‘Everyone has a price.’ Pablo Escobar once said. ‘The important thing is to find out what it is.’ That Escobar was a visionary cannot be denied. That’s not to say I admire the man; but after a good friend recently provided me with a complimentary Netflix subscription, the Columbian drug kingpin has been on my mind. I’ve been binge-watching Narcos, the show based largely on the life of Escobar and his Medellín cartel. TV effects and exaggerations aside, Narcos is an excellent illustration of the 1980s drug trade and the requisite money laundering that accompanied it.
Escobar was said to be a master of ‘smurfing’, the technique of breaking down money into smaller sums to avoid the attention of the authorities. To stay under the legal radar, Escobar sent his army of cronies to US banks in Miami, where they deposited amounts that fell below the Cash Transaction Reporting threshold of US$10,000. Now commonly known as ‘structuring’ or ‘aggregation’, anti money laundering (AML) experts have long known how to spot such tactics.
A concept closely related to smurfing is beneficial ownership. When I was an AML officer in 2001, the rules were clear that the ultimate beneficial owner of the source of funds must be determined and assessed. This policy did not truly resonate with me until I began working for an organisation that dealt solely with High Net Worth Individuals (HNWIs). I often wondered why HNWIs would establish Corporate Investment Vehicles and Trust Structures at a distance from the money source. At the time, as the money originated from reputable banks in Singapore, I thought nothing more of it.
Recent headlines have brought these memories back. On October 10, two former bankers of BSI were charged as part of an ongoing money laundering probe into 1Malaysia Development Berhad (1MDB). The bankers were both close associates of the financier Jho Low, the man most publically linked with the 1MDB scandal. They were charged after inspectors had reasonable grounds to suspect that the huge sums of money involved directly represented proceeds of an act that may have constituted criminal conduct. The bankers had reportedly failed to disclose these details to the Suspicious Transactions Reporting Office (STRO). Much of the money originated in, or was transferred to, Corporate Vehicles in the Cayman Islands and the United Arab Emirates.
Background to 1MDB
BSI’s licence was revoked by the Monetary Authority of Singapore (MAS) in May 2016, after they discovered ‘serious breaches of anti-money laundering requirements, poor management oversight of the bank’s operations, and gross misconduct by some of the bank’s staff.’ At the time, six members of the bank’s senior management in Singapore were referred to the public prosecutor to determine whether criminal offences had been committed.
MAS announced this month that they would withdraw the licence of Falcon and fine DBS and UBS Singapore for AML deficiencies. Although not mentioned specifically, the deficiencies are believed to be concerned with dealings between close associates and related entities of 1MDB. In addition to the closure order, Falcon face a S$4.3M fine; DBS and USB will be fined S$1M and $1.3M respectively. When you consider that HSBC was fined US$1.3Bn by US regulators in 2012 for sanctions and money laundering infringements, it is not unfair to describe the MAS fines as paltry. The reputational damage, however, to both DBS and UBS Singapore is substantial and potentially long-lasting.
The FATF (Financial Action Task Force) Mutual Evaluation Report 2016 was hardly full of surprises. It explicitly states the obvious, that ‘Singapore has not undertaken an adequate ML/TF risk assessment of all forms of legal persons and legal arrangements.’ It goes on to say that ‘legal persons and arrangements created in Singapore, and those registered or operating in Singapore from foreign jurisdictions, can be used to facilitate predicate crimes and ML/TF offences.’ The report, whilst highlighting the robust measures Singapore takes against money laundering, makes it clear that there is plenty more that can be done.
Reading the report took my back to my experience as an MLRO, where I witnessed structures with four layers or more. One such structure was a Corporate Investment Vehicle set up in Guernsey, wholly owned by a Jersey company, which in turn was part owned by a company in the British Virgin Islands, which was itself owned by a Trust Structure set up in Bermuda. The settlor of the above mentioned trust was a wealthy Singapore businessman. I am relieved to have had filed a suspicious transactions report (STR) back when I was asked to review the transaction.
Naturally more needs to be done. Here are some initial recommendations:
- All clients transacting using a legal person or arrangement should be asked to provide an explanation for such an arrangement by default.
- Legal persons or arrangements with more than two layers should be disallowe
- Private banks should stop helping wealthy clients to structure such corporate arrangements
- STRs should be filed by default for transactions involving legal persons or arrangement for amounts exceeding a certain threshold, based on the firm’s risk assessment
It seems rather difficult to reach the conclusion that the individuals – and to a certain extent, the firms – implicated in this scandal were entirely unaware of any wrongdoing. If this is the case, then it will be fascinating to discover what else emerges from this saga. It may not be long until we find out whether Escobar’s mantra that everybody has a price holds any weight.
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