countering financial crime - the importance of effective training

COUNTERING FINANCIAL CRIME

FEBRUARY 2016

The Importance of Effective Training

Countering Financial Crime - The Importance of Effective Training

KNOWLEDGE AND TRAINING: OVERVIEW

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• As criminals become ever more sophisticated at exploiting weaknesses in the global financial system, authorities seem to be perpetually one step behind. Simultaneously, the stakes for risk and compliance staff - and indeed all employees of financial institutions - have never been greater given increasingly tighter regulations and personal liability inherent in their roles. With recent changes in anti-money laundering regulations of Western countries, including the UK and U.S., demands on bank staff can only be expected to broaden.

• In such an environment, how can firms and their staff feel comfortable or confident taking on a risk or compliance function? How can financial institutions avoid being exploited for criminals’ illicit purposes?

• The answer lies in knowledge and how firms obtain relevant knowledge which enables their staff to perform effectively, in this case, the role of a risk and compliance officer. The collective knowledge of a firm’s staff can serve to protect it from the multitude of threats common in financial services today; including financial crime. Conversely, a lack of knowledge can cause significant harm – commercially and to reputation and integrity – for firms, individuals involved and the wider financial system.

REGULATORY LANDSCAPE

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TRAINING, AS DEFINED BY THE FCA, MUST BE APPROPRIATE AND EFFECTIVE FOR THE FUNCTION BEING PERFORMED.

• Training has always been one of the pillars of anti-money laundering (AML) and financial crime compliance however it is often considered a cost rather than an investment. In today’s strict regulatory framework, merely having a training programme is insufficient.

• The Financial Conduct Authority (FCA) requires that individuals have appropriate qualifications, be assessed as competent by their firm and maintain their competence through training. Training, as defined by the FCA, must be appropriate and effective for the function being performed. It must also be periodically reviewed and updated, ensuring its continued relevance.

• What constitutes appropriate training depends on both a firm’s characteristics (i.e. type of organisation, product base, client base, geographical footprint) and particulars of the employee (i.e. level of authority, years of experience, job description, existing knowledge).


REGULATORY LANDSCAPE: SENIOR MANAGERS AND CERTIFICATION REGIME

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• The imminent start of the Senior Managers and Certification Regime in March 2016 highlights the importance of competence of employees. Competence requires knowledge, which in turn necessitates appropriate and effective training.

• In the wake of the 2008 global financial crisis, regulators and authorities received significant criticism from political leaders and in the media for not holding executives of financial institutions personally and criminally liable for their contribution to the crisis. The Senior Managers Regime (SMR) aims to ensure that senior managers can be held accountable for any misconduct that falls within their areas of responsibilities.

• Individuals subject to the SMR will continue to be pre-approved by regulators, however, firms will also be legally required to have procedures in place to assess senior managers’ fitness and propriety before applying for approval, and at least annually afterwards.

• Under the SMR the FCA also has the authority to mandate that a particular individual undertake additional training or receive mentoring to enhance their competency, should the FCA find it to be deficient.

• In assessing a person’s competence and capability to perform a significant-harm function, the FCA will consider, in addition to other criteria, whether the person has demonstrated by experience and training that they are or will be suitable if approved to perform the function.


REGULATORY LANDSCAPE: SENIOR MANAGERS AND CERTIFICATION REGIME

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Under the Certification Regime an annual evaluation of competence is compulsory

• Similarly, the Certification Regime (CR) and implementation of Rules of Conduct require firms to assess whether more junior staff are also competent to carry out their roles.

• The CR and Conduct Rules effectively cover a broader range of employees than previous regimes and increase the expectation that firms have ‘the right’ people in their respective roles.

• Under the CR an annual evaluation of competence is compulsory, while staff not captured under this regime are still required to undergo training on Conduct Rules before 7 March 2016.

• Firms therefore need to expand their training programme to include additional staff and tailor these to ensure that employees are trained appropriately for their function and level rather than having a one-size-fits-all training programme.

• Training and competence requirements are expected to be met even while a firm is transitioning to the regime.


INDUSTRY STANDARDS

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The JMLSG requires that relevant employees are trained on money laundering and terrorist financing issues and the use of a risk-based approach to AML and CFT.

• The Financial Action Task Force (FATF)’s recommendation #15 states that an on-going employee training programme is an essential component of a firm’s anti-money laundering and counter terrorist financing framework. A financial institution’s commitment to having effective controls is contingent on both training and awareness.

• In accordance with FATF’s risk-based approach, training must:

Be tailored to the appropriate staff responsibility. Be at the appropriate level of detail. Be at a frequency commensurate with the risk level

of the business line involved. Include testing to assess knowledge commensurate

with the detail of information provided.

• The EU’s 4th Anti-Money Laundering Directive, adopted in 2015 and required to be implemented into EU member states’ laws by 2017, is closely aligned with FATF’s guidance, containing a strong shift to the use of risk-based approach.

• Similarly, the Joint Money Laundering Steering Group (JMLSG) requires that relevant employees are trained on money laundering and terrorist financing issues and the use of a risk-based approach to AML and CFT.

• A risk-based approach naturally requires sound analysis and judgement which can only be achieved with proper knowledge.


TRAINING IS AN INVESTMENT: FINANCIAL IMPLICATIONS

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Comprehensive staff training can prevent the kind of mistakes which can lead to fines therefore preserving the value of the brand.


• Cost effectiveness: “Time is money” and when staff are properly trained they are less likely to make mistakes which can result in the need for costly re-work. One of the most important controls over the prevention and detection of money laundering is to have staff alert and trained to identify potentially suspicious activities. Competent staff can safeguard a firm from enforcement actions and costly fines and remediation.

• Brand Reputation: The Parliamentary Commission on Banking Standards noted that how a firm manages and assesses its risk is crucial to the success of the organisation. Fines and enforcement actions are inevitably accompanied by a media-frenzy of negative press on the target firm which erodes customer confidence in the brand and can reasonably impact a firm’s bottom line. Comprehensive staff training can prevent the kind of mistakes which can lead to fines therefore preserving the value of the brand.

• Wasted Expenses: A firm can spend a considerable amount of time and money in the creation of robust policies and procedures. However, the effective application of even the best designed control systems can be easily compromised if the staff applying the controls are not adequately trained.

TRAINING IS AN INVESTMENT: GREATER GOOD

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“Employees need a sense of broader purpose, grounded in strong connections to their clients and their communities. To move to a world that once again values the future, bankers need to see themselves as custodians of their institutions, improving them before passing them along to their successors.”

Dr. Mark Carney, Governor of the Bank of England


• Dr. Mark Carney, Governor of the Bank of England notes that: “Employees need a sense of broader purpose, grounded in strong connections to their clients and their communities. To move to a world that once again values the future, bankers need to see themselves as custodians of their institutions, improving them before passing them along to their successors.”

• Financial institutions find themselves in unique positions of amassing considerable information on their clients and thus are able to detect criminal activity from a vantage point but only if they know what to look out for.

• Through training, financial institutions are able to help protect and maintain the integrity of the local and global financial systems; acting not only as custodians of their institutions but of the system as a whole. When financial institution staff are equipped with the knowledge to identify and report suspicious activity they can prevent financial institutions from being exploited by criminals and help thwart illicit activity.

• The Proceeds of Crime Act (POCA) and the Terrorism Act carry stiff penalties for staff failing to report criminal activity where they should have reasonably known it was occurring. It is therefore imperative for staff to be made aware of their obligations and trained in how to properly fulfil them.

TRAINING IS AN INVESTMENT: ENFORCEMENT ACTIONS AND MONETARY PENALTIES

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• As FCA fines have steadily increased and the Serious Fraud Office (SFO) has issued its first Deferred Prosecution Agreement, financial crime training is likely to begin featuring more prominently in UK enforcement actions, as it already does more extensively in the U.S.

• Any company with U.S. operations is already subject to oversight by tough U.S. regulators.

• Some fines notable for deficiencies in training components are as follows:


SANCTIONED ENTITY DETAILS DATE AMOUNT AUTHORITY

John Joseph Financial Services Limited (JJFS)

JJFS is an independent financial advisory firm. JJFS failed to take reasonable care to ensure suitability of its investment advice for customers; failed to recognise associated risks; and failed to assess the needs and circumstances of its customers. The FCA noted that JJFS failed to maintain written training material but cited the firm’s providing its advisors with additional professional qualifications as a mitigating factor for its violations.

September 2015

GBP 20,000 FCA

Craig McNeil (case related to JJFS) Mr. McNeil’s violations included failing to disclose necessary information to authorities; and failing to act with due skill, care and diligence. Mr. McNeil was deemed by the FCA as “not fit and proper” to perform regulated activity and noted that he failed to satisfy training and competence requirements. He was expected by the FCA to have had knowledge of regulatory concerns regarding the business under his control.

September2015

GBP 350,000 FCA


10 Countering Financial Crime - The Importance of Effective Training


B.A.K. Precious Metails Inc, Bogos Karaoglanyan, Arman Karaglanyan

B.A.K. is a wholesale precious metal and stone dealer cited for violations to the Bank Secrecy Act (BSA- primary AML regulation in the US). Among its violations, B.A.K. failed to implement an AML programme until 5 years after the company was established; failed to assess its money laundering and terrorist financing risks, conduct due diligence on high risk customers and implement procedures to identify and mitigate red flags. The compliance officer further failed to provide training- including to himself. FinCEN’s order required- among other things- that B.A.K. establish a training programme and report its progress annually to FinCEN.

December 2015

USD 200,000 FinCEN and FRB

Oak Club Room d/b/a Oaks Card Club Oaks Club was a card table casino in California whose employees were convicted of loan-sharking, racketeering and selling controlled substances. Whilst Oaks Club was not included amongst the criminal defendants, it was fined by FinCEN for failing to report the aforementioned suspicious activities of its employees. Among its violations, Oaks Club failed to provide adequate BSA/AML training; whilst the club did have a training programme it was found to be deficient and staff lacked basic BSA knowledge.

December2015

USD 650,000 FinCEN

Lee’s Snack Shop Lee’s Snack Shop operated as a money service business. The shop failed to fulfil MSB requirements under the BSA including establishing proper controls, failing to file required disclosure reports (CTRs and SARs) and failing to conduct proper AML training.

June 2015

USD 60,000 FinCEN

Bank of Mingo Bank of Mingo facilitated structuring of cash transactions by its corporate customers- a criminal offense- and subsequently failed to file related CTR and SAR reports. Among its violations was its failure to maintain an effective BSA training programme. Employees of the bank lacked basic knowledge of BSA requirements. Whilst the bank did have a training programme it did not “provide comprehensive training tailored to the needs of specific positions, departments, board members and other personnel.”

June 2015

USD 4.5 million

FinCEN, DoJ, and FDIC




North Dade Community Development Federal Credit Union (NDCD)

NDCD AML violations included failing to adequately monitor, identify and report suspicious activity, primarily related to foreign MSBs. As well NDCD was cited for failing to provide adequate training to employees and not providing any training to board members. The FCA notes that JJFS failed to maintain written training material but cited the firm eventually providing its advisors with additional professional qualifications as a mitigating factor for its violations.

November 2014

USD 300,000 FinCEN

TD Bank N.A. TD Bank N.A. was the subject of a consent order for failing to detect suspicious activity and file SARs. The activity related to the Scott Rothstein USD 1.2 billion Ponzi scheme. Mr. Rothstein, a former Florida-based attorney, used a Ponzi scheme to fund his political contributions, law firm, life-style and even philanthropy. He pleaded guilty and received a 50 year prison sentence. FinCEN noted that TD’s training on IOTAs (Interest on Trust Accounts) was inadequate and thus compliance staff was unable to recognize the suspicious activity or file SARs in a timely manner. The order notes, “A lack of adequate training for both the business and the [BSA/AML] staff contributed to the failure to recognise this suspicious activity.”

September 2013

USD 37.5 million

FinCEN and OCC

A lack of adequate training for both the business and AML staff contributed to the failure to recognise suspicious activity

TYPES OF TRAINING: ONE SIZE DOESN’T FIT ALL


TRAINING PROS CONS

Computer-based Easy delivery to a wide audience. Minimal loss of work time; no logistics required. Cost effective for larger audiences.

Often only provide general overviews. Does not account for firm’s nuances, particular characteristics. No customisation.

Internal, Instructor Led More effective and tailored training based on staff and organisation’s needs.

Generally only very large firms can afford to retain an internal training functions. Logistics of providing face-to-face, on-going training to all staff in an organisation pose a significant challenge.

External Course/Workshop Provide a significant amount of information. Provide forum to potentially network with industry peers.

Information is not tailored and different parts may not be relevant for different attendees. Attendees can spend various days out of the office to attend these courses. May not represent the most cost-effective method of training a large number of employees.

Third-party, In-house More cost effective manner of providing training to various attendees from a single firm. Less work-time lost than with external workshops. Can, depending on the firm, be tailored to a firm’s specific needs.

More costly than computer-based training. Generally cover specific topics which may not be suitable for a broad audience, rather for a particular department.

• Financial institutions and third party firms have created various methods for delivery of training. Each carries its own advantages and disadvantages.

• In accordance with a risk-based approach, there is no one-size-fits-all training model.

• Firms must assess their overall risk profile and exposure and then implement commensurate training. What works for one firm might not work for another firm.

• It is generally good practice to use an on-going combination of training methods which increases retention of relevant information, ensures knowledge remains current and encourages a risk-aware culture throughout the firm.

CHALLENGES TO EFFECTIVE TRAINING


Cost: Training staff is not inexpensive. Courses, irrespective of delivery method, cost money and time which staff would normally use for work must instead be devoted to training. Moreover, “back-office” departments - those which generate cost but not profits - often have more limited budgets, which can impact their decision when selecting appropriate training.

Time: With increasing business, onerous regulatory requirements, remediation projects, staff cuts, and looming deadlines, time is a scarce commodity in the financial services industry. Devoting work hours to training can be a dissuading factor for firms.

Offer: There are variety of companies which provide training services and it is often difficult to distinguish which might provide the most effective and efficient training relevant to the risks of a firm.

CHALLENGES TO EFFECTIVE TRAINING


Culture: Banking ‘culture’ has recently become a focus for industry associations (such as the BBA), standard setters (FATF) and regulators (FCA). Mark Steward, FCA’s Director of Enforcement and Market Oversight, in describing banking culture, noted that “Good rules and standards describe the expectations and set the boundaries. But they’re not like the rules of a board game: they don’t determine the moves made by every player. Alone they cannot create the environment in which good governance, regulatory compliance and fair process magically appear – more is needed.”

A bank’s culture is driven by management’s ethical values and its business strategy. A bank that values its bottom line over all else creates a culture where risk and compliance training is not an essential component of proper controls, rather a tick-box exercise to appease regulators. In such a case, the effectiveness of the training is less important than fulfilling the requirement.


CONCLUSION

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• The value of training has been repeatedly highlighted by regulators and standard setters, and is set out in regulations.

• Subsequent to the global financial crisis, authorities are looking to hold leaders - and indeed staff at all levels - accountable for how a firm follows the letter and spirit of the law. The Senior Managers and Certification Regime as well as discussions on banking culture by relevant authorities demonstrate a clear need for effective training in order for staff to successfully carry out their roles and establish a positive bank culture.

• Effective, on-going training is an important component of a successful control framework which can help avoid the types of mistakes and violations that have over the past two decades led to record-breaking fines of numerous financial institutions.

• There are a variety of options for training programmes, but the most important factor to consider is their relevance to a firm’s risk profile. There is no one-size-fits-all programme and the general shift to risk-based approach across the financial industry is applicable to training programmes as well.

ABOUT APERIO INTELLIGENCE

We are a corporate intelligence and financial crime advisory firm based in the City of London. We specialise in: conducting enhanced due diligence on high risk customers and third parties; integrity due diligence on critical acquisitions and investments; market entry and political risk analysis; and investigations. We provide tailored training and advisory services relating to financial crime, in particular anti-money laundering and sanctions compliance. Our clients include some of the world’s leading regulated financial institutions. Our team has decades of collective experience in advising clients on financial crime and intelligence gathering, helping them to manage risk and maximise potential.

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countering financial crime - the importance of effective training

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