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Financial Crime Newsletter _Issue 2_


									                             An Update from the
Financial Crime Newsletter   Financial Crime Sector Team

                             Issue No.2 – May 2005

                             Introduction by Philip Robinson                 regime. It offers the real and very welcome
                                                                             prospect of a properly risk-based, effective
                             As the FSA’s Financial Crime Sector             and targeted regime; and one in which
                             Leader, I am pleased to introduce our           customer identification procedures play an
                             second Financial Crime Sector newsletter.       important, but proportionate, role in the
                             You will recall that the main focus of our      fight against crime. As a consultation draft
                             first issue was financial crime legislation     there is of course some ‘unfinished
                             and the FSA’s financial crime policies. In      business’, and some aspects that we hope
                             this issue, we focus on the more practical      the JMLSG will be willing to amend. But,
                             aspects of how the FSA fulfils its              all in all, we warmly commend the JMLSG
                             regulatory objective to reduce financial        on the text and the radical thinking that
                             crime. This includes an introduction to our     underlies it. It is also marvellous news that
                             new Financial Crime sector team.                the JMLSG propose to make a pdf version
                             Other issues covered are:                       of the Guidance available to all on their
                                                                             website. This will be a big contribution to
                             •   our work to combat financial crime at       promoting good AML practice across the
                                 each stage of the regulatory process –      industry. For our part, we will continue to
                                 this includes an overview of the work       offer input to the consultation process and
                                 done by our Risk Review Department;         to encourage others to do the same.

                             •   recent convictions for fraud, following     The new Guidance is a key element in a
                                 work by the FSA;                            more risk-based approach, but I recognise
                                                                             that statements of support for this change
                             •   money laundering ‘mules’;
                                                                             of direction are hollow without delivery of
                             •   company identity fraud;                     a risk-based approach by FSA supervisors
                                                                             on the front line. We must mean what we
                             •   new ‘boiler room’ tactics; and              say and act on it. So training and
                                                                             equipping our supervisors to regulate in a
                             •   the obligation to report significant
                                                                             risk-based, proportionate way is one of
                                 frauds to the FSA.
                                                                             our highest financial crime priorities in the
                             Before covering these areas though, it is       coming months. And as I have already
                             important that I update you on key              stressed publicly – in my letter to Ian
                             legislative and policy developments since       Mullen (Chairman of the JMLSG) last year
                             the last newsletter.                            – our enforcement policy will also be
                                                                             driven by a recognition of the risk-based
                             The publication in March by the Joint           approach. You can read more about this
                             Money Laundering Steering Group                 later in this newsletter.
                             (JMLSG) of a consultation draft on new
                             Guidance is an important step forward in        Another area of risk-based activity is our
                             the fight against money laundering and          work supporting the Treasury over their
                             terrorist finance. The draft Guidance, with     negotiation of the Third EU Money
                             its strongly risk-based flavour and its         Laundering Directive. The wording of the
                             blueprint for a more streamlined customer       new Directive will be absolutely crucial for
                             identification (ID) regime, is part of what I   the future of the UK money laundering
                             see as a new era in the money laundering        regime. If that wording is too prescriptive,

                             This is not FSA guidance                                                             Page ◆ 1
we are in danger of losing some ground we have          •   helping the FSA become better at identifying
made in recent years in the development of a UK             risks early on and taking pre-emptive action to
AML regime that works – that achieves what we               manage issues swiftly and decisively;
all want in the fight against crime at a
proportionate cost to all those involved.               •   building and maintaining strong relationships
                                                            with external stakeholders to achieve our
The final piece of the risk-based jigsaw for us is to       common goals in the fight against crime;
look at our Handbook provisions on money
laundering, to see whether alternative provisions       •   ensuring that issues are considered on a cross-
would better serve our aims. We have concluded              FSA basis so our financial crime objectives and
that they might, so we will shortly be consulting           priorities are understood by the whole
on proposals which reduce the number of specific            organisation and that we achieve them in the
rules in the Handbook but emphasise the                     most efficient way possible; and
importance of senior management having in place         •   developing the skills and knowledge of
appropriate risk sensitive systems and controls to          our staff.
reduce the likelihood of their firms being used as a
conduit for financial crime.                            A key priority is to develop and deliver improved
                                                        financial crime training for FSA staff – the sector
As ever, we would welcome feedback, ideas for           team is directly responsible for this. This is
future issues and suggestions of how we might           particularly important as the industry moves
make this newsletter more useful to our external        towards a risk-based approach to anti-money
stakeholders. Our contact details are at the end of     laundering. Firms must be confident that
this newsletter. We aim to publish our newsletters      supervisors understand how a risk-based approach
on a quarterly basis but they might be slightly         might operate in their firms, otherwise they may
more or less frequent than that, depending on           be reluctant to move forward for fear of
financial crime developments.                           regulatory sanction. A risk-based regime cannot
                                                        be “zero failure”.

                                                        It is important to point out that the FSA’s staff
                                                        already consider financial crime issues on a daily
                                                        basis. Below, we outline how we identify, mitigate
                                                        and monitor financial crime issues at each stage of
Philip Robinson                                         the regulatory process.

FSA work to combat financial crime
                                                        One function of our Regulatory Transactions
Financial Crime Sector Team                             Division is the assessment of corporate applications
                                                        for Part IV permission from firms wishing to
The new Financial Crime sector team has been in         conduct regulated activities in the UK. We initially
place for around two months and reports directly        assess applications to identify risk impact and key
to Philip Robinson. It comprises Edna Young             risk factors. This assessment will determine whether
(Manager) and Rob Gruppetta. Edna and Rob both          an application is dealt with as routine and handled
have a banking supervision background, and Edna         through our Authorisation department’s ‘green
spent many years in Whitehall (most recently in the     channel’ mechanism, or presents something of a
Treasury). Immediately before their appointments,       non-routine nature, in which case it will be referred
they worked in the FSA’s Intelligence and High          and dealt with as a ‘red channel’ case. These risk
Street Firms departments, respectively.                 factors include those relating to financial crime and
The team’s main role is to support Philip in            whether the applicant could be used to facilitate, or
ensuring that the FSA achieves its challenging          be exploited for, financial crime purposes. A number
financial crime objective by:                           of triggers can prompt a referral to the red channel.
                                                        These can arise at the outset or may occur as a
                                                        result of vetting checks or other enquiries made.

This is not FSA guidance                                                                             Page ◆ 2
Where financial crime concerns are identified, case      from frauds and, where appropriate, strengthen
officers will work closely with colleagues in our        their controls. Of course enforcement action is
Intelligence department and, where applicable, will      always possible, but is very much the exception
also liaise with other internal and external parties.    rather than the rule. However, we would consider
Staff in Authorisation have access to advice on          it if, for example, there were serious systems and
financial crime issues, usually through their local      controls weaknesses or if there had been
sector lead, to ensure relevant issues are covered.      significant detriment to consumers.

Over the last two years, formal warning notices
have been issued through the Regulatory Decisions
Committee to several applicant firms proposing to        The overriding consideration in this area is
refuse their application on grounds of financial         whether a firm has implemented an effective
crime concerns. One of these reached ‘final notice’      control structure that identifies and mitigates its
stage; the remainder withdrew their applications         own particular financial crime risks. High-profile
before a final decision notice was issued.               anti-money laundering enforcement action over the
                                                         past two years has sent clear and valuable
Supervision                                              messages, in support of earlier public statements.
                                                         Firms now better understand what is expected of
In our Supervision department, we have done              them and, as a result, evidence suggests that
much work since N2 (1 December 2001 – when               standards have risen.
the FSA gained its statutory powers) on raising the
standards of firms’ anti-money laundering                Effective AML systems should reduce the risk that
controls. We believe there has been a real               money laundering remains undetected, unreported
improvement across the industry in understanding         and successfully completed.
and managing money laundering risk. Even so,
our interest in ensuring that firms maintain high        It is likely that, in the immediate future,
standards of anti-money laundering controls is           enforcement efforts will concentrate on actual
                                                         money laundering where a high risk was
                                                         identified; where there is a higher risk of money
We are now looking more closely at fraud issues as       being laundered because of, for example, a failure
part of our supervision of individual firms, where       to report suspicions or seek consent; or where
we expect there to be effective and proportionate        there are specific weaknesses in systems and
fraud management systems and controls.                   controls that result in high risk transactions not
                                                         being detected or reported. We expect firms to
Our Handbook requires that firms take reasonable         identify any high-risk areas within their business
care to establish and maintain effective systems and     and to ensure that sufficiently effective procedures
controls for countering the risk of fraud. At a high     are in place to control those risks.
level, we seek to assess whether a firm has a strong
anti-fraud culture with a clear lead being given from
the top. We expect there to be a clear allocation of                   FSA rule SYSC 3.2.6R
responsibility for the day-to-day management of            A firm must take reasonable care to establish
fraud risk; effective staff training arrangements; and    and maintain effective systems and controls for
good management information on fraud presented             compliance with applicable requirements and
to the board and senior management.                       standards under the regulatory system and for
We believe there are clear market incentives for             countering the risk that the firm might be
firms to prevent fraud and so our response to                     used to further financial crime.
fraud is reasonable and proportionate. We expect
firms to report significant frauds, as our Rules         Enforcement’s approach to money laundering has
require (see box on page 5). In most cases where         developed from a high-level, message-based focus
we believe we do need to take action, we will use        to a strategy in support of the FSA’s risk-based
supervisory tools, probably through a firm’s risk        approach. So it is not our current intention to
mitigation programme. We want firms to learn             direct significant enforcement resources to ID and

This is not FSA guidance                                                                              Page ◆ 3
record-keeping issues, but we are more likely to       Recent fraud prosecutions and
take these types of cases where there are
                                                       disciplinary action involving the FSA
particular aggravating circumstances.
                                                       We have recently contributed to two successful
Future disciplinary action is more likely to involve
                                                       fraud prosecutions, full details of which can be
breaches of FSA rule SYSC 3.2.6R and involve
                                                       found by following the links below to the Serious
failures that may appear to be very firm-specific
                                                       Fraud Office’s website.
or involve specific circumstances. More
intelligence-led action is also expected, as we        Over £1 million stolen in options trading
continue to develop our relationships with law         deception: Malcolm Varrick was jailed for four
enforcement and similar agencies.                      years on 10 November 2004 after admitting he
                                                       stole £1.16 million from investors deceived
Risk Review Department                                 through his Durham-based financial businesses.
                                                       He promised high and assured profits on options
Our Risk Review Department (RRD) acts as an            trading. He spent lavishly on himself, using some
in-house consultancy, giving technical support to      of the £4.25 million in investors’ funds.
regulatory divisions across the FSA on credit,         For full details, click here:
market, insurance and operational – including
financial crime – risk issues. Reviews of FSA
regulated firms’ policies, procedures and controls     Two sentenced in trade finance fraud: David
are commissioned by line supervisors, who decide       Mahood and Michael Cuzner-Charles were
the scope and objectives of the exercise, which        sentenced on 25 February 2005 at Belfast Crown
most commonly comprise an on-site visit of one to      Court to a combined six years’ imprisonment
two days. However, sometimes a desk-based              (suspended for two years) in relation to the misuse
review of relevant documentation is sufficient.        of £2.5 million of investors’ money acquired by
                                                       their merchant finance business Regal Brook Ltd.
The need for a review is often identified during an    They have been ordered to pay £125,000 each by
ARROW risk assessment but may also arise in            way of compensation and each disqualified from
response to an application for authorisation or to     acting as a company director for seven years.
a specific concern about a firm which, for             For full details, click here:
example, might be flagged by law enforcement 
agencies. The visit can be used to explore             In addition, the the Financial Services and
potential areas of risk, where we need to              Markets Tribunal directed on 6 April 2005 that
understand the risk management and procedures a        the FSA fine Mr Arif Mohammed, a former
firm is implementing, or could be part of a risk       PricewaterhouseCoopers (PwC) audit manager,
mitigation programme to assess progress in             £10,000 for committing market abuse. This is the
dealing with previously identified risks.              first time that the market abuse provisions in the
                                                       Financial Services and Markets Act 2000 have
RRD also leads and contributes to project and          been the subject of a Tribunal decision.
theme work on sector- or industry-wide topics,         For full details, click here:
including financial crime. This work not only          Library/Communication/PR/2005/pr034.shtml
assesses the financial crime risk associated with
particular areas of activity, and how it is being
managed, but also identifies standards of practice     Money Laundering ‘Mules’
across regulated firms and informs FSA line
directors, sector leaders and supervisors where        A recent addition to the FSA website’s ‘Scams and
those standards lie. A recent example of RRD’s         Swindles’ section warns consumers about them
project/thematic work is their examination of          becoming so-called money laundering ‘mules’.
information security risk in the financial services    Prompted by calls to our Consumer Contact
sector. You can find the information security          Centre and other referrals to the FSA Intelligence
report on our website at:                              Team, the warning relates to emails or adverts            purporting to contain an offer of employment.

This is not FSA guidance                                                                           Page ◆ 4
The cover story used varies, but may typically           companies involved may become liable to refund
claim that a company is looking for ‘account             investors the full price paid for their shares.
managers’ who can work from home and earn
good rates of pay. A heartless example claimed to        The FSA reminded companies and consumers to
be from a charity requiring assistance because of        check that a firm offering fund raising or
what they described as the collapse of the banking       investment opportunities is authorised. The
system following the Asian tsunami.                      Department of Trade and Industry (DTI) has
                                                         warned small unlisted companies that, in many
All that is asked is that the prospective new            cases, selling their shares to the public is a
employee has access to a UK bank account. They           criminal offence. Companies considering raising
will receive payments into this account, but             funds should seek legal advice.
because the company or charity has ‘difficulties
accessing the banking system’, the mule will be
asked to withdraw these sums in cash, keep a             Your obligation to report significant
commission for themselves and transfer the               frauds to us
balance abroad using a money transmission agent.
                                                         We would like to remind firms that they are
Of course, as with all such offers, if it looks too      required under FSA rule SUP 15.3.17 to report
good to be true it usually is. These mules are           significant frauds to us. ‘Significant’ does not relate
facilitating a fraud, usually involving ‘phishing’       solely to the amount of the actual or potential loss.
attacks. Once the fraudster has access to an online      Our Handbook makes it clear that you also need
bank account, they are faced with the problem of         to consider the risk of reputational loss and
moving the funds. By recruiting and using mules          whether the incident reflects weakness in internal
they can have the money moved abroad to any              control. Significant fraud reports should be sent to
destination they choose and break the paper trail        your relationship manager or, for smaller firms, the
by using cash. When the authorities investigate, the     Firms Contact Centre.
trial leads them straight to the unsuspecting mule.

                                                         SUP 15.3.17R
FSA warns of new ‘boiler room’ tactic                    A firm must notify the FSA immediately if one of the
Companies and consumers were recently reminded           following events arises and the event is significant:
of the dangers of dealing with unauthorised firms.       (1) it becomes aware that an employee may have
The FSA warned of a new tactic used by ‘boiler           committed a fraud against one of its customers; or
rooms’ – overseas investment firms that are not          (2) it becomes aware that a person, whether or
authorised by the FSA – to con both investors and        not employed by it, may have committed a fraud
UK small companies out of their money.                   against it; or
Boiler rooms traditionally use high-pressure selling     (3) it considers that any person, whether or not
techniques to persuade UK investors to purchase          employed by it, is acting with intent to commit a
shares in foreign companies. But the FSA is now          fraud against it; or
aware of boiler rooms that are selling shares in
small companies based in the UK.                         (4) it identifies irregularities in its accounting or
                                                         other records, whether or not there is evidence of
In a typical scenario, a boiler room would               fraud; or
approach a small unlisted UK company and
propose to raise capital by selling £100,000 worth       (5) it suspects that one of its employees may be
of shares in that company on their behalf. Of this       guilty of serious misconduct concerning his
£100,000, the boiler room would take 60% as its          honesty or integrity and which is connected with
fee, leaving the small company with £40,000              the firm’s regulated activities or ancillary activities.
capital. In reality, the boiler room will cold call UK
investors to sell the shares at up to 100% over the
agreed price, take their fee and vanish. The small

This is not FSA guidance                                                                                 Page ◆ 5
Metropolitan Police and Companies                        Contact details
House initiative to tackle company                       If you would like to receive this newsletter in
identity fraud                                           future or have any comments on its content or
                                                         format please contact us by e-mail at:
On 9 May, the Metropolitan Police launched a
media campaign and crime prevention leaflet in
partnership with Companies House, the                    Individual contact details are as follows:
Association of Chief Police Officers and key
stakeholders to highlight a fraud targeted at            Edna Young (Financial Crime Sector Manager)
British business.                              
                                                         020 7066 0964
This fraud relies on organised criminal networks
being able to hijack the identities of legitimate        Robert Gruppetta (Financial Crime Sector
companies by making fraudulent entries on their          Associate & Newsletter)
registration at Companies House and then using their
credit rating to obtain high value goods and services.   020 7066 0140
The loss to industry through this type of fraud is       Chris Eridani-Ball (Anti-Money Laundering
estimated to be over £50 million a year.                 and Fraud Policy)
We would encourage you to read the leaflet which
can be found at            020 7066 3490
docs/CHleafletforlaunch.pdf and consider taking          Ian Matthews (Fraud Policy)
the measures suggested to protect your firm from
this growing type of fraud.                              020 7066 1092

                                                         Jamil Choudhry (Anti-Money Laundering Policy)
Forthcoming changes to the law on              
money laundering                                         020 7066 1936

The Serious Organised Crime and Police Act 2005          Helen Smith (Anti-Money Laundering Policy)
contains provisions amending Part 7 of the     
Proceeds of Crime Act 2002. When implemented,            020 7066 0656
these will mean some changes to the law on
money laundering. In particular, there will be           Abnash Sagoo (Anti-Money Laundering Policy)
changes in relation to:                        
                                                         020 7066 4734
•   the position over proceeds deriving from
    conduct overseas;                                    Useful links
•   the circumstances under which pre-transaction        FSA website ‘Scams and Swindles’ at:
    consent needs to be sought where there is not
    much money involved;                                 mn_scams.html
•   some limited exemptions over what has to be          Further financial crime information is available at:
    reported; and                              
•   reduced penalties over the failure to use the        index.shtml
    form in which reports have to be made.

The Act is available on the internet at
Details of the coming into force of the relevant
provisions will be posted on the Home Office
website (
crimpol/oic/proceeds/index.html) in due course.

                                                                                                      Page ◆ 6

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