In common with many people, the experience of the past year has been a blur of timelines and events, with both 2020 and 2021 becoming blended together with a seeming lack of definition to working and home life patterns brought about by the pandemic.
In this context, you would be forgiven for thinking that financial services regulators had been focusing on keeping the industry they supervise operating to maintain basic client service levels. However, the pandemic has produced some rather counterintuitive statistics in the realm of global enforcement action for anti-money laundering (AML) failings. As part of Kroll’s 2021 Global Enforcement Review, our research has shown that the trend has been undoubtedly towards larger fines.
Globally speaking, the first seven months of 2021 alone have yielded 17 fines for AML failures; this is just under half of the total number of fines issued in both 2019 and 2020, with a total of 45 fines. The total value of fines at the halfway point in 2021 stands a shade under $1 billion (bn), which is on a par with 2020’s overall total of $2.2 bn, which was five times higher than the 2019 figure of $444 million (mn) and over two-thirds of the record-breaking 2018 figure of $3.3 bn.
Looking more closely at the numbers, we identified four key topic areas from the past five years that regulators worldwide have consistently identified when levying fines. These can broadly be defined as:
• AML management (124 cases)
• Suspicious activity monitoring (98 cases)
• Customer due diligence (94 cases)
• Compliance monitoring and oversight (57 cases)
But it is not just the US, which has been notably active in this space. Other regulators have also been flexing their financial penalty muscles. In 2020, Australia levied the greatest proportion of the global total (41%) in fines, followed by Sweden and Hong Kong. Another jurisdiction not noted for its prosecutorial and regulatory aggression, the Netherlands, was at the top in 2021, with 59% of the total as a result of the imposition of a single fine of $582 mn on a bank following ‘structural and serious’ violations and ‘culpable money laundering’ from 2014 to 2020.
It all rather points towards an answer to a piece I wrote in October 2020 for the Jersey Evening Post titled, ‘AML – Will it Ever End?’. The answer is seemingly ‘No’, or at least as far as the regulatory and prosecutorial zeal for handing out fines for not only poor behaviour but what seems to be reckless, and at times, highly negligent, activity.
From a Jersey perspective, we seem to be following a similar path with not only an increase in the number and severity of civil penalties (the formal term for ‘fines’) being issued by the JFSC but also criminal prosecutions for breaches of the Money Laundering (Jersey) Order 2008 in 2020 against a bank and a trust company business. There is no doubt that this shift of emphasis is, in part, due to the upcoming MONEYVAL inspection in 2023 that will reflect on the observations contained in the last inspection report that Jersey was not doing enough to prosecute financial crime.
But the shape of the regime is still evolving.
While the first incarnation of the Jersey civil penalties regime related solely to firms, the second brought principal persons (directors and shareholders) into the net. The third regime, which is the most recent, is likely to capture an even wider group of individuals including:
• Compliance officers
• Money laundering compliance officers (MLCOs)
• Money laundering reporting officers (MLROs)
• Those involved in ‘senior management functions’
Although there is no guidance on what constitutes senior management, with such functions to be designated as such by the JFSC by notice in due course, one can look for guidance to the UK’s Senior Managers and Certification Regime. While the Jersey system is unlikely to be as prescriptive as the UK’s, it is likely to include individuals who have a significant influence on Jersey firms’ operations but who are not acting in a formally recognised function (unlike group heads of compliance, chief risk officers, other members of the C-suite for example), as well as those influential parties who sit in the wings but don’t have a formal regulatory position.
Our experience tells us that compliance professionals are already feeling under pressure in businesses and the move to include them in the civil penalty net means that they will increasingly feel that burden. Sometimes overstretched, maligned and marginalised, it is likely that members of staff discharging compliance responsibilities are going to be demanding more from employers in terms of resources, remuneration and respect (a novel take on the ‘3Rs’), and understandably so. A move to increase demand for compliance professionals without any relaxation or investment in the underlying skills is likely to lead to wage inflation and an increase in the speed of the employment merry-go-round whereby staff move from firm to firm in pursuit of attractive packages.
Equally, there might be a more pernicious effect whereby employees captured by civil penalties, who are not senior enough to be shareholders or directors, which gives them not only more decision-making power and financial compensation for the risk taken, might simply decide to leave the industry, taking valuable skills and knowledge out the door. The financial services sector has long worried about Jersey creating an unlevel playing field, but it could well be that the pursuit of international compliance perfection could have a materially adverse impact in the long term. Unfortunately, a decision not to comply would have a more damaging effect. On a more positive note, the proposed and inevitable extension of the civil penalties’ regime is throwing the profile and position of key persons into sharp relief. This may lead to more positive debate and progress in terms of raising the profile and seniority of compliance professionals and increased board appreciation and support for its compliance personnel.
With our own firm transitioning from Duff & Phelps to Kroll in 2021, we are also experiencing change. We begin this new chapter with a fresh look and a clear and confident vision for the future, building on our specialisms in valuation, expert services, investigations, cyber risk, corporate finance, security, restructuring, legal and business solutions, data analytics, due diligence and regulatory compliance.
Being an independent advisory firm with nearly 5,000 professionals in 30 countries and territories around the world, paired with the latest technology, we are positioned to give our clients clarity ̶ not just answers ̶ in all areas of business. That is why we are best placed to give firms rounded solutions and advice to complicated AML/CFT problems.