Lessons from the Global Laundromat investigation: part one

Thomas Jefferson sagely noted 200 years ago that “banking establishments are more dangerous than standing armies”. Jefferson was only half right. Personal experience combatting money laundering and financial crime over the past 30 years has made it crystal clear to this author that international crime, including large-scale illicit capital flows, can only succeed and flourish with the active participation and tacit leadership of the mainstream professional class.

Bankers, while they may facilitate and profit from impressive criminal mischief, are merely vassals for an emergent “professional kleptocracy”, consisting primarily of legal and accounting firms with an international reach. Over the past 75 years these firms have empowered their more pernicious members to guide traffic flows at every major intersection of financial crime and money laundering.

The global Laundromat investigation

Last week it emerged that Russian organised crime groups had laundered between $20 billion and $80 billion of criminally derived funds through the financial system between 2010 and 2014. The laundering allegedly occurred via many top-tier international and UK banks and UK-registered corporations.

The UK professional class, against the backdrop of financial malfeasance, takes its cut in the form of generous professional fees and bonuses. Mark Carney, governor of the Bank of England, has acknowledged that banks today have a crisis of legitimacy, but it is a huge mistake (and a clever deflection) to assume banks alone are the corpus of the rot that has embedded itself within the financial system.

Indeed, it took Latvia and Moldova, two small countries which lack the perceived legal and investigative sophistication of the UK, to uncover the magnitude of what has been happening at financial institutions and corporate services firms operating from London. The aptly named “global Laundromat” investigation was triggered by the recognition, in the autumn of 2014, that the UK’s Companies House was facilitating money laundering and financial crime by Russian organised criminals with almost reckless abandonment.
Lawful UK “corporations of convenience”, legally constructed to conceal beneficial ownership, aided in layering and legitimising

criminal enterprise to launder illicit funds. The launderers used fake loans and carefully crafted legal documents fomented with the pre- determined objective of triggering a contrived judicial default action in Moldova, which allowed this massive money laundering operation to take place.

The cross-border and legally precise nature of the scheme required smart UK lawyers, accountants, bankers and corporate secretaries to make things run smoothly. Why did the UK choose not to do what Latvia and Moldova did, which was to conduct a proper and thorough investigation? The answer comes down to only two realistic scenarios: incompetence on the part of the UK authorities, or that the UK authorities knew full well what was happening and quietly became complicit in the conspiracy because it served an agenda known only to an elite few who stood to benefit politically or economically. Selective enforcement is certainly not unique to the UK.

The role of financial intelligence units
Two aspects of the global Laundromat investigation in particular demand serious analysis. The first is the failure of costly financial intelligence units (FIUs) to identify or trigger an investigation into why billions of dollars from Russia suddenly poured into the financial system through Latvia and Moldova. By any metric, large Russian capital movements between 2010 and 2014 should have been considered high-risk, especially in the light of Russian military actions in the region.

Role of government-appointed monitors
The second, equally disturbing point for discussion, is the effectiveness of deferred prosecution agreements (DPAs) and government- appointed monitors.

An unseemly number of UK and overseas banks involved in the Laundromat investigation are already subject to DPAs for criminal money laundering and facilitating financial crime. In many cases, the U.S. Department of Justice had appointed and placed monitors within banks such as HSBC, Barclays, Standard Chartered, RBS and Credit Suisse, all of whom feature prominently in the continuing investigation.

Monitors were in place at the time when some of the $20-$80 billion is said to have been washed through the banks they were supposed to be monitoring. It is hard not to question why all the monitors embedded within the banks failed to pick up this
money laundering activity. They were awarded these lucrative monitorship roles due to their expertise in identifying financial crime and ensuring effective AML procedures were in place. The vast majority, if not all, of these monitorships go to U.S.-linked lawyers and accountants, many of whom appear to have direct professional or personal relationships with the Department of Justice (DoJ) or Securities and Exchange Commission (SEC) personnel who have the most influence on the appointments to these positions.
One of the challenges facing law enforcement when confronting an investigation of this magnitude is the degree of complexity and cost with which investigators must contend. When it comes to financial crime, several truisms play out. First, the bad guys have all the money and no rules, and the good guys have all the rules and no money. Secondly, jurisdiction equals freedom, and if the Panama

Papers taught the world anything it was that those with money can use the best professional help to ensure they legally envelop their activities with the best protection that purchased offshore vehicles and “independent legal opinions” can buy.
For the record, this author met a lawyer associated with Mossack Fonseca in June 2002 while posing covertly as the moneyman for a fictitious Colombian cocaine cartel, which was supposedly generating $3 million per day. The lawyer marketed his services on providing best practices to defeat the Financial Crimes Enforcement Network (FinCEN) and other FIUs, and promoted the use of Panamanian foundations and offshore international business companies to help launder and protect the author’s cocaine proceeds.
He also offered, during this two-hour recorded meeting on a covert Federal Bureau of Investigation (FBI) yacht in Fort Lauderdale,

to assist the author in laundering the cocaine cash through the services of five different lawyers who were prepared to wash the dirty cash through their trust accounts for a 7 percent laundering fee. He said he would then structure the funds into the author’s account in Panama.

During this same multi-year undercover project, the author laundered “cocaine cash” into a Russian-owned bank in the Caribbean via the services of an Oxford law graduate and a former partner of a Big Four accounting firm. During this same project the author also laundered his cash through other lawyers and banking associates, including a South African bank owner who asked him to launder discounted bonds for Libya, Iran and North Korea.

Globalisation of crime and money laundering
The globalisation of crime and money laundering is directly proportional to the globalisation of banking and professional services. HSBC, for example, allegedly processed $545.3 million in Laundromat cash, mostly routed through its Hong Kong branch. This makes perfect sense. Russian money launderers have been actively assisting many Chinese nationals in stealing and laundering Chinese state-owned assets for many years, utilising the hard-won experiences of the oligarchs following the break-up of the Soviet Union.

Money launderers and the professional kleptocracy that assist them are well aware that Hong Kong represents an easy pathway to hide illicit money flows among the vast capital flows moving between China and the world via Hong Kong. These illicit cash flows merely have to swim in this cross-border monetary current and be swept along. Smart criminals and the professionals who serve them also realise that Hong Kong has no substantive border controls on capital, and that the Hong Kong Monetary Authority (HKMA), as the primary regulator of HSBC, and indeed all banks in Hong Kong, has a perceived conflict of interest in stopping these capital flows, regardless of the origin of the funds.
The HKMA and the Hong Kong Association of Banks (HKAB), of which HSBC is the dominant member, have a profitable private joint venture, known as Hong Kong Interbank Clearing Ltd (HKICL).

Both the HKMA and the HKAB make money on every cross-border transaction, whether it involves currency flows or other capital market instruments. Making easy money is a great motivator to ensure nobody looks too hard to find wrongdoing. The Central Money Markets Unit, a clearing system operated by the HKMA, illustrates the scope and scale of why Hong Kong is so attractive to sophisticated money launderers.

Another factor is that Hong Kong follows English Law. Hong Kong is an international financial centre, and is home to the greatest purveyors of anonymous offshore vehicles. It is perplexing that, after so many years and so many cross-border transactions by the largest banks in Hong Kong, in 2015 it was the State Bank of India which became the first bank sanctioned under the Hong Kong 2012 Money Laundering Ordinance for relatively benign AML infractions.

Smart criminals notice these peculiarities, as do lawyers and accountants, and it is therefore unsurprising HSBC or indeed any international bank would try to shift large “at risk” capital sources or clients through Hong Kong. Devious bankers and third-party professionals know very well how to play the regulatory arbitrage game.
There is no less money laundering taking place today than there was 10 years ago, notwithstanding the $1 trillion that has been paid out in fines, penalties, disgorgements and enhanced compliance costs since the financial crisis. It seems clear that the same people who captained the AML ship 10 years ago are still at the helm, and still driving into icebergs. This alone suggests that making something bigger does not make it better. If something has not worked for the last 15 to 20 years, it seems illogical to keep following the same thinking.

Published 29-Mar-2017 by Bill Majcher

If you are interested in learning more about this news update, please read more here