&O insurance is purchased for senior staff and management, shareholders will s t ill foot the bill for employee malfeasance via the payment of spectacular monthly insurance premiums.

Such protections would be above the pay grade of middle management and clerical staff. For these employees – who are under immense pressure to build the corporate banking business, increase trading volumes and boost transactional activity – the mere thought of raising one’s hand to report potentially suspicious activity is already implicitly discouraged. Raising the flag, filling out forms and communicating with compliance staff detracts the middle manager or clerk from their daily responsibilities. The pressure to allay suspicion to improve productivity and revenue generation requirements is enormous as it stands.

When an employee realises that the act of escalating money laundering or terrorist financing concerns can lead to infernal personal consequences, the grounds for suspicion will rapidly rise to almost impossible levels. Suspicious transaction reporting will shrivel up. Why run the risk when the consequences for get t ing it wrong are so punishing?

The last consequence for arresting individual bankers is the most damaging. For the past few years, government policymakers and the

judiciary have placed increasing pressure upon financial institutions to supervise their businesses and assert loudly that criminal organisations and the financiers of terrorism are not clients. At the extreme, some policymakers have suggested that the hand-on-heart signature, as required by the Sarbanes-Oxley Act for company accounts, should be introduced to the sphere of AML/ATF compliance.

The public sector has effectively outsourced, via legislation and punitive regulatory findings, the responsibility of supervising and regulating the financial sector. Bankers must see all and report all,

which is a much cheaper solution for financial sector supervision than hiring more public employees in regulators’ offices. Errors must be self-reported and sanctioned. Wilful blindness heralds large financial consequences, including possible forced mergers or bankruptcies. Conspiracy involves

exchanging pinstripes for prison stripes.

Upping the ante increases the pressure on industry to suppress more indiscretions and flow questionable business into the murkier corners of international banking. Such actions place regulators and industry at even greater odds. Yet politicians smile and claim proudly to the cameras that the financial services industry is paying the price for dire transgressions. The truth is that, in the delicate balance of financial intelligence between public and private sectors, the equilibrium is being disrupted by political posturing.

Given all that’s at stake, who wouldn’t want a brilliant career in AML/ATF compliance in international banking? Think of the opportunities! Think of all the wonder ful people you could meet in the holding cell immediately af ter you’ve been arrested. Sign me up!


“wilful blindness heralds large financial consequences.Conspiracy involves exchanging pinstripes for prison stripes.”

3 of 3ManchesterCF Analytics October 2014

1 http://www.dfs.ny.gov/about/press2014/pr1406301.htm2 http://www.finra.org/Newsroom/NewsReleases/2014/P4434423 http://www.fsa.gov.uk/pubs/final/m-wheelhouse.pdf4 http://www.reuters.com/article/2014/05/02/financial-regu-lations-moneylaundering-idUSL2N0NO0QA201405025 http://www.reuters.com/article/2014/09/27/us-commerz-bank-fraud-idUSKCN0HM00R201409276 http://www.fatf-gafi.org/media/fatf/documents/reports/High%20Level%20Principles%20and%20Procedures.pdf

October Analytics - Pinstripes for Prison Stripes

Economy & Finance

Transcript of October Analytics - Pinstripes for Prison Stripes