ECC0026

Written evidence submitted by Martin Woods (Director at AAAML Ltd)

Call for evidence regarding potential “improvements to the UK’s anti-money laundering regime.”

My name is Martin Woods, I am a director of AAAML, which trades as AMLWoods.  I am an anti-money laundering subject matter expert who has been fighting financial crime for more than thirty years and has previously submitted evidence to Parliament (Parliamentary Committee on Banking Standards 2012).  During my career, I worked as a police officer investigating money laundering (1986-2001) and then as a bank compliance officer dealing with money laundering and financial crime (2001-2009).  Subsequently, I blew the whistle upon my then employer, Wachovia Bank London Branch (now part of Wells Fargo NA), in regards to the laundering of hundreds of millions, perhaps billions of dollars connected to Mexican drug cartels and Eastern European organised crime groups. Latterly, I have been the head of financial crime for the world’s biggest foreign exchange trading business and now I provide consultancy and advisory services to clients.

In multiple countries, I have been called upon to provide advise and training to regulated firms, law enforcement agencies, central banks and governments.  I have been described as an innovator in the business of financial crime prevention. 

As a detective with the National Crime Squad (NCS (now National Crime Agency (NCA)), I made use of suspicious activity reports (SARs) within money laundering investigations.  As a financial crime compliance officer, I have filed hundreds of SARs with both the NCS and the NCA. Recently I assisted the International Consortium of Investigative Journalists (ICIJ) and the BBC in regards to the FinCEN Leaks, as such I saw a number of the SARs which related to UK Banks.

I am submitting this document because I am a passionate anti-money laundering fighter and I want to support all efforts to make a difference and improve the present anti-money laundering regime. Moreover, given my experience in both the public and private sector, I believe I am well placed to offer advice and to support your efforts to deliver positive changes to a failing regime.

FinCEN Leaks

These Leaks appear to have been a catalyst which has provoked this call for evidence, because the Leaks have presented a negative narrative of the current status of the anti-money laundering regime in the UK.  Of course, the SARs referenced in the Leaks were filed in the US and are subject to strict secrecy, therefore, I will not reference specific SARs, banks or customers identified within the same.

At a far more basic level, it is widely reported that globally anti-money laundering, efforts result in the seizure of less than 1% of all funds laundered.  Simultaneously, the value and number of financial penalties applied against banks and other regulated firms for failing to prevent money laundering or implementing effective money laundering controls, have not decreased.  Essentially, criminals continue to generate proceeds from their crimes which are laundered within regulated businesses.

The Leaks referenced fundamental failures within the discipline of ‘know your customer’ (KYC) and a failure or determination to stop money laundering after SARs had been filed.  I contend all of this is indicative of a lack of understanding of money laundering and the role played by money launderers in facilitating organised crime; grotesquely violent crime; trafficking crimes, including human trafficking; exploitation crime, including sex slave trading; deceptive crimes, including Ponzi frauds and general acquisitive crimes, including the theft of emergency Covid-19 government funding. 

Most importantly, the victims of money laundering and the crimes which generate the funds to be laundered, have been ignored or forgotten.  Money talks, bankers listen and a lot of money makes a lot of noise.  Consequently, bankers and their judgment are compromised by money; money launderers with a lot of money offer opportunities for increased commissions, bonuses, pay rises and promotion, all of which impact upon decision making.  Please keep upper most in your mind, banks and regulated firms do not launder money, people do.  

All too often bankers seek to give dubious and even suspicious persons/companies the benefit of the doubt, in order to secure their business and their money, even if it may not be as clean as it should be. 

This approach has been accepted and therefore encouraged by regulators and governments who have constantly failed to hold individuals accountable for their actions, often, criminal actions.  Absent to the prosecution of individua bankers, there is no credible deterrent to discourage or deter would be banking launderers who do not fear being caught or the consequences of being caught.

For as long as I can recollect the regulators, in particular the Financial Conduct Authority (FCA) and its predecessor, the Financial Services Authority (FSA), have applied financial penalties to firms and banks for failing to implement adequate anti-money laundering controls, which could have led to money laundering, albeit, no actual evidence of money laundering is found.  I can say from direct personal experience (working as a contractor for an FCA investigation) this is not true. 

I did find evidence of money laundering in a bank, indeed the FCA told me where to find it.  I found evidence of bankers lying to public authorities to support customers with the provision of false information and other instances of money laundering related to individuals (not bankers) who had been convicted of money laundering.  Regardless of this, the FCA applied a financial penalty upon the bank, took no action against any individuals and asserted no evidence of actual money laundering had been found.

This style of regulatory action aligns with the invention of the concept of mis-selling, which regulators used to describe the fraudulent and criminal sale of pensions, endowments, mortgages, payment protection insurance (PPI) and more recent interest rate swaps.  The point being, weak regulation accepts and therefore encourages the commission of crime within the regulated sector, including money laundering.

What to do

Thus, this call for evidence is perhaps more a call for action, because the evidence has always been there, given that money laundering takes place everyday and it is not undertaken by fairies, goblins or other mysterious figures.  The FCA has been known to state they found insufficient evidence to prosecute any individuals, thus we should all be thankful the FCA is not tasked with investigating knife crime or terrorist offences.  Many are left with the impression of the FCA as a weak and frightened prosecutor which requires evidence in the form of fingerprints, a DNA match, a photograph of a suspect committing an offence and a signed confession, before they will prosecute.  Note, the FCA has the power to criminally prosecute individuals for money laundering and has never done so.

In the event this Committee wants to see change, then adopting and applying the mantra of the Financial Action Task Force (FATF), “Stop money laundering, save lives” would be helpful, because it serves to remind all of us of what money laundering is connected to. Thus, with genuine respect change must be driven by government thinking and policy, which should demand “better” from all stakeholders[1].  This, includes improved regulation, at all levels and improved training for everyone.

The FinCEN Leaks provide further evidence of poor training and a lack of understanding of how banks and regulated firms should deal with suspicious transactions and confront suspicious customers.  In some instances, SARSs should not have been filed, because, whilst there were concerns and some unusual characteristics to transactions, no suspicion was actually articulated within the narrative of the SARs.  It is possible some of the customers could have provided a logical and legitimate explanation for some of the transactions, but they were not given an opportunity to provide such explanations.  This reflects poor investigative skills on the part of those who filed and continue to file the SARs.

The solution is training

Please note, whilst I do provide training services, I am not an employee of a training company. I boldly posit this solution, because it can simultaneously provide practitioners with knowledge, confidence, capability and most importantly, motivation.  Presently, the SARs reporting system asks anti-money laundering professionals to become detectives, given they are tasked with investigating allegations of crime made by colleagues who submit their own, internal SARs.  This is where the system and process is likely to fall down.

By way of example to the above, the anti-money laundering laws for the UK were first introduced in 1984 and has since evolved,  In 2001, a major UK bank appointed a man with 31 years banking experience as the nominated officer responsible for filing SARs with, the then Serious & Organised Crime Agency (SOCA).  In preparation for this new role, he attended a half day financial crime and anti-money laundering event presented by the then British Bankers Association and another half day course presented by SOCA.

He subsequently filed tens of thousands of SARs. In 2006, he filed 24,000 SARs, including a SAR with a value of $28 million.  In evidence at the High Court in 2012[2] he stated this was the highest value SAR he had filed and without being provoked, he described the SAR as, “Very, very poor.”  The evidence he provided was of an untrained banker failing to undertake the most basic of investigations.  He failed to seek information from the customer’s relationship banker and whilst he stated he was unaware of the origins of the $28 million, lack of awareness is not suspicion. 

Ironically and perversely, had he asked the relationship manager what she knew about the money and the customer, she would have informed him the money came from within his own bank in London.  Had he been trained he would have undertaken a simple investigation and never filed a SAR. 

Whilst this was a long time ago, not enough has changed and far too many people perform this important role without adequate training.  Consequently, these individuals are put at risk, as are their legitimate customers, their colleagues and shareholders.  At the same time, the absence of adequate training benefits the money launderers, because those tasked with investigating the SARs do not have the confidence to confront suspicious, often intimidating customers.

Moving from reporting and intelligence gathering to stopping money laundering

There is a saying within the financial services industry, “Compliance is everyone’s responsibility.”  Yes, there are compliance departments and compliance officers who manager and oversee each firm’s compliance with rules and regulations, but each employee must be compliant. This logic does not actually apply to money laundering and therefore I urge you to ponder who is responsible for stopping money laundering?

The FinCEN Leaks portray a system within which banks filed SARs, reported intelligence to the authorities and then did nothing else.  We do not know if they were awaiting a response from the authorities or they determined it was not actually their role to stop the suspected money laundering they reported.  The training manual for a major UK bank references a programme of, “Deter, detect and report” and in some instances, “Deter, detect and protect (the financial services industry from financial crime),”  What is evident is that nowhere does the programme assert that laundering should be stopped. 

The FinCEN Leaks produced evidence of one major UK bank continuing to process payments for a customer, after they had received more than one inquiry/subpoena from authorities seeking account data, as the customer was suspected of fraud.  Indeed, one of the SARs related to this customer stated the customer appeared to be running a Ponzi (fraud) scheme and in another sentence stated there appeared to be no legitimate economic activity.  Nonetheless, the account remained open, victims paid their money and the major UK bank’s subsidiary in the US laundered it.

Given the volumes of SARs forwarded to the authorities (500K+/annum) banks and regulated firms cannot wait for an answer to their SARs and therefore, I encourage you to look at what needs to be done to give banks and firms the confidence to stop the money laundering.  Not for one moment do I believe the major UK bank referenced above, wanted to facilitate the fraud and the theft of money from victims, but this is precisely what they did.

Again, the answer is training, at all levels, to all stakeholders.  There needs to be improved collaboration and support, encouragement and perhaps, where appropriate instructions to banks and firms to close accounts suspected of laundering money.  

As I draw this to a close, I would ask you to contrast the regulated financial services industry to the passenger airline industry.  Both industries are heavily regulated, customer driven, shareholder accountable and inter-connected.  Core to success and safety within each industry is the need to know customers; to screen customers; to verify the identity of customers and generally to understand the purpose of their business with an airline or a bank/regulated firm.

Since the dreadful attacks upon the twin towers in the US, no US or UK planes have been the subject a successful terrorist attack.  Why is this?  Well the answer is a combination of an industry which collaborates, relies upon and supports each other, this includes customers and most importantly, the industry. This is because the airlines and the airport dictate the terms of business with customers.  So, what’s my point?  Well, this call for evidence has arisen from an acknowledgment that collectively our anti-money laundering strategies, policies and endeavours, are failing.

Imagine for a moment that we allowed banks and bankers to run the airports. At the airport, we are all asked, “Is this your bag, did you pack it yourself and have you had it with you at all times?”  The answers are generally, “Yes, yes and yes”.  Passengers are also asked “Are you carrying anything for anyone else?”  If a passenger declines to answer, the bag will not be getting on the plane.  Now, when was the last time your heard of a bank asking questions such as, “Will the account solely be for your use, are the funds yours and does anyone else have access to you account?” 

Perversely, we that is bankers, and worst still, British bankers are reluctant to ask intrusive questions of customers; we do not want to offend them; we respect their privacy and most importantly of all we do not want to push them and their money away.  As a consequence, customers and their money all too often dictate the terms of business with banks and regulated firms.

The airports, in collaboration with law enforcement stop the terrorists boarding planes.  Everyone has a role to play and they act, they do not pontificate, they do not report, they stop the bad actors.  Thus, we need to change our approach and embark upon a new strategy of stopping money launderers. 

Of course, such a strategy and revised collaboration needs to be taught, hence training remains central to a solution to improve the effectiveness and efficiency of our collective anti-money laundering endeavours.

I will submit no more and keep this simple.  I sincerely hope you will take on board my thinking and my proposals, which I acknowledge will not fix everything, but it will deliver significant improvements. 

November 2020

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