Swedbank shines a light but FATF prefers privacy

This week we look at two separate issues (but there are similarities). 

First up, Swedbank published its 3rd quarter results this week and included an update on their ongoing investigations into the alleged use of their bank as part of a money laundering operation in the Baltics.

Secondly, we revisit the recent FATF plenary in Paris and put forward our own proposals for how we think the Mutual Evaluation Report process could be improved.

Both demand to be looked at as much in the round as they do in detail.

Transcript

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spk_1:   0:16
Hello. Welcome to the sixth episode of Season three of Dark Money Falls in which we shine a light into a murky world. I'm Ray Blake, and with me is my co host friend and business partner, Grand Barrow.

spk_0:   0:28
Hello, Ray.

spk_1:   0:29
Last time Crime, we looked at the mutual evaluation reports conducted under the aegis of fat If the financial action task falls and that was timely because you were about to attend the fat of plenary session in Paris.

spk_0:   0:42
That's right, Ray. And no sooner had I got back then Swedbank updated the market with their third quarter results, which contains some insights into their well continuing internal enquiries into their exposure to the Laundromat activities in the Baltic states.

spk_1:   0:58
Yes, we reported on the first phase of their investigation when the details were published back in March. I remember I spent a throwing morning going through the report line by line and coming away distinctly underwhelmed with scope and rigour.

spk_0:   1:12
I remember it well, Ray, And are you still under whelmed?

spk_1:   1:16
No, I'm no Grey and Swedbank seemed to have changed their approach. In what way? That they've zoomed out. Graham

spk_0:   1:23
Oh, you'll have to explain what you mean,

spk_1:   1:25
I will. Let's go back to March. You'll remember. I jumped on the phase one report as soon as it was released on. We've got a podcast out the same day.

spk_0:   1:34
Yes, we were pretty critical of their approach.

spk_1:   1:37
We criticised their sole focus on determining whether the 50 entities that the broadcaster as Feet E had linked them with were indeed their clients. Whether, if so, they'd off boarded any of them and when and whether they continue to transact for them after having purportedly afforded them.

spk_0:   1:55
Yeah, we thought they should have been really simple questions to answer, but that there were a number of other to us obvious questions that were being ignored. As I recall, this turned into a chorus of disapproval that led to the CEO at the time leaving the bank under a cloud.

spk_1:   2:12
And now it emerges. She wasn't alone.

spk_0:   2:15
Really? Okay, let's come back to that. Okay, But I remember that the Phase One report set out amore ambitious scope for phase two of the investigation.

spk_1:   2:26
That's right, Graham. And in these third quarter results, we're getting our first insight into what's going on with that. All

spk_0:   2:32
those good tell us all.

spk_1:   2:34
The new CEO, Jens Henriksson, introduces the report three weeks into his new role and immediately addresses the AML issues. It's actually the first topic of substance he addresses in his introductory comments, and he says, Firstly, we have to get to the bottom of the money laundering accusations against our bank and address the shortcomings in our AM L work not only because off the ongoing investigations, but because it's the right thing to do. In concrete terms. It means I will be spending much of my time making sure that the internal investigation is completed promptly on DH, that the authorities have access to all the information they need to complete their investigations. It also means strengthening the bank's work to fight financial crime by allocating more resources and improving our processes.

spk_0:   3:26
Well, there's a lot there, but it is pretty much what you'd expect him to say.

spk_1:   3:31
Well, yes, crime, but I think it's significant that it's the issue he's chosen to put front and centre

spk_0:   3:37
on. That's fair enough. There's more detail, I imagine. Later in the report

spk_1:   3:42
there is Graham, Let me direct you to page 10 and they're heading update on ongoing investigations

spk_0:   3:50
OK, OK, I'm I'm there. Oh, yeah. There's quite a long section here is

spk_1:   3:57
Yes, there is. It leads on the work of the new anti financial crime unit,

spk_0:   4:02
which it says was only set up in April this year. That that seems a bit recent, doesn't it?

spk_1:   4:08
Well, yes.

spk_0:   4:10
So what does it say about the investigations on when there's a investigations? How many? How many of their talk

spk_1:   4:17
about? Well, there are surprises here, Graham. We knew, of course, about their own internal investigation which Clifford Chance is conducting for them on. We knew about some external investigations by regulators. But there's quite a long list of investigations referenced in this update.

spk_0:   4:36
Well, yes, I can see that as well as investigations by the Swedish and Estonian regulators, which is due to finish in the new year. They also disclose investigations by the Latvian Police Department for combating economic crime, the European Central Bank on DH, the Swedish Economic Crime Authority.

spk_1:   4:56
Now that last one, Graham is specifically looking at whether sweet bank employees have violated communication laws related to money. Long drink.

spk_0:   5:07
Oh, what does that mean, right?

spk_1:   5:10
I can only speculate, Graham then speculate on that But well, I think this could be interpreted as communication to law enforcement through suspicious activity reports.

spk_0:   5:22
Oh, so this might be an investigation into whether there were failures to report.

spk_1:   5:27
Yes, although that's just conjecture until there's more information

spk_0:   5:31
noted. But of course, it might also be a about the communications Swedbank made to the markets early on about the scale and indeed existence of money laundering problems.

spk_1:   5:43
Fair point Graham Still conjecture though

spk_0:   5:45
it is, but that there is an explosive sentence here, I Oh, well, it says quote a number ofthe U. S. Authorities are also currently investigating Swedbank. These investigations may take years to conclude.

spk_1:   5:59
Oh, yes, that one.

spk_0:   6:02
Do we know which U. S authorities? Right?

spk_1:   6:04
No ground we don't Henrickson was specifically asked in the Q and a session whether this included the US Department of Justice and he declined to answer.

spk_0:   6:13
Well, no doubt more detail will emerge in due course.

spk_1:   6:16
I spoke so but there's one more interesting thing we do know now. And what's that? I'm going to quote directly quote. As a consequence of the internal investigation, a number of employees have had to leave the bank unquote

spk_0:   6:30
Whoa, What because they were involved in the illicit activity or because they negligently failed to address it.

spk_1:   6:36
We don't know. But the phraseology doesn't really allow much beyond those two possible interpretations, does it?

spk_0:   6:42
Ah, no, it doesn't. But actually, this is going to be a bit of an issue for sweet bank, isn't it?

spk_1:   6:49
What do you mean?

spk_0:   6:50
Well, if people are leaving the organisation and for whatever reason, they're taking historical knowledge with them. The CEO is not yet a month into the job and his top team are all pretty recent, too. The A F C unit is barely six months established rate. We've been in banks needing to investigate historical matters. And you know how hard it is to interpret contemporaneous records without input from people who were there at the time and knew the systems and procedures from then.

spk_1:   7:21
That's right, Graham. And we know from our own work that firms often fall foul of the regulators when they have to rely on institutional memory because historically, recordkeeping may not have been consistently up to scratch.

spk_0:   7:34
Yeah, when you're not talking just about a single internal investigation, but multiple independent investigations as well, all of which will have their own information requests. The bank's going to really struggle to keep all the investigators informed when it is short of institutional memory itself.

spk_1:   7:52
And we know that information requests from the authorities come with non negotiable deadlines. So they will have to be giving that priority over their internal investigation.

spk_0:   8:01
Very true, Ray. I mean, we were very critical of the narrow scope of their initial investigation. Has that opened up a bit?

spk_1:   8:09
It certainly has great. And they've really zoomed out, in fact.

spk_0:   8:12
Oh, how do you mean?

spk_1:   8:13
Well, the report says that in total, more than 30 billion transactions made between 2007 on March 2019 of being reviewed, of which 15 billion from the Baltic operations.

spk_0:   8:27
Did you say 30 billion? Right. That is 1,000,000,000 with a B

spk_1:   8:32
A. Did. Graham,

spk_0:   8:34
I'm speaking this ray.

spk_1:   8:36
Well, I very much doubt that, but you're right. It's an astonishing number. I did some rough calculations that showed that if each transaction takes an average of just 60 seconds to review to get through them all represents around 200,000 man years of work.

spk_0:   8:53
Well, I can believe it. So So when are they planning to conclude this work Ray

spk_1:   8:57
early next year. Graham.

spk_0:   9:00
Well, now I really am speechless.

spk_1:   9:04
Well, I've no doubt they'll have some fairly. Was he Tech to do much of the heavy lifting?

spk_0:   9:08
I'm sure they will rape. But if they're only looking at individual transactions, even 30 billion offthe um, are they missing out on seeing bigger patterns that only emerge when you look at a network of transactions where each individual payment on its own just might look innocuous?

spk_1:   9:25
Well, I think we'll have to see what the next update says. Crime

spk_0:   9:28
indeed. Well, let's keep an eye on this one. But for now, it looks like the bank has at least learned from past mistakes, and going forward is going to be more open and look at itself more widely.

spk_1:   9:39
Yes, that's encouraging on. We will keep listeners up to date. Now, Graham, I am very eager to hear about your time with the fat if,

spk_0:   9:47
well, Ray. Oddly, there's a thing that we can use to tie this back to sweet bank. Really well, yes, As you said, sweet bank of really zoomed out in their investigation to look at the bigger picture on one of the key themes I picked up at the plenary was the need for fat. I have to do something similar.

spk_1:   10:03
What completely reviewed the global AML framework by early next year?

spk_0:   10:08
No, I mean but I do may perform a review of the way that the mutual evaluation reports are currently working to see if they are still fit for purpose.

spk_1:   10:18
Well, I guess you'd better start by explaining exactly why you were there and who you're with.

spk_0:   10:23
Good idea. Well, I was there as a guest of Transparency International, who brought together experts from civil society organisations or CSOs and beyond toehold aside, meeting in Paris at the same time as the fatter Flannery, partly to protest about being excluded from the deliberations either as a contributor or is an observer party to demonstrate the CSOs have a great deal to contribute to the debate about how best to manage the battle against financial crime.

spk_1:   10:52
And did they?

spk_0:   10:53
Yes, I think between us we had a range of great ideas which I think would make a really impact.

spk_1:   10:59
You want to start with your own contribution?

spk_0:   11:02
Well, okay, well, firstly, I worry that M ers mutual evaluation reports are Unitarian approach by which I mean they focus exclusively on individual countries, whereas we know that high end money laundering laundromats, if you will. Ah, highly multi jurisdictional. I think the outcome of that is that the f b ours miss a trick.

spk_1:   11:23
What would be your suggestion to address that?

spk_0:   11:26
All right, you know, here in the UK, the FDA performs both individual firm visits as well as thematic reviews. That means they look at risk both within specific firms and across a variety of different firms. Because only that way can they assess the broad risks facing the financial services industry.

spk_1:   11:45
And you think that the fact, if you do the same thing, continue with country specific evaluations but also do thematic reviews across different countries to see how their controls interact, or whether there are loopholes which criminals could arbitrage to their benefit?

spk_0:   12:01
Exactly. And is one of my colleagues at the meeting pointed out, The in country evaluations don't always have to be across the entirety of the 40 recommendations

spk_1:   12:11
we'll know they could adopt ah risk most approach so that there was no reason to suppose that previously were received. Elements have changed. They could focus on just those bits that had

spk_0:   12:23
which they already due to a degree, with what they call follow up reports. But I think the whole approach just could be much smarter, especially when they're dealing with smaller, less systemically important countries, which have, frankly neither the budgets nor the expertise to prepare for a visit in the same way of some of the bigger, more developed countries, which contro huge resources at them.

spk_1:   12:45
That almost complete sense to me. What was your other point?

spk_0:   12:49
Well, the down, like the requirement for countries to adopt a risk based approach. The fat f doesn't I made the point of the meeting that a small lack of compliance in some of the recommendations in the country like the UK, which you know is a major player in international finance

spk_1:   13:05
on money laundering.

spk_0:   13:07
Indeed, on that that can have a much greater impact than a significant deficiency in a country like say, you can do it, and I mean no offence to the London's is not a significant presence on the international financial stage.

spk_1:   13:21
You know, that makes a lot of sense. Getting a non compliant or partially compliant rating does not in itself tell me very much about the impact of that rating in the war on financial crime.

spk_0:   13:33
No, it's like running a project. Identifying risks is important, but unless you assess the likelihood of those risks crystallising on the impact off those risks on the project. If they do, you're not adding very much to your overall risk management.

spk_1:   13:49
You know, you're absolutely right, Graham. And the difference between a largely compliant and a partially compliant can have far reaching consequences in respect to the country concerned.

spk_0:   13:59
Exactly on. The other thing that struck me was the point that one of my colleagues at the meeting made in respect ofthe risk assessments Oh, well, yeah. Risk assessments tend to measure inward risk by which I mean the risk that countries face from outside coming in should they know, also include outward facing risk, the risk that those countries export out into the financial system.

spk_1:   14:22
What do you mean? Like the fact that the UK provides legal entities which he used all over the world to facilitate money Long? Yes, exactly. You know, Graham, I don't think the UK would have emerged quite a swell from its recent Emmy. Are if the fat F had adopted a risk based approach and measured outward facing risks.

spk_0:   14:40
Yeah, you know, that might not have been a bad thing in the long run.

spk_1:   14:43
I agree. So what happens next in this respect?

spk_0:   14:46
Well, I think the recommendations we put together will be put into a paper and presented to the letter F. Andi. I also know that Tom Keating at the Royal United Services Institute. Rosie has just recently written very compellingly about the case for reform.

spk_1:   15:02
An article which you can read on the Rosie website exactly on what's next for us crime.

spk_0:   15:09
Well, right, there is a very interesting Panorama documentary which is being broadcast today as we speak, which is the 28th of October. Looking at how billions of pounds of drug money, some of which is collected here in the UK, ends up being laundered through the gold markets off Dubai.

spk_1:   15:26
That does sound very interesting. Any reason for you saying so?

spk_0:   15:30
Well, yeah, Unless I ended up on the cutting room floor and that, frankly, is quite possible. I believe I'm going to make an appearance in that programme.

spk_1:   15:39
Well, well, whether you do or whether you don't. Is it worth talking about the programme and next week's broadcast?

spk_0:   15:45
I think it is.

spk_1:   15:46
I'm looking forward to it.

spk_0:   15:49
Thank you for listening to this episode of dark Money files. We hope with you. If you like to listen to future episodes, fully subscribe through iTunes, Spotify or your normal podcast provided thanks.