8

Modern Money Laundering and Terrorist Financing: Two Case Studies

Risk assessment

Those involved failed to assess the risks of the relationship with Dalea Investments correctly. Particularly on the business side, the assumption was that as long as Dalea came from within the EU, it could effectively be treated as ‘low risk’, which isn’t necessarily the case. Factors such as the size and reputation of the intermediary in question and the recent financial and economic history of the jurisdiction should all be taken into account.

Depth of due diligence

Even though the above point was eventually accepted, the acceptance seemed to be reluctant and almost certainly influenced the depth of the further due diligence undertaken. AlnaBank seemed to satisfy itself with simply checking the due diligence records which had been obtained by Dalea Investments and failed to conduct its own investigations. The minimum requirements in terms of paper documentation, certificates of incorporation, passport copies, etc. seemed to be there. There was also evidence from corporate reports and local newspapers that Xavier Group was a genuine business. What was missing, however, was any real investigation into Xavier Group’s business, its source of wealth (i.e. what produced its revenues) and its business counterparties and trading partners. The journalist Judi Shimanova started asking these questions and quickly got answers. Why didn’t AlnaBank? Was it really not possible for it to discover the business connections between Xavier Group and companies controlled by Radovan Kaltan? And was there really no way in which they could have discovered Kaltan’s dubious reputation within the country? Likewise, even though Dalea Investments claimed to have reached a dead-end in determining the ‘rumour’ that Yulian Garbov, the supposed ultimate beneficial owner of Xavier Group, was connected to an unnamed senior political figure, AlnaBank again made no attempt to get to the bottom of the matter. Had it done so, the connections with the Minister of Transport, Vassiliy Chernov, may have been detected.

Failure to conduct proper due diligence against a correspondent bank

After the Dalea Investment accounts were opened, a correspondent banking relationship was set up between AlnaBank’s New York office and a wholly-owned banking subsidiary of the Xavier Group called KVP Bank. The due diligence relied upon for that account was the same flawed due diligence in existence for the Xavier Group. In other words, the bank assumed that because the Xavier Group had been deemed acceptable, then any subsidiary – including a banking subsidiary – would also be acceptable. Alna took none of the required CDD steps referred to below against its new respondent, KVP Bank. Had it done so, that would have provided another route for the discovery of Xavier Group’s connections with Kaltan-controlled companies.

What do international standards and well drafted procedures and controls require in relation to customer due diligence?

FATF Recommendation 10 sets out that financial institutions must conduct due diligence against entities with which they form business relationships. ‘Due diligence’ means:

• establishing and verifying the identity of the person or entity concerned
• establishing the beneficial ownership of the asset concerned – meaning the natural person who owns or controls the asset, or on whose behalf transactions are being conducted
• establishing the purpose of the business relationship, and
• conducting ongoing monitoring to ensure that transactions are consistent with what is known about the customer.

It also states that due diligence should be conducted on a risk-sensitive basis and Recommendations 12 and 13 go on to state that in relation to higher-risk relationships involving PEPs and cross-border correspondent banking relationships, additional measures should be taken.

In relation to PEPs, these measures are:

• developing risk management systems to determine whether the customer or the beneficial owner is a PEP
• obtaining senior management approval for the commencement of the relationship.
• taking reasonable measures to establish the PEP’s source of wealth (that is, the economic activity that has generated their wealth) and source of funds; and
• subjecting the relationship to enhanced, ongoing monitoring

In relation to cross-border correspondent banking, the additional measures are:

• assessing the correspondent bank’s business and customer base
• assessing the strength or otherwise of its AML/CFT controls, the quality of its supervision and whether it has been the subject of investigation or regulatory action
• documenting the responsibilities of each institution
• obtaining senior management approval for the commencement of the correspondent banking relationship, and
• ensuring that where the respondent bank’s (i.e. KVP Bank’s) own customers will be accessing its accounts with its correspondent bank (i.e. AlnaBank), the respondent bank has identified its own customers and can and will provide CDD records in relation to them upon request.

In practical terms, a bank’s policies and procedures would require extensive due diligence against a corporate group such as the Xavier Group and its subsidiary bank, KVP Bank. The complex corporate structure would need to be unwrapped and understood, and also the reason for the complexity of that structure. Natural persons owning 25 per cent or more of the shares or voting rights in the corporations in question would need to be identified, and their sources of wealth established. In particular, investigations would need to be undertaken into the business activities of the corporate group, how it made its money, who its trading partners were, the type and amount of transactions which it conducted, and also its status and reputation within the country – not just from local newspapers but also from multiple, independent, unbiased sources. Some banks would employ the services of professional investigations consultancies in these circumstances, with access to a wide range of sources and contacts both public and non-public.

Due diligence investigations in high-risk situations such as this, whether they are in respect of individuals (e.g. Garbov) or corporate groups such as the Xavier Group, need to be thorough and detailed and supporting evidence needs to be obtained and retained on the file.

Questions on beneficial ownership and PEPs

What mechanisms were used by those involved to disguise beneficial ownership and political connections?

Use of fronts

The former Minister of Transport, Vassiliy Chernov, used the lawyer and businessman Yulian Garbov as a ‘front’ to disguise his own ownership and control of the Xavier Group. The use of fronts in this way is very common and is extremely difficult to detect, because there will usually be no formal record or document confirming the controller’s interest (that, after all, is the whole point). When fronts are used, the true controller’s name doesn’t appear anywhere in the documentation relating to the account, trust or company concerned. When a suspicion exists, therefore, that a front may be being used, one is often left with less than satisfactory indicators. These include:

• the credibility of the suspected front
• the extent and credibility of market rumours and information about whether a relationship between the suspected front and suspected controller does in fact exist, and if so its nature and extent
• careful and detailed searches through public records using not only subscription products such as World-Check but also general search engines such as Google, searches in online international, regional and national newspapers (although these can be suspect – see below) and other information sources such as society magazines and informal conversations with other banks, companies and professional firms such as lawyers and accountants.

In addition, there is personal questioning – often referred to as ‘the smell test’. A succession of meetings at which a range of important and detailed questions are asked over a period of time can assist in developing an accurate impression. A person’s demeanour, the confidence with which they speak, the extent of their knowledge and mastery of the relevant issues, whether they change their minds on important issues without apparent reason, whether they give different answers to the same questions asked (deliberately) at different times during the process, are all matters which can be taken into account.

Ultimately, it is extremely hard to spot a controller–front relationship if it has been carefully constructed. The important thing is that a bank should be able to show that it has gone through a structured – and not necessarily easy or trouble-free – process to arrive at a decision. Nobody can ask that you get it right all the time, but they can – and do – ask that you make a reasonable and genuine attempt at finding out. Simply saying ‘It’s a rumour, maybe it’s true, maybe it isn’t’ won’t suffice.

Complex structures

Complex structures can develop for legitimate reasons, such as during and after a series of corporate acquisitions when there has been no opportunity to simplify the corporate structure. But they also have a more sinister use in that they are an ideal mechanism for hiding ownership. The more complex a corporate structure is in terms of the number of companies, the ownership layers and the degree of inter-company ownership, the harder it is to determine the natural persons who are actually in control.

A bank should adopt a clear policy that unless the reason for it is clearly understood, any corporate structure at or above a certain number of layers of ownership (e.g. three or four) should automatically be designated as a higher-risk account and therefore subject to enhanced due diligence and enhanced ongoing monitoring. Enhanced due diligence in these circumstances would entail peeling back the corporate structure (something which can take many weeks or even months) so as to fully understand it and determine the identity of the natural persons holding 25 per cent or more of the shares or voting rights or who otherwise appear to be individuals who are exercising significant influence over the affairs of the company/structure concerned.

During this process, the investigations themselves and the conversations that are had with officials and managers of the company can often assist in developing a sense of whether or not it would be appropriate to proceed. Ultimately, if, at the end of the process, one simply isn’t satisfied that the true beneficial ownership of a complex structure has been established, then the business should either be refused or requirements expressed as to the level of transparency and restructuring which would be necessary in order for the Bank to proceed.

Public disinformation

People wishing to hide their control over a company or its assets are fully aware that banks these days will look to a wide variety of sources of information in trying to establish true beneficial ownership, and are often prepared to disseminate false or deliberately misleading information in order to improve perceptions about themselves. The purpose of this may be either to help persuade you that a rumour of a connection isn’t true, or to enhance the credibility of a front as a genuine owner/controller. Articles in newspapers, journals and websites, internet blogs, even official announcements from government bodies (where these have been corrupted) mingle with other information and are, to all extents and purposes, indistinguishable. In such circumstances, the quality of the information obtained – and in particular an assessment of the quality of the source of that information – becomes paramount and this is an area where many financial institutions again turn to professional investigation firms and the specialist services they offer.

Money laundering and terrorist financing

What mechanisms do criminal and terrorist groups use to move money around and launder it?

Money laundering

Radovan Kaltan was apparently laundering the proceeds of his Moldachian criminal activities out of the country and into Cyprus by getting shell companies which he owned and controlled to engage in apparently legitimate business transactions with Xavier Group companies. These funds would then be transferred to the ‘pension fund’ and onward to Dalea and AlnaBank.

Whilst some of these trading transactions were no doubt genuine, others will either have been completely fabricated or substantially over- or understated, and will have involved tactics such as false invoicing, over-invoicing and under-invoicing.

For example, a false invoice for a fake transaction from an Xavier company to a Kaltan company would provide an apparently legitimate business purpose for the transmission of funds from the Kaltan company to the Xavier company, then to be fed on out via the pension fund to Dalea Investments in Cyprus and thence on to AlnaBank. Laundered funds coming back the other way could be transferred back to other Kaltan companies under cover of similar invoices issued by those companies to Xavier companies.

The process therefore involves the laundering of criminal funds in a sophisticated scheme involving genuine companies and shell companies, genuine transactions and fake transactions, a corrupt politician, his ‘front’ and the business structure beneath him, a regulated financial intermediary and an international financial institution. Through this network, the criminal provenance of some of the funds in the AlnaBank accounts is hidden from view. AlnaBank sees initially only Dalea, and subsequently the Xavier Group and Yulian Garbov. It doesn’t see behind them Vassiliy Chernov, Radovan Kaltan or the Messengers of God (see below).

Terrorist financing

The terrorist financing undertaken by the Messengers of God in the film utilises many of the money laundering features outlined above, in particular, the use of shell and front companies as cover for the transfer of funds.

The added element in the case is the use of the Xavier Group pocket bank, KVP Bank. (A ‘pocket bank’ is a bank owned and controlled by a particular corporate group, or sometimes even a particular individual, and which often has only one customer, or a relatively small number of customers who are associated with the group or the individual). Following the transmission of funds from Iranian shell companies to the accounts of the Kaltan-controlled companies with KVP Bank in Moldachia, the funds are then wired to KVP Bank’s dollar clearing account with AlnaBank in New York, for onward transmission, presumably to other companies and individuals inside the US. By this method, the Messengers of God would make funds available to its accomplices inside the US for its purposes there; much the same as happened with the 9/11 attacks, only on a larger scale due to its (expensive) ambition of exploding a dirty bomb in downtown Manhattan.

Criminal groups and terrorist groups will sometimes cooperate when it is expedient to do so. The most high-profile example of this in recent years was the cooperation between the Taliban (pre-2001) and those engaged in drug trafficking from the poppy fields of Afghanistan, which suited the needs of both groups. The Taliban were able to finance their regime and the drug lords were able to continue with their lucrative, illicit trade.

What does the law require you to do if you become suspicious of money laundering or terrorist financing?

You must report suspicions of money laundering or terrorist financing immediately to your Compliance Officer or Money Laundering Reporting Officer, who will advise you further on what is required.

Failure to report a suspicion and/or warning or ‘tipping off’ a customer that a report has been filed and that they may become the subject of an investigation are serious criminal offences in almost all jurisdictions.

If you are in any doubt at all, speak to your Compliance Officer or Money Laundering Reporting Officer.

Questions on organisational responsibilities for CDD

In what way or ways did AlnaBank’s AML/CFT governance structures fail it in this case?

The division between business-getters and business-controllers

Whilst the division of responsibilities in AlnaBank between the RMs and the BUS group made sense in theory – and is indeed a model followed in many financial institutions – in practice it didn’t work out. The RMs came to the conclusion that the BUS group was simply there to stop them doing business (as evidenced by the acronym they attached to the ‘New Client Acceptance’ system or NCA – ‘No Clients Any More’). The BUS group clearly came to the conclusion that the RMs wanted any kind of business, regardless of risk. Thus, the two parts of the bank were fighting each other instead of cooperating towards a common goal.

Senior management contribution

The main players involved fell well short of their responsibilities. The business head, Daniel Johnson, was too focused on the GRD’s revenue targets and on the contribution which the Dalea business would make to them – preferably at minimal cost – to appreciate the wider risk implications of AlnaBank getting involved in that business. As part of the GRD business structure, the BUS group would have felt completely undermined by what was happening.

For her part, the Head of Compliance, Ottily Marks, and her Compliance team whose role was to support the BUS group from outside of business reporting lines, had clearly failed to make the case for effective CDD to the business team in GRD, which indicates a failure in the training and communication strategy. Whilst a degree of awareness and sensitivity to other people’s positions is always required, her most serious mistake was in agreeing to allow the accounts to be opened when both she herself and those on the BUS team who had been working on the case in detail were fundamentally dissatisfied with the extent of the due diligence which they had reviewed from Dalea. Thereafter they failed to follow up on the enhanced monitoring and relationship sign-off that Daniel Johnson should have executed, which she had stipulated was necessary in her account opening approval email. Had monitoring taken place, it is possible that warnings would have been raised and suspicious activity reports filed in relation to the receipt of three times the expected funds from Dalea (€3 billion instead of €1 billion).

The Group Chief Executive, Greg Jonas, whilst seemingly supporting the Compliance Department’s position that the bank needed to look behind J Dalea Investments, nevertheless appeared to do so reluctantly and his approval words contained a barely-disguised warning that Compliance and the BUS group within GRD would be expected to display a little more understanding in future. This was probably influential in Marks’ later decision not to push for further, extensive due diligence on the rumour about Garbov’s political connections and on the real nature of Xavier Group’s business activities in Moldachia.

What might individual senior managers appearing in the case have done differently?

Daniel Johnson, Head of GRD

He could and should have insisted that CDD be done properly. As a senior business leader, Johnson should have been aware that it was he and his business which was primarily responsible for customer due diligence and that scrimping and saving on it in terms of time and money is a false economy, especially when dealing with relationships which are not ‘plain vanilla’ low risk, which was definitely the case with the Dalea Investments relationship.

If Johnson had problems with the way in which the BUS group was doing its job, instead of expressing this in the form of tactical fights on specific cases, he could have sought to engage the BUS group and the compliance department in a discussion about how the two could work together for the general benefit of the business.

Ottily Marks, Head of Compliance

Seeing the way things were going, Ottily Marks as the Head of Compliance could and should have sought to address the divisions between the business and the BUS group in GRD through a programme of training and communication. As part of this programme she could have obtained their views on ways in which the CDD process could be streamlined and made to work more efficiently, whilst also stressing of course that the fundamental requirements of knowing the customer and establishing beneficial ownership, political connections, etc. would need to remain.

Marks should also have tried to use her powers of persuasion – with both the Head of GRD, Daniel Johnson, and the Group CEO, Greg Jonas – to convince them that the risks of proceeding with the account without undertaking further and more detailed checks in Moldachia, were too great.

Greg Jonas, Chief Executive of AlnaBank Group

He should have been far less equivocal in his communication about the requirement for effective CDD at all times. Instead of planting the seeds of doubt about his support in Ottily Marks’ mind with his email, he could instead have insisted that both Johnson and Marks together lead a joint project between GRD, the BUS group and the Compliance Department to review the Bank’s CDD policy and procedures as part of a programme to start reducing the unhealthy tension which was contributing to the creation of unacceptable risks for the bank.

TOO GOOD TO BE TRUE: ALNABANK AND THE LAUNDERING OF THE KRANSKY MILLIONS

Background checks and account opening

Halit Kransky was introduced to AlnaBank by Hegit Milrich, a long-time client of AlnaBank’s Private Banking division in London. At an initial meeting Milrich provided a strong personal reference which allowed Kransky to open an account.

Two months later, Alison Carter (a Senior Relationship Manager with AlnaBank) flew to Vresk, the capital of Moldovia and Kransky’s given place of residence, to obtain Kransky’s signatures on the required account opening documentation. Milrich had introduced Kransky as a brother of the former President of Moldovia. Kransky had, according to Milrich’s testimonial, held a succession of posts at state-run agencies within Moldovia. Carter did not check this information. She did not investigate Kransky’s employment background, his financial background or his assets. Nor did she seek references other than the one which had been provided by Milrich. Nevertheless, she recommended that Kransky should be accepted as a client of AlnaBank. This recommendation was approved by Carter’s Divisional Head, and multiple accounts were opened in London. AlnaSecor, the Private Bank’s trust in Switzerland, also discussed with Kransky the setting up of additional accounts in the name of an offshore shell corporation.

An AlnaSecor employee wrote to his senior managers suggesting that a detailed reference should be sought from Carter and signed off by her Divisional Head, before opening these accounts. Although this reference and sign-off were never obtained, AlnaSecor proceeded to set up the shell structure discussed with Kransky.

Secrecy products and services

The structures that AlnaBank had been asked to set up for Kransky and the methods to which the Bank agreed in its handling of his affairs were complicated and shrouded in secrecy.

The shell corporation set up by AlnaSecor was called Fasco, and was registered in the Cayman Islands. AlnaSecor also used three nominee companies to act as Fasco’s board of directors, and a further three to serve as its officers and principal shareholders. AlnaSecor controlled all six of these nominee companies, which it used routinely to function as directors and officers of shell companies owned by Private Bank clients. Initially the recorded owner of Fasco was Kransky himself. However AlnaSecor subsequently established a trust, identified only by number, to serve as the owner of Fasco. The result of this elaborate structure was that Kransky’s name did not appear anywhere in Fasco’s incorporation papers.

Additional accounts were opened for Fasco in Switzerland, together with a special name account for Kransky under the name of ‘Caesar’. Kransky had requested the utmost secrecy in relation to the Fasco accounts. As a result, the Private Bank in Switzerland did not disclose the name of the Fasco shell corporation to anyone other than the AlnaSecor personnel who administered the company, and those Swiss Private Bank personnel who were required by law to know the beneficial owner of the Swiss accounts. Not even Alison Carter knew about Kransky’s ownership of Fasco.

Meanwhile, Carter had returned to Vresk where Kransky introduced her to his fiancée Svetlana Sevatskaya, a former model and night club owner. Kransky explained that he wanted to move funds out of Moldovia. However, he wanted to do this very discreetly, since if the extent of his personal wealth became known, it could be politically damaging to his brother, the former President. Kransky requested that Sevatskaya be allowed to bring Moldovian rouble cashiers’ cheques from various banks in Moldovia into the Vresk branch of AlnaBank, where they would be converted into dollars and wired via New York clearing to a special account in London. This special account was called the ‘Accumulation Account’. It was used by AlnaBank in London for administrative purposes, commingling funds from various sources before transferring them on to other accounts. The Accumulation Account was not intended for use by clients. Nor had Carter ever operated for other clients a system such as the one suggested by Kransky. Even so, she acceded to his request.

Carter also agreed that Sevatskaya would use an alias when presenting the cashiers’ cheques at AlnaBank’s branch in Vresk. As a result of this arrangement Kransky was able to move funds via an indirect route into secret accounts in Switzerland, without leaving any audit trail to connect either himself or his fiancée to the origins of those funds, or their destination.

Account balances and account monitoring

Carter had estimated early on that the relationship with Kransky had potential in the $15 million to $20 million range. She did not, however, attempt to conduct independent checks on the sources of this anticipated in-flow of funds. The first deposit was from a $2 million cheque drawn on an account in Milrich’s name. Carter did not query this transaction, nor did she raise any comment when, in a period of less than three weeks shortly after the accounts were opened, the accounts received deposits from cashiers’ cheques totalling $40 million, at least twice what Carter had anticipated for the relationship. She raised no comment either, when deposits totalling $87 million were made over the next six months – the vast majority of these once again made via cashiers’ cheques. In all, the total deposits by far exceeded Carter’s estimate of Kransky’s net worth, and yet at no stage did she see fit to enquire about or report this anomaly. Nor did she make enquiries to establish the source of the funds used to obtain the cheques, nor even whether Kransky had accounts at the Moldovian banks which had issued them.

Suspicion reporting and other matters

Roughly two years after Kransky had initially approached AlnaBank, he was arrested on murder charges. In the trial that followed evidence emerged of the deep links between Kransky and an East European organised crime syndicate known as ‘Kratev’.

At the first sign of trouble, AlnaBank’s instincts were tough and self-interested. Alison Carter’s Divisional Head recorded in a memo his view that the Private Bank should seriously consider moving funds in London over to Switzerland, where their existence might stand a greater chance of remaining undiscovered. The same memo also recorded his view that the Private Bank should consider exercising set-offs, so as to avoid being out of pocket as a result of their involvement with Kransky. Control of the Kransky accounts was handed over to the Private Bank’s legal department, who changed Alison Carter’s extremely limited entries in the client profile database so as to emphasise and expand upon her stated beliefs about Kransky’s source of wealth. It was not until nine months after Kransky’s arrest that AlnaBank finally filed a suspicious activity report with the authorities in London and Geneva.

Questions on anti-money laundering deficiencies and failures

What did AlnaBank’s Private Bank staff do and omit to do, that increased the risk of exposure to money laundering?
What procedures and controls are you required to operate within your own private banking business that are designed to minimise your exposure to such a risk?

In most countries there is a legal and regulatory obligation on banks and banking staff to operate certain minimum anti-money laundering measures in their handling of client business. The sequence of events described in this case could, in a large part, be attributed to a number of deficiencies and failures in complying with these measures.

Know Your Client (KYC)

It is incumbent upon private banking staff to take reasonable steps to ensure that clients really are who they claim to be, and that the information they give about themselves and their sources of wealth is accurate. This includes carrying out background checks independently of the client, in order to verify the information given.

Alison Carter accepted as the only means of verification the personal reference of Hegit Milrich. She did not seek other references for Kransky or carry out further background checks into his stated employment and financial interests.

Management supervision

Managers have a supervisory responsibility for private banking staff within their jurisdiction. This includes monitoring for compliance with required anti-money laundering procedures, in particular where approving or signing off on new client business.

Alison Carter’s recommendation that Kransky be accepted as a client was approved and signed off by her Divisional Head without question. He failed to note or even to enquire into the absence of the required background checks.

Account monitoring

Private banks should operate procedures for monitoring a client’s business activity and flag up any unusual or suspicious activity which does not match the true and likely nature of a client’s known business and business needs.

Even if AlnaBank had such procedures, Alison Carter clearly failed to apply them adequately. The in-flow of funds from Kransky by far exceeded her estimation of his known net worth, yet she raised no comment.

Ownership of assets

One of the key principles of anti-money laundering is to ensure that the bank knows the identity of any real persons behind the assets and structures it manages. The nature of private banking is such that quite complex structures may be set up for clients, often with built-in secrecy features such as special named or numbered accounts. Nonetheless, the identity of the real person behind such structures and accounts should always be the subject of a bank record and known to relevant personnel. It is also clear that banks should take particular care with due diligence procedures, in respect of clients who request such products and services.

In setting up Fasco as it did, the bank facilitated a structure in which Kransky’s name did not appear in incorporation documents, or ultimately even as the owner of the Fasco accounts. This was compounded by the fact that the Fasco accounts were held in Switzerland and were therefore subject to very strict banking secrecy laws. Whilst the bank did nothing wrong per se in providing this service for Kransky, it is clear that the provision of such complex and secret structures to clients about whom little is actually known constitutes a very high risk of exposure to money laundering. The bank was negligent in its duties in a couple of important respects: firstly, in failing to carry out the required due diligence before accepting Kransky as a client; and secondly, in failing to obtain the detailed reference from Carter and sign-off from her boss (as had been internally recommended) before setting up the Fasco structure and accounts.

Source of funds

From an anti-money laundering perspective it is important to know both the origin and destination of funds. Where the source of funds is unknown, it is incumbent upon private banking staff to take reasonable steps to establish the sources and, where a satisfactory explanation cannot be found, to report the funds as potentially suspicious.

Kransky used a method for the placement of funds that was designed to disguise their origins as far as possible – cashiers’ cheques, drawn on a variety of Moldovian banks and presented under an alias, for subsequent transfer to his accounts in Switzerland. Carter made no enquiries as to the sources of the funds to obtain the cheques which, as cashiers’ cheques, gave the banks on which they were drawn as the payees. Nor did she enquire as to whether Kransky even held accounts at the banks that had issued the cheques. Even if this method of disguising a source of funds is unusual, there are a number of other more common methods which should be noticed, for example receipt of funds from shell corporations not usually associated with the account, or of fund value in the form of redeemable bearer instruments such as bearer bonds and certificates of deposit.

Record keeping

It is a key responsibility for private banking staff to keep adequate and accurate records for their clients and client business. This includes a record of the client’s identification evidence and the means of obtaining this, and records of the client’s transactions. It also includes a record of any information gleaned about the client from due diligence and background checks.

Carter’s records in respect of the required background checks were paltry to say the least. There was little or no record – she had not done the necessary checks. After the arrest of Kransky and, fearing possible censure of AlnaBank’s handling of this client, the bank’s legal department responded by ‘amending’ Carter’s records to give the impression that she had indeed researched Kransky’s background and sources of wealth far more diligently than had actually been the case. Carter was obviously negligent in her failure to do the background checks. But the legal department should never have taken the action it did in amending records after the event.

Questions on recognising suspicions

What features of Kransky’s behaviour and the nature of his business with AlnaBank might have alerted Private Banking staff to the possibility of money laundering?
What does the law require of you if you know or suspect that money laundering may be taking place?

It is impossible to anticipate every possible situation which might duly give rise to a suspicion. There are, therefore, no absolute rules for what constitutes suspicious activity, and what does not. In an anti-money laundering context it is the role of each relationship manager to develop a sufficient knowledge and understanding of their client and their business, and to use this information to identify anomalies or discrepancies which might give due grounds for suspicion.

Whether or not a particular circumstance is suspicious is often a subjective judgement, depending strongly on your knowledge and understanding of the client and whether the activity makes sense, given what you know about them. As a general rule, transactions which are economically meaningless, which seem unusual or unexpected for the client or for which you cannot find any plausible or satisfactory explanation are potentially suspicious. This is particularly true for repeating patterns of unusual or unexplained client behaviour.

In the AlnaBank case study, Alison Carter was the relationship manager for Kransky. It was her responsibility to know her client, and to recognise unusual requests or transactions on the part of her client. The summary below outlines the many circumstances which should have given Carter cause for caution or suspicion in her handling of Kransky.

Client’s connections with public office

Particular care and attention may be required when a client is linked to public office or positions of power in countries where public corruption and fraud are known to be widespread. Kransky had powerful political connections and had held public offices in Moldovia, a former Soviet bloc republic with a presumed risk of public corruption and fraud. The fact that Kransky fitted a high-risk profile did not automatically make him a suspected money launderer. But the fact that Carter failed to check out his employment or financial background certainly exposed the bank to greater risk.

Receipt of large, third-party cheques

Payment in of large, third-party cheques endorsed in favour of an account holder might reasonably give rise to queries on the part of private banking staff as to why this particular payee is making this particular large payment to this particular client’s account. The first deposit into Kransky’s account was a cheque from Milrich, for $2 million. Carter did not make enquiries or seek an explanation for this transaction. The cheque from Milrich may, of course, have had nothing to do with Kransky’s money laundering activities. Even so, Carter should at least have been curious as to the rationale for this receipt.

Unusual balances and business volume

Where the balance or volume on an account varies significantly from what one would normally expect for a client then this should generate an exception warning, prompting a closer inspection of the transactions in question. Kransky’s accounts very quickly showed balances and volumes of in-flow which far exceeded what Carter would have expected, on the basis of her knowledge about the client. Yet at no time did she take action to enquire about the funds or their sources.

Sources of funds

Any receipt of funds for which the sources cannot be satisfactorily identified is potentially a cause for suspicion. The use of cashiers’ cheques drawn on various Moldovian banks would, of course, have made it much harder for Carter to identify the sources of the funds behind the cheques. However, she did not approach the banks on which the cheques had been drawn either to establish whether they knew the sources of the funds, or whether Kransky even held accounts with them.

Multi-jurisdictional transfers

Large numbers of unexplained transfers across a large number of jurisdictions are always a potential cause for suspicion. The cross-jurisdictional nature of such transactions in particular makes monitoring difficult. Kransky’s funds were paid into AlnaBank in Moldovia, before being wired for clearing to New York, wired back to an account owned by AlnaBank in London and subsequently on to Kransky’s Swiss-held accounts. No rationale was sought for the additional London leg of the funds route, nor did Carter see fit to query what was an unnecessarily complicated method of transfer.

Unusual client requests

There should be immediate cause for concern where a private banking client requests a level of secrecy which appears extreme or out of the ordinary, and particularly where the services requested may have the specific effect of impeding bank or regulatory oversight. The methods for receipt and transfer of funds to which Carter agreed were unusual to say the least. In particular her agreement to use the bank’s ‘Accumulation Account’ to commingle Kransky’s funds before transferring them to Switzerland would have made the funds even harder to trace, and had never been done before.

Questions on senior management responsibilities

In what ways could AlnaBank’s Private Banking senior managers be deemed to have contributed to the risks of exposure to money laundering?
What responsibilities do you as a senior manager have under your bank’s rules and applicable regulatory requirements?
How does senior management diligence in relation to these responsibilities help to minimise the risks of exposure to money laundering?

A compliance culture can flourish in a bank only where it has the demonstrable support and commitment of senior managers. Banking staff take their lead from the attitudes and behaviours of their senior bosses. Where the attitudes and behaviours are such that they bring the bank into conflict with its duty of oversight, you have a problem.

The events described in the AlnaBank case study could not have developed to the extent that they did if the bank’s culture had fostered greater attention to compliance and due diligence matters. The commentaries below go some way towards explaining the culture and attitudes which were prevalent in AlnaBank’s Private Banking division, about the time of the Kransky affair. Reading through these commentaries will help you to think about what it means to have a ‘compliance culture’, and what it takes to develop one.

Pressure for profit

Commentary

‘Much of AlnaBank’s success in recent years had been generated through the strength of its Private Bank, which had seen its contribution to group profits rise fourfold, such that by 1998 it accounted for nearly 25 per cent of those profits world-wide. This phenomenal growth had been built on the back of a fierce commitment to client satisfaction, combined with an independence of spirit and a willingness to push banking rules and regulations to their limits, an approach which sometimes found itself at odds with other AlnaBank divisions.’

(Adrian Fenn, MD Hayden Bros, Private Bank)

‘You know your position within the Private Bank depends on these relatively few, very wealthy individuals whom you have to try to keep happy. A private banker does tend to become an “advocate” for his client within the organisation where he, the banker, works. His job is to find the best ways of utilising the bank’s services in his client’s interests. In doing so, they often become the client’s “voice” within the company, sometimes arguing against other colleagues who wear other hats – particularly risk function hats – in order to try to get particular deals or transactions done.

Senior management attitudes to risk, control and ‘rule bending’

Commentary

‘Throughout the late 1990s the Private Bank was subjected to repeated criticisms in internal audits and external regulatory reviews, many relating to money laundering control deficiencies and very low audit ratings. This kind of attention was unwelcome, but not seen as particularly disastrous.’

(Saad al Sayyah, former ARM with AlnaBank)

The Private Bank’s senior managers had come to associate the success of the business to a certain degree with the existence of bad reports. The unspoken, but unanimously held view was that if you weren’t getting the occasional low score in audits, then your business was too control-oriented and you weren’t taking enough risk.’

(Karen Chen, former FX trader with AlnaBank)

‘I remember on several occasions coming under pressure from the Private Bank. Can you do this trade or that trade, and can you book it on this date instead of that date? This was stuff that you knew was wrong, but they wanted you to do it anyway, maybe for some tax reason. And it wasn’t just the relationship managers who would be pushing you. Sometimes you’d get quite senior people who would ring up your boss to try to get the deal through.’

Effect of leadership example on staff attitudes and behaviours

(Saad al Sayyah)

‘You see, this is what I have learned about human nature in organisations. People, they take their cue from the top. Because they want to get on and succeed, they adopt the standards and procedures of those who lead them. So that if you say one thing and mean another, they will pick it up. So if you say that you want people to keep proper records ... but in reality you show that you’re not too concerned about it ... then everyone knows.’

As these excerpts illustrate, the culture within AlnaBank’s Private Banking division was such that risk-taking outside the rules (as opposed to risk-taking within the rules) was starting to be treated as acceptable behaviour for any private banker who wished to get on within the organisation. The generally accepted attitude was that you got the client what he or she asked for, almost regardless of the risks.

Senior managers are ultimately responsible (through the example they set) for the culture which exists within their business. The rules should be designed to ensure senior management responsibility for and oversight of risk assessment and risk management within the designated area of the business. Senior managers are required to take ‘reasonable care’ to ensure that adequate systems and controls are in place, and that these are effectively maintained. ‘Reasonable care’ means ensuring that:

• the business for which they are responsible has been thoroughly assessed for possible risks
• the systems and controls used are sufficient to manage and minimise those risks
• staff within their jurisdiction are made aware of:
  • the required systems and controls
  • how these are to be used
  • the consequences of non-compliance.

Finally, we should not forget Stanley Milgram’s warning about human behaviour, issued all those decades ago. Most people will do as they are told, as long as they perceive that the instruction has come from a legitimate authority. If a senior manager allows a perception to develop that they are more concerned about winning new business and hitting targets than they are about compliance with national laws and company policies, then they should know by now what to expect.