cpd day 2016 - simmons & simmons

CPD Day 2016

Session 01 - FINcarceration? Gatekeepers under pressure in the fight against financial crime

Speakers: Joanna Pearson, Partner, SingaporeTom Fyfe, Partner, Hong KongKane Mak, Supervising Associate, Hong Kong

19 October 2016

© Simmons & Simmons LLP 2016. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.

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Introduction

Global Financial Crime trends

Focus on AML, including de-risking

Regulators and customers – protecting information vs. transparency

Meeting global standards in local markets


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Global Financial Crime Trends

Political agenda

The role of “Gatekeepers”

Collaboration

• Terrorism• Corruption on a global scale• Panama Papers

• High regulatory expectations• Sanctions for failing to prevent• Criminal liability

• Law enforcement/private sector cooperation (but challenges)

• Regulator/law enforcement cooperation


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Criminalising corporate failure

Going beyond regulation: criminalising corporate failure

Failing to prevent concept – Corporate offence for failing to prevent bribery (s.7 Bribery Act 2010)– Defence: “adequate procedures” designed to prevent bribery– Criminal liability and extraterritorial reach

Standard Bank Deferred Prosecution Agreement – First ever DPA by the UK’s Serious Fraud Office– Financial penalties and other costs of US$32m+ (cf. transaction fees of

US$8.4 million)– Adequate procedures not found

“Cooperation, cooperation, cooperation”


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Copycat corporate criminal offences on their way?

Failure to prevent the facilitation of tax evasion

Failure to prevent economic crime (fraud, money laundering etc)

“Reasonable Procedures”– Proportionate procedures– Top-level commitment– Risk assessment– Due diligence– Communication– Monitoring and review

A step too far?


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Global trends:Focus on AMLincluding de-risking


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Enforcement Trends

Increasing focus on AML-related enforcement

Increasing regulatory scrutiny on internal policies and practices

Increasing fines and disciplinary penalties for controls failures and misconduct

Threat of criminal sanctions


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Recent AML enforcement actions

UK / FCA:

– Sonali Bank (fine) & Sonali Bank’s former MLRO: fine and ban

“Mr [X] did not have sufficient senior management support and was overworked”.

“Mr [X] failed to take any of the potential steps open to an MLRO”

Singapore regulatory (and criminal) action in context of 1MDB Fund scandal

– BSI Bank: revocation of licence and fine

– Falcon Private Bank: revocation of licence and fine

Regulatory (and criminal) action by Swiss authorities

Hong Kong:

– State Bank of India: fine and public reprimand by HKMA


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Lessons from AML enforcement actions

Inadequate scrutiny of suspicious customer transactions

Failure to file suspicious transaction reports

Poor conduct by senior management and ineffective oversight

Failures to tighten controls despite repeated warnings

Circumventing ordinary policies or processes to get the deal done

Poor or no record-keeping

Inadequate internal resources

Poor awareness of risks and methods / lack of training


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Is “De-risking” risk free?

Conflicting messages?

HKMA Circular (8 September 2016)– “AIs are not required to implement

over stringent CDD processes with a view to eliminating, ex-ante, all risks”

SFC Notice (21 September 2016)– “expected to enhance their AML

internal controls immediately… had ample time to develop their internal controls…”

What does this mean for you?


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Risk-based approach to determine “reasonable measures”

Considering the “risk-based” approach

Factors for risk classification

Risk classification factors include:– Product/service risk– Delivery/distribution channel risk– Customer risk – Country risk

No one-size-fits-all approach

Class-based / checklist type de-risking discouraged– Against principles of financial inclusion– Attracts regulatory scrutiny and adverse public sentiments


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Polling question (1)

The HKMA Circular mentions that they do not expect a “zero failure” regime. In your day to day dealings with the HKMA, is this reflected in their practice?

1. Yes, they do not expect the system to catch all money-laundering / terrorist financing activities

2. No, in practice they do expect a “zero failure” system


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Criminalisation in Hong Kong

Penalties and Mitigation of Risk

Criminal offences under AMLO– E.g. “Knowingly causes or permits”

Preference for disciplinary actions may change

Adequate systems and controls?– Difficult to request overseas information – Other secrecy or confidentiality restrictions


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AMLO - A balancing exercise

Takeaway points

Do what is right, not what seems to be expected

Avoid obvious de-risking exercises and class-based / checklist approach

Interpret and apply the SFC and HKMA anti-money laundering guidelines

Put in place RBA procedures and provide sufficient staff training

Document your risk assessment process

Escalate when having difficulty in applying RBA

Engage regulators where tension between global policies and guidelines

If ineffective - will we be expecting prosecutions and new criminal offences?


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Regulators and Customers

Finding the right balance


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Polling question (2)

In your AML training, do you use case study / factual scenarios to illustrate the AML procedures that should be followed?

1. Yes2. No

Of the ‘yes’ voters, how many of the case studies portrayed a scenario of money-laundering, versus an innocent, bona fide transaction?

1. All were examples of attempts at money-laundering2. There were few examples of bona fide transactions3. There was a fair balance between the two


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Objectives and obligations

The bank mandate– to repay on demand

Client confidentiality

Banking secrecy

Personal data privacy

Consumer and investor protection

Financial inclusion

Secrecy obligations to the regulator

Restrict organised crime

Defeat terrorism

Transparency

Information sharing

Deputising law enforcement


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Best intentions and consequences

… and the law

Regulatory squeeze– Major fines– Monitors

De-risking / ‘caution culture’– Responsibility evasion

Financial exclusion

Business impact

Compliance cost / admin burden

Conflicting regulator messages


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Dealing with the regulator

Domestic

Require proper notices– Be careful of “informal” enquiries

Search warrants– Deputising execution– Keep a detailed record

Notifying all your regulators– nb.SFC secrecy obligation – ‘Tipping off’

Remember your RBA


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Dealing with the regulator (cont)

Cross-border

How / where / on whom is the info production notice enforceable?

Branches – Where is the data?– Who has right of access?

Be aware of data privacy / banking secrecy laws– Does the exception extend to foreign

regulatory / law enforcement?– RBA 2.0

Have an effective PICS to cover foreign regulators / law enforcement


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… and the customer?

How much can I let them know?

‘Tipping off’ offence– ‘… if, knowing or suspecting that a disclosure has been made [to the relevant

authority of suspicion of proceeds of an indictable offence], he discloses to any other person any matter which is likely to prejudice any investigation which might be conducted following that first-mentioned disclosure’

Defence:– ‘that he did not know or suspect that the disclosure concerned was likely to be

prejudicial [to such an investigation] or– that he had lawful authority or reasonable excuse for making that disclosure.’

Paper trail your decisions

“No-consent” letters

Statutory secrecy obligations


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Losing perspective

… and missing the objective

Customer comes last

Terrorism and organised crime

Stovepiping of information

Deputised but handicapped

Call for better information sharing– Entity to entity– FI to FI– Govt to FI– Cross-border


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Until then ….

In Asia

Retail and corporate banking– new guidance?

Continued regulatory focus on AML/CFT controls in the region– Put some fresh thought into them– Keep under review / test them– Engage with the HKMA

Brokerages to remain a key focus for the SFC– Client identity: check your client agreements

Balancing secrecy & disclosure obligations during investigations

Be willing to defend and challenge


Contact us

T +65 6831 5607E:[email protected]

Tom Fyfe, Partner, Dispute Resolution Group, Hong Kong

Tom is the firm’s Asia Head of Dispute Resolution. He has 15 years ofexperience of commercial litigation, contentious regulatory and arbitration inChina, England and Australia, during which time he has advised clients innumerous high value and business-critical disputes. Tom has particularexperience in disputes relating to financial products and services, fraud andbreach of trust claims, accountants’ liability and disputes arising out ofmergers, acquisitions and joint ventures. He regularly advises banks,financial intermediaries and individuals in connection with regulatoryinvestigations into market misconduct, rate manipulation and tradingirregularities.

T +852 2583 8318E: [email protected]

Joanna Pearson, Partner, Dispute Resolution Group, Singapore

Joanna is a partner specialising in disputes and investigations in the financialinstitutions, wealth and asset management sectors. She has advisedinvestment banks, asset managers and other major financial institutions inrelation to a wide range of issues, including: regulatory and internalinvestigations; structured products and derivatives disputes; portfolio mis-management claims; contractual interpretation; jurisdiction; and hedge funddisputes.


Contact us

T +852 2583 8247E: [email protected]

Kane Mak, Supervising Associate, Dispute Resolution Group, Hong Kong

Kane has experience handling criminal and regulatory investigations, andwhite-collar defence work. He regularly advises corporations on their ‘dawnraids’ and compliance policies. He is also a member of the Law Society ofHong Kong’s Criminal Law and Procedure Committee, and of the firm's crime,fraud & investigations group.


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