Money Laundering
| by Paul Gosling 07 Jan 2004 Topic: News |
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Money laundering rules - they don�t work Anyone in the UK who has tried to open a bank account recently knows that the money laundering rules have a big effect. You will most likely be required to show your passport, ID card or driving licence with photo as evidence of your identity, plus utility bills in your name to prove your address. Mislaid your passport? No photo on the driving licence? Just moved, or someone else pays the bills? Worst of all, no passport? You could find it very difficult to open an account if the answer is yes to more than one of these. Money laundering rules certainly have an effect - just not the intended one. Although consumers are being hampered in trying to open bank accounts, it seems that terrorists and paramilitary groups have little difficulty in moving their money around the world. A third of financial institutions in the UK expect money laundering to increase in coming years, according to research conducted for IT consultants LogicaCMG, despite the focus of corporate spending on crime most commonly being money laundering. This is itself a concern for profits in the sector, as credit card fraud is more damaging financially to the companies, yet there is much less spending to combat it. The survey found that companies were motivated by rules compliance rather than a business case for crime investment. The Royal Bank of Scotland is particularly concerned at what is happening - not least as it was fined £750,000 by the UK�s Financial Services Authority because of its weak money laundering compliance standards. Chief executive Fred Goodwin responded that the FSA rules were now �so draconian� that banks might as well report every transaction to the National Criminal Intelligence Service - which is already so overworked by reports to it that it is said to be unable to operate effectively. Accountants fear that they will be trapped in a similar situation of compliance to little real effect, with the adoption by many jurisdictions of tougher money laundering regulations applying to the profession. In the UK, accountants could be jailed for failing to notify a suspicious transaction under rules to come into place in March. John Davies, head of business law at ACCA, is not confident that the new UK money laundering rules - required to comply with the European Money Laundering Directive - will be more effective than the ones they replace. He provides a parallel with pension regulation, which the National Audit Office said was too broad a brush and insufficiently focused on the greatest risk. Davies believes the same thing is happening with money laundering. So will the new rules prevent terrorist operatives from moving money around to fund their activities? �There could be better ways of achieving this objective if there were a more focused approach out there,� suggests Davies. �Accountants will now - at pain of imprisonment - have to be looking out at even the most innocuous �criminal� activities. It will be very difficult for professional advisers to distinguish between minor and serious criminal activity. It will be a pretty extensive bureaucratic activity to report it all. There will be some serious failures as a result.� Toby Latta, director of corporate investigations at the Control Risks Group, says: �The big problem with terrorist financing is that it�s often financed out of legitimate activities. No number of money laundering regulations will deal with that. We don�t believe that the events of 11 September were from money laundered funds, so money laundering regulations would not have caught those. �The second problem is that a tick box form-based process doesn�t necessarily help catching really serious transactions where you need to look into the substance and what is behind the transaction. That is not a criticism, but a limitation of the regulations. The regulations themselves are a good thing. Do they provide cover for the problem? Our view is that they don�t and they can�t be expected to.� A leaked United Nations report apparently concludes that, although nations around the world have created strict money laundering rules, fund raisers for terrorists are continuing to control property and other assets in a range of European jurisdictions, including Italy, Switzerland and Liechtenstein. Most countries, alleges the UN, are failing to comply with agreed reporting and sanctions arrangements related to Al Qaeda and the Taleban. A recent report from the International Monetary Fund similarly expressed concern at the lack of adoption of global standards to combat money laundering and terrorism financing. The latest generation of mobile technology promises to convert the cellphone into a wallet. As a result, telecom companies could move into position to become bankers of the future. While media attention to 3G technology has tended to focus on games and news services, the real significance could turn out to be the end of loose change and notes. Evidence for this profoundly important development is now emerging, some years after the mobile handset manufacturers invested heavily in researching the ideas and systems to enable it to happen. Moneybookers.com announced in September that it was to become the first payment provider to operate in the UK via mobile phones. Its system can be used to transfer funds between mobile phone subscribers, or to pay bills. Earlier last year the company became the world�s first authorised issuer of electronic money when it was approved by the European Union. A variety of payment applications by mobile are already in use, e.g. lottery tickets can be bought from mobiles. Gambling and pornography could become core revenue earners for the telecom companies, which between them have spent 100bn euros in purchasing 3G licences in Europe alone. According to market researchers Juniper, gambling and �adult content� may generate annual industry revenues of 6.5bn euros. Dublin Corporation and Edinburgh City Council in Scotland now enable drivers to pay for roadside parking places via their mobiles, but the mobile is used to authorise payments from a debit or credit card, rather than accumulating on the mobile phone network�s own bill. This is predicted to be one of the next stages of evolution. Nokia has been working for some years on developing the mobile handset as a means of payment, either when a mobile is used for Internet access or as an in-store payment device. More modern handsets (such as the Nokia 6310i, pictured) have a function to store credit or debit card details to enable them to be used for on-line purchases without the need to key these in for each transaction. They are backed by the �verified by Visa� system to provide greater security. A trial scheme currently being operated by Nokia in the Finnish town of Lahti enables users to pay for goods within a shop by pointing their mobile at the retailer�s till. The payment is debited against the customer�s Visa Electron card, details of which are contained in a chip which is embedded in a special mobile phone cover. Technological development offers the telecom companies the opportunity, if they want to take it, of competing against banks as transaction brokers. The signs are - at least for the moment - that they are targeting the market niche of micropayments. Last year BT launched Click&Buy, an on-line payment system for its Internet customers: the cost of purchases can be added to a BT phone bill, or cleared by credit or debit card. The same principle is practical for m-commerce. The downside to the evolution of mobiles is that they could become as prone to �spam� as e-mail currently is - but more intelligently. Gerry Penfold, a partner with KPMG�s IT Advisory practice, says: �The technology currently being utilised by UK retailers is developing at a rapid rate. That technology is now converging with the latest developments in the telecom sector, opening up so many new promotional avenues. For example, the technology to identify when a mobile phone handset is nearby could be linked by retailers to their latest smart card technology and the related customer data. If a retailer can link that phone to the customer�s buying habits, it is then a simple step for an automated process to send a message to that phone, advising the owner of the latest in-store special offers which they should find of most interest. �If the second part of that equation sounds far-fetched, then you only have to consider what the recently trialled chip and pin technology is leading us towards. In the stores of the future, information is at the heart of everything which is being developed. Personal data, buying habits, shopping lists and payments could all end up being collated via a smart card. So long as a mobile phone number is included in the personal data, retailers will have everything they need to target consumers with promotional messages. With this in mind, asking for a mobile number upon completion of a transaction or when applying for a new card could become as commonplace as getting a date of birth or home address.� But KPMG is warning companies not to become too heavyhanded in their rush to market. A real risk, says the firm, is of consumers being deluged by text messages as they walk down any high street. The individual is then likely to switch off the phone or stop using text messaging and retailers and telecom companies will be the losers. The plus-side, it suggests, is that phone users could easily run a search of products and prices before they leave their workplace, making shopping simpler, quicker and cheaper. There is already controversy over the benefit of services being offered around the world, using location based texting. Japanese cellphone users can opt to receive texts saying when �buddies� are nearby. The important thing, says Penfold, is that shops and phone companies will have to accept that the consumer must be in charge of the process. Mobile operators and content providers are aware of the criticisms and have been involved in trying to draw up a new code of practice, based on only using systems where there is real customer consent. The proposals have not, as yet, won over civil libertarians. But advocates cannot be accused of under-selling the concept. �If done correctly this could soon change the face of UK retailing,� says KPMG�s Penfold. Why does it always rain on Wall Street? It is tempting to ignore matters which are difficult to understand. And the operations of US mutual funds are so opaque that many of the country�s 70m citizens who have invested in them have little idea how they operate. What most of them will now recognise is that something has gone very wrong in their management. As with other US corporate scandals - the discriminatory use of research by investment banks, in particular - the charge sheet has been drawn up by the energetic New York attorney-general, Eliot Spitzer. Over recent months, several of the leading fund managers have found themselves accused of market abuses which have disadvantaged their own clients. One example has been the so-called �market timing� practice through which favoured clients are allowed to make near instant buys and sells, which gears funds into being more liquid than benefits the majority of investors. A second serious abuse has been �late trading� - allowing preferred clients to trade after close of market at end of trading prices. Observers outside North America may be unaware of the significance of this latest Wall Street scandal. Mutual funds were regarded not just as safe investments, but as some of the best managed. That perception has been sharply deflated. Nearly $8bn of withdrawals were made from just four mutual funds in September and many more billions of dollars have been taken out of the sector since then. Before the scandal broke, the total of funds under management stood at a staggering $7 trillion. It is for these reasons that some commentators have described the mutual funds scandal as more important and damning in corporate governance terms than the failures of Enron, WorldCom and others, or the prosecutions of investment banks. Just as corporate governance has now been overhauled and modernised and investment banks have been forced to change many trading practices, so new and stronger standards look inevitable for the mutual funds sector. But it now cannot be denied - something is, or was, very rotten at the heart of Wall Street. It is generally assumed that much of this can be explained by institutional investors� demand for unsustainable returns, which have driven fund managers towards practices that could only ever be satisfied in the short term - sometimes by unscrupulous means. Another important ingredient may be a culture of weak disclosure, as seems to be confirmed by a global survey conducted by the Association for Investment Management and Research (AIMR). AIMR awarded companies a C-plus grade for the overall quality of their financial reporting and disclosure, compared with B-minus in 1999. �What this survey says is people need this information, but the quality is not there,� says Patricia Walters, a senior Vice President at AIMR. �It�s an opportunity for good companies to voluntarily differentiate themselves from the pack.� She adds that she is �disappointed� that companies have not improved their disclosure practices given the sequence of corporate governance scandals over the last three years. Walters suggests that the survey results should enable investors to demand from companies better quality information. �Companies are not wasting their time preparing financial statements and accompanying footnotes,� she says. �They should not try to pretend that people don�t use this information.� The AIMR survey of almost 42,000 investment professionals around the world found that 44% of respondents gave companies a B for disclosure while another 14% handed out Ds or Fs and only 1% awarded them an A. The C-plus grade, which Walters describes as a �pretty low-quality rating,� is the average. The survey also challenges the widespread practice of providing investors with earnings guidance - a forecast of what executives think a company will earn during any given quarter. Investment professionals said companies which provide investors with earnings guidance tend to increase share price volatility because failures to meet earnings targets tend to cause big share price falls. Aviva - the UK�s largest insurer, more commonly known as Norwich Union - has caused a stink in the UK with its announcement it will create work for 2,500 people in India. Many of these positions will be at the expense of existing jobs in Britain. The majority of the jobs will be call handling and claims processing, but this raises the question of whether higher income jobs - such as those of accountants - might eventually move from Europe and North America to India and China. The expanded Aviva operation in India will now employ a total of 3,700 staff. Most will service the UK, but about 150 will be related to the company�s trade in Canada. The transfer of operations from the UK is part of an ongoing trend now well underway. Previous job transfers have included 11,000 positions at General Electric on network support and risk management; a major drive by BT to move call centre handling to India which could eventually employ up to 10,000 staff; 2,400 data entering jobs at British Airways; and a potential 6,000 jobs at HSBC involved in transaction processing. Perhaps surprisingly, the process is not unique to the private sector. Capita, working on contract for the UK Home Office, has sub-contracted some of the Criminal Records Bureau data processing to Hays, which is fulfilling this in India. And there is a political row in the United States over the data processing of sensitive state information to Asia. Matters came to a head when a woman in Pakistan, who was employed to process medical records in San Francisco, threatened to post personal details onto the Internet unless she was given a pay rise. Until now, the focus of transferred jobs has been medium skilled data processing and call centre work, and highly skilled software programming which the US and Europe have too few qualified people to undertake. Things may be about to change, with several of the investment banks beginning trials to use research analysts based in India and to provide some other investor services from there. Analysts believe that accountancy positions could figure in the next wave of job transfers. Andrew Stewart is managing director of consultancy Troika, which has just completed a study of the offshoring phenomenon. He says: �Historically, people have talked a lot about lower skilled call centre staff, but the workforce, particularly in India, is a highly skilled and trainable one. There is increasing interest in moving higher skilled jobs offshore - for example, in accounts departments - as these UK staff are more expensive and the savings are commensurately higher. Banks such as Goldman Sachs, JP Morgan and CSFB are all running pilots for offshore investment research - a highly skilled job that has traditionally been seen as a core competency.� Stewart believes that increasingly lower skilled jobs will transfer to China. He argues that financial services companies pressured to operate on 1% margins have little option but to consider offshore operations. But, he adds, quality is also a factor. �Financial services providers will need to ring-fence existing businesses and create new business models for the future - �virtual companies� providing innovative new products, new levels of customer services and more efficient processes,� suggests Stewart. �More efficient processes are likely to include outsourcing and offshoring to India and South Africa, where costs are roughly £10 per policy as opposed to £30 plus in the UK. In time, the real prize may turn out to be China where policy costs are expected to fall to 50 pence per policy within five years.� The most startling prediction of the impact of the shift in jobs came in a report in the spring last year from Deloitte Research. This argued that the top 100 global financial service businesses would move two million jobs offshore over the next five years, representing activities to an estimated value of $356bn. It confirmed the recent trend towards offshoring to India, but added that China is one of the attractive emerging alternatives. Activities which Deloitte predicted would move include accounting and finance, as well as data processing, call centres and software development. There are already some signs of accounting services being transferred to India, with Ernst & Young operating a tax returns completion service for clients in the United States which is fulfilled in India. The UK�s Tesco supermarket chain is also to outsource some accounting functions to India. | |