Banks are in the spotlight of the campaign to tackle corrupt money. This campaign was intensified when the UK passed its 2011 Bribery Act and it promises to become yet more focused as of early next year when inter-governmental body the Financial Action Task Force (FATF) strengthens its measures against corrupt payments. The growing use of the US Foreign Corrupt Practices Act against companies found to be engaging in bribery of public officials, not to mention the escalation of fines by the US Department of Justice, adds to the pressure.
The collapse of Middle Eastern ruling families has given the corruption hawks some juicy morsels to bite. They had their first taste when Tunisia’s head of state, Zine El Abidine Ben Ali, was toppled in January. The Swiss authorities immediately froze SFr60 million ($65 million).
When Hosni Mubarak stepped down as Egypt’s head of state in February, international agencies immediately froze SFr410 million of his assets. And later in February, SFr300 million of the assets of Muammar Gaddafi and his family were frozen. The first effort of countries is to ensure that these assets do not move out of their jurisdiction. The second is that they are restored to the country of origin.
There have been unsubstantiated claims that the amounts frozen are much larger. According to Swiss financial markets supervisor Finma: "Libyan assets certainly in excess of $35 billion have been frozen, comprising $30 billion in the US, $2 billion in Canada and $3.2 billion in the UK. Investigations have also confirmed the international dimension of the North Africa dossier. Assets have reached Switzerland from the countries concerned – Tunisia, Egypt and Libya – but also from banks in such countries as France, the US, the UK and Italy. Conversely, assets have been transferred from Swiss banks to banks in other countries, notably France and the US."
Foremost in the hunt for assets is the UK’s Serious Fraud Office, the organization that investigates and prosecutes financial crime where more than £1 million has been stolen. It also has the brief for prosecuting allegations of corruption under the UK Bribery Act.
Its director, Richard Alderman, says the assets of fallen Middle East families are being pursued. "We are interested in what is emerging from Libya and indeed from other countries," he says. "We are interested in details of corrupt contracts that were entered into in the past. If we get something about that, it is something that we will look into. We will be looking into how the banks and other companies got the mandates, who were they dealing with, what were the financial arrangements, what did they do about the risks, how did they manage the risks – we are very interested in all such questions. This is a story that is going to run for a number of years. We certainly haven’t got to the end of it yet. We are also interested in helping the authorities in those countries, if they take action. And of course we have access to WikiLeaks and we are interested in what that is showing up. So this is an area that is capable of generating cases for us as this starts to emerge."
WHILE THE SFO PURSUES ITS INVESTIGATIONS OF SOME UK banks found with Libyan assets, the US Securities and Exchange Commission has confirmed it is also tracking Middle Eastern money. Global Witness, a UK pressure group, has stated that HSBC held $292.7 million belonging to Gaddafi in 10 accounts and Goldman Sachs had almost $44 million in four accounts on June 30, 2010.
Further to that, some complex transactions involving French bank Société Générale and the former regime have been pinpointed by US authorities. It has been reported that SocGen paid an unspecified amount to a Panama-registered company called Leinada, to help structure and advise a $1 billion investment vehicle in 2008. Leinada is understood to have served as an intermediary in the company’s relationship with the Libyan client.
The bank reportedly took a 6% fee for structuring a product that was based around a bet that SocGen’s stock price would climb. As the bet failed, the relationship between the Libyan Investment Authority and SocGen collapsed. The bank would not confirm the details of the account but sources inside the bank told Euromoney that at the time "all the banks were chasing commercial relationships with Libya. We don’t understand why people tried to say this was wrong or unusual behaviour to work with the country."
Global Witness is pushing banks to take a tougher line on all deposits from countries with reputations for poor governance. However, it says that banks are at greater risk to reputational damage when they are found to be harbouring the private money of corrupt dictators.
Anthea Lawson, the Global Witness manager leading the group’s financial investigations, says: "Banks have a responsibility not to launder money and they have a responsibility to identify the beneficial ownership of funds. Banks will err on the side of ‘we don’t know that it’s corrupt, so we will accept it’. There is a line banks must not cross. They must not knowingly accept corrupt money. If they do this, they fall off a cliff, because no bank is stupid enough to take this risk as they’ll be done for money laundering. Anti-money-laundering laws require them to do due diligence, they’ll take a few steps in this direction and they’ll stop where they can. They’ll say, ‘we’ve learnt enough about our customer to satisfy the regulators and don’t want to learn any more’. The current know-your-customer laws don’t require them to have evidence that the money is clean; they require them to do due diligence. They stop short of knowing that it’s dirty."
Lawson calls on banks to reverse the burden of proof, and make sure money is positively clean before accepting it. "A bank that wanted to take its responsibilities seriously, as far as politically exposed persons from countries known to be corrupt are concerned, should say, we would like to have proof that the money is legitimate. That would mean turning money down. That they will never do unless pressured to do so."
Banks that want to ensure they have systems to spot bribery and corruption in their ranks should start by examining their risks. Only then should they start to introduce systems. Jansen Versfeld, the head of fraud and investigations at Crédit Agricole Corporate and Investment Bank, identifies the areas of greatest risk. He mentions five: procurement, entertainment, the use of third-party agents, conflicts of interest, and expenses.
Systems should be developed to cover the corruption risk based on procedures established to deal with economic crime more generally. Versfeld says that Crédit Agricole has evolved its structures and based them around its existing anti-money-laundering systems. He advises banks to work on a process of evolution, to ensure maximum support. "The commitment of the board is essential." He also says that the bank needs to appoint a "bribery champion" who reports to the board on progress in implementing procedures, on any risks or concerns, and any breaches, should they occur.
Crédit Agricole works closely with the UK’s Financial Services Authority to ensure compliance with its recommended procedures. It based its systems on the findings of the FSA’s review of corruption risks in the insurance broking sector.
Versfeld says that the risk that the FSA will do a spot check on anti-corruption systems in the bank is a much greater concern to the compliance department than the draconian UK Bribery Act. "We feel more exposed to the FSA’s regulatory systems and control requirements. The FSA does checks on all banks to see if we have the systems. If you don’t have the controls, you will be subject to enforcement actions. We have systems and controls in place to fight financial crime. These map adequate procedures for bribery, under the Ministry of Justice Guidance. You need an offence to take place for the Bribery Act to apply. You don’t need to have an offence for the FSA to get involved. That is a much lower threshold. The institution doesn’t need to be corrupt for the FSA to take action, only for the rules not to be in place."
Banks would be unwise to take any chances on prosecutors overlooking incidences of bribery, says Versfeld. He says the new Bribery Act has increased the risk. "It is the high-water mark, it sets the highest standards. For example, the US Foreign Corrupt Practices Act accepts facilitation payments, unlike the Bribery Act, which outlaws them."
The Bribery Act’s primary innovation is to make the institution liable for an incidence of bribery that one of its employees is involved in. Where this happens, the authorities can levy an unlimited fine. The only defence open to the institution is that the guilty employee acted on his own initiative and in total contravention of the bank’s policies and procedures.
Robert Amaee, the former head of the SFO’s anti-corruption team, says banks are now under the corruption cosh. "The new Act introduces a corporate offence of failing to prevent bribery. This is a novel concept under English law and one that we are likely to see more of in the years to come. This makes a commercial organization criminally liable if one of its employees, agents or subsidiaries bribes another person, intending to obtain or retain business or an advantage in the conduct of business for the company."
Banks are going to have to raise their anti-corruption standards to ensure they steer well clear of the Bribery Act’s remit, say lawyers. One comments: "If trends continue, the Bribery Act’s broad scope, harsh penalties and narrow defences may be seen as harbingers of more onerous future minimum standards for corporations."
Gregory Husisian, a counsel at Foley & Lardner, a US law firm, says: "Nobody really knows the full implications of the UK Act yet. There are concerns that if the UK SFO is aggressive on jurisdiction, the result could be major fines from both the US and the UK for essentially the same conduct. So people will be watching to see what kind of trans-Atlantic cooperation there will be, both in terms of constructing enforcement actions and in putting in place global remedies that settle multi-country actions."
Nick Kochan is the author of Corruption, the new corporate challenge, published in October, by Palgrave Macmillan