Prevention Is Better Than Cure

TNT, a leading global express and mail business has taken a lead within the field of preventing fraud and corruption. Their Global Security and Compliance function have provided and conducted professional investigations of incidents concerning suspected fraud and corruption. Global Security and Compliance have also embedded procedures, which have been in place for some time now, for dealing with whistleblowers. A great deal of effort has been placed on developing proactive anti-fraud and corruption measures as a way of improving integrity for all stakeholders. TNT carries out “health checks” of its business units aimed at identifying, analysing and dealing with the “red flags” of fraud and corruption.

In parallel with these efforts, the TNT Integrity Programme was developed by TNT Group Integrity in conjunction with other key departments including Global Security and Compliance and Corporate Audit. The Integrity Programme provides anti-fraud and corruption training for employees. “Prevention is better than cure,” says Simon Scales, TNT’s Deputy Director of Global Security and Compliance Manager, “and it’s about doing the right things as well as doing things right.”

Ten years ago, it would have been unthinkable for a top manager of a major international organisation to openly include the fight against corruption in his agenda. Today, things are different. It is now widely agreed that corruption hampers economic growth, discourages public and private investment and increases poverty. The former president of the World Bank, James Wolfenson, advised the international community to “deal with the cancer of corruption, because it is a major barrier to sustainable and equitable development.”
Having signed UN’s Global Compact, TNT included the 10th principle on anti-corruption in its corporate business principles. However, TNT has taken this work further than most other companies.

The company has invested heavily in their security frameworks globally, demonstrating a worldwide investment in security provisions, practices and procedures. The Integrity Programme forms part of this emphasis towards matters other than just the physical security aspects within a multi-national organisation.

“For the benefit of our stakeholders, we do everything we can to improve our integrity,” says Simon Scales. As a former police officer, he had wide experience of working on intelligence, anti-terror and fraud-related issues as a detective when he decided to switch over to the private sector, joining TNT in 2002.

“We’re aiming towards ethical transparency and take this aspect extremely seriously,” says Simon enthusiastically. He has technical and investigative expertise within this field and is part of the company’s core investigation team. Although most of his time is spent on prevention aspects, he also spends time investigating any allegations or suspicion of fraud and corruption.

Risk Ranking Exercise
TNT has involved internal departments in its efforts to prevent fraud and corruption and Simon admits that cases have been found and acted on.

“Early on, we decided to carry out a ‘Fraud and Corruption Health Check’ which we refer to as a Security Financial Review, or SFR, in different business units. Red flag items and fraud and corruption risks were identified. The list was long, and with the benefit of a risk-ranking exercise, which creates a TNT Fraud Profile, we were able to pinpoint the most high-risk items. The eventual result was a diagnostic report, tailored to the most significant areas of enquiry,” explains Simon.

But TNT didn’t stop there. “Based on the red flag item list, we started work on plugging the holes,” he continues. “Parallel with the Health Checks, the TNT Integrity Programme was developed, focusing on awareness and dilemma training. It’s about having the right things in place. We call it ‘doing the right things, and doing things right’ and from thereon our focus on continuous improvement is the key to the overall success of our programme.”

Tone at the Top
He also emphasises the importance of what is referred to as the “tone at the top.” TNT’s CEO Peter Bakker is deeply involved and has taken an active approach. By anchoring it at the top level, embedded and cascaded by the Director Group Integrity, the message of ethical transparency and the desired attitudes flows through the business units.

“The backing that our CEO and the Senior Management Teams have given to this topic has been crucial to what we have accomplished,” says Simon.

Whistleblower Policy
The subject of “whistleblowing” has also been given attention. It is widely accepted that reporting internal fraud and corruption has historically tended to be a poor career move and TNT has taken steps to change this attitude.

“In order to succeed with our Integrity Programme, it is of vital importance to establish a whistleblower policy that encourages people to report suspected cases,” says Simon. He recognises that although the tools and techniques to look for the signs of fraud and corruption are made available, actually giving people the confidence to speak out if they suspect wrong doings is essential
“But we are well on our way. The external advisors assisting us have helped us to identify that the ability to significantly increase profit margins is one compelling reason to systematically manage fraud and corruption risk.”

As an organisation, TNT knows that a thorough understanding of fraud and corruption risks across the organisation is a prerequisite for effective prevention. Using a risk management and assessment methodology expertise and acting on the Fraud Profiles they know that they are able to make a difference for their customers.

Simon Scales has 25 years experience in both the private and public sectors and has conducted fraud investigations in Europe, the United States, South America, China, India, South Africa and the Middle East. He has previously worked within Financial, Public Utility and MNC environments prior to serving as a Detective with the Metropolitan Police Service both Divisionally and at New Scotland Yard. He has studied with the National Crime Faculty and is an advanced investigative interviewer. Simon is the Deputy Director Global Security and Compliance for TNT, and holds responsibility for Global Fraud Investigations, Non-Operational Security and Compliance, eCrime, Intellectual Property Rights and Identity Theft encompassing legal and regulatory authority compliance and liaison. Contact Details: Tel: + 44 (0) 207 720 7800 Email: simon.scales@tnt.com

What Does the Third Money Laundering Directive Mean for Compliance in Ireland?

Background
While money laundering, as a term, is relatively new to the statute books of most jurisdictions, the essence of money laundering is as old as crime itself. That essence is best expressed by “disguise”.
Most laundering operations will, at some stage, use the legitimate banking and financial system to achieve the disguise. In the 1980s, concerns about the scale of money laundering and about the adverse impact that this was having on the integrity of the financial system led to a number of international initiatives to combat money laundering. The two key initiatives were first, the establishment in 1989 of the Financial Action Task Force (FATF) and the publication in 1990 of its 40 Recommendations for action; and second, the adoption in 1991 of the first EU Directive on Money Laundering (91/308/EC) (the Directive). There were two strands to the Directive. The first was a prohibition on money laundering. The second was, the imposition of anti-money laundering (AML) procedures on credit and financial institutions, namely measures relating to:

· Client identification
· Record keeping
· Reporting suspicions of money laundering
· Education and training of staff, and
· Procedures to prevent and detect money laundering

The Directive was implemented in Ireland by the Criminal Justice Act, 1994.
Ten years later, the second money laundering Directive (2001/30/EC) (the 2 MLD) extended the requirements of the Directive to professions that are vulnerable to money launderers such as accountants, auctioneers, auditors, estate agents, tax advisors and solicitors.

The terrorist attacks of 11 September 2001 had an impact on international efforts to combat organised crime and terrorist financing and led to the FATF introducing nine new special recommendations on terrorist financing. These FATF amendments were the impetus for the third money laundering directive (2005/60/EC) (the 3 MLD). This aims to consolidate the Directive and the 2 MLD. The 3 MLD must be implemented in Member States by 15 December 2007 and, when in force, the first two directives will be repealed and the 3 MLD will form a new text.

What’s New? Implications for Compliance
The 3 MLD extends the list of regulated businesses subject to the Directive. Trust and companies service providers are included as are life and investment insurance intermediaries not already covered by the 2 MLD. Trust and company service providers and casinos will need to be licensed.

The definition of “financial institution” is amended with the result that all financial services operatives fall within the scope of the Directive. Currently, it applies to institutions that carry on a financial services activity as a principal activity. This change may require amendment to current Irish law.

The 3 MLD also gives EU Member States the discretion not to apply the Directive to financial institutions “which engage in a financial activity on an occasional or very limited basis and where there is little risk of money laundering or terrorist financing occurring”. The scope of this provision is fleshed out in Commission Directive 2006/70/EC laying down implementing measures for the 3 MLD.

Client Identification
The client identification requirements under the Directive were colloquially known as the KYC (know your client) obligations. Under the 3 MLD, KYC is replaced by customer due diligence (CDD). This is more than just a change in form.

The 3 MLD confirms that there are four aspects to customer due diligence:

· Identifying and verifying a customer’s identity
· Identifying all relevant beneficial owners
· Obtaining information on the purpose and intended nature of the business relationship
· Ongoing monitoring of the business relationship

It may be said that these requirements are implicit in the current regime. However, by writing these obligations into the text of the 3 MLD, it is now clear that customer identification under the Directive goes beyond a “box-ticking” document collection exercise and is all about understanding the client and its business and being clear about the source of its monies.

The 3 MLD enhances the level of identity checks required in respect of third parties or beneficial owners. Broadly, under the 3 MLD, a beneficial owner is “anyone who, has an interest in any relevant property of 25 per cent or more”. Such an interest need not be simply ownership. It may be a direct or indirect interest and may have to be traced through a number of nominal owners, as a beneficial owner must be the natural person ultimately so interested. It may be enough for the person to be able to exercise significant control.

Risk-Based Approach to Client Identification
The 3 MLD endorses the risk-based approach to CDD. This approach to AML compliance has been embraced by the FATF Recommendations, the Joint Money Laundering Steering Guidance Notes in the UK, the Basle Committee and the Wolfsberg Group. The essence of it is that additional information over and above identification documents should be obtained and used by firms. This is to help the firm to assess the risk of money laundering at the outset of the relationship and to continue to assess this during the course of the relationship. It involves discriminating between different customers, products and countries. The risk-based approach in the 3 MLD manifests itself in the context of simplified customer due diligence and enhanced customer due diligence procedures.

Simplified Due Diligence
Simplified customer due diligence essentially means a full exemption from the identification procedures for certain classes of regulated entities. They are as follows:

· Listed companies
· Beneficial owners of pooled accounts held by notaries and other independent legal professionals for member states, or from third countries
· Domestic public authorities
· Any other customer representing a low risk of money laundering or terrorist financing who meets the technical criteria established in accordance with Article 40(1)(b) of the 3 MLD

Enhanced Customer Due Diligence
The 3 MLD applies more onerous enhanced customer due diligence procedures for customers who present a higher risk of money laundering or terrorist financing. These include the following situations:

· Non-face-to-face business
· Cross-border or correspondent banking relationships with respondent institutions from third countries
· Transactions with politically exposed persons (PEPs) residing in another EU Member State or any third country
· Correspondent banking relationships with a shell bank
· Products or transactions that might favour anonymity

PEPs are defined as “natural persons who are or who have been entrusted with prominent public functions, and immediate family members, or persons known to be close associates of such persons”. The approach has been to have quite a wide category of individuals on which enhanced checks have to be made. For example, in Ireland the following UK people would be PEPs, the Queen of England, any UK Member of Parliament, a member of the judicial committee of the House of Lords and Prime Minister Gordon Brown.

Comment
At the time of writing, legislation, which will take the form of a primary act, was being drafted in Ireland to implement the 3 MLD. The consolidation of current money laundering legislation is also proposed and it is anticipated that AML regulatory guidance, currently spread among five sets of guidance, will be rolled into one set. Some insights as to what the 3 MLD and the risk-based approach may mean for regulated business may be found in the revised UK Joint Money Laundering Steering Guidance Notes of March 2006. The key components of the risk-based approach endorsed by this guidance were as follows:

· Firms are allowed to focus their resources on the minority of customers who represent a high risk.
· The documentation needed to verify the identity of non-personal customers is reduced.
· The document requirements by which most individuals have to prove their identity are simplified.
· Wider use of electronic means of verification of identity is encouraged.
· All unnecessary duplication of identity checks is reduced.

In addition, on 25 July 2007, the FATF published guidance on the development of a common understanding of what the risk-based approach involves and indicates good public and private sector practice in the design and implementation of this approach.

It would appear that responsibility for AML compliance will rest even more firmly on the shoulders of senior management. It will require them to assess their vulnerability to money laundering and/or terrorist financing and have systems and procedures to manage it. In some ways, the risk-based approach is more challenging than a tick-box, one-size-fits-all approach. It involves discriminating between different customers, products and countries. It requires the use of judgment. Judgments and decisions can look wrong with the benefit of hindsight, increasing regulation and reputational risk. This is why the Financial Services Authority in the UK has clearly stated that a risk-based approach cannot be a zero failure regime. It is hoped that the Financial Regulator in Ireland is of the same mind.

	Paula Reid is a barrister and is Director of Knowledge Development at A&L Goodbody. She has spoken and published extensively on the topic of money laundering and is the co-author, with Michael Ashe QC, of Money Laundering: Risks and Liabilities, (2nd ed. First Law, 2007). Contact Details: Tel: + 353 1 649 2000 Email: preid@algoodbody.ie
	Peter Law is a Partner in the Litigation and Dispute Resolution Department and is widely experienced in all aspects of commercial litigation including contractual disputes and professional negligence. He was Head of the Firm’s Litigation and Dispute Resolution Department during the years 2003/2007. Contact details: Tel: + 353 1 649 2000 Email: plaw@algoodbody.ie