Customer’s Customer Compliance Issue

MSB Talk 4

I was reading an interesting article entitled ‘ Argor-Heraeus Rejects Allegations on Congo Conflict Gold’ By James Kraus of Bloomberg  – Nov 4, 2013.  Essentially, a non-profit Swiss organization by the name of TRIAL was accusing Argor-Heraeus SA , a Swiss gold refiner of illegally refining gold originating from the war torn – Democratic of Congo for the years 2004-2005.

TRIAL is stating the Argor-Heraeus refined close to 3 tons of gold pillaged from an armed group which used the gold proceeds to finance its operations.  From the article, Argor-Heraeus received the questioned gold from its customer Hussar Limited.

My commentary of this article is not to give my opinion as to whether the TRIAL accusation is true or not.  My interest is solely from a ‘Know your Customer’ point of view.  Most compliance experts would agree that a rigorous Know Your Customer policy would be one of the most important criteria in protecting an institution against money laundering or the financing of terrorism.

Should Hussar Limited have been the customer and thus delivered the gold for refining at Argor-Heraeus then the latter institution would have executed the KYC ( Know Your Customer) due diligence on the former institution.  Apart from the obvious customer identification and verification procedures,  Argor-Heraeus would have evaluated Hussar’s own compliance procedures on its own customers.   And most likely this documentation would have been satisfactory and thus Hussar would have passed the Customer Acceptance process for Argor-Heraeus.

But now it appears that the gold actually came from illegal sources via Hussar Limited and then passed on to Argor-Heraeus.   The question now becomes as to how much should Argor-Heraeus have to know as to its customer’s customer.  And should Argor-Heraeus have actually o assessed whether Hussar Limited was adhering to its own AML policy of accepting gold from only legitimate sources.  This is a tough call especially at least in the beginning stages of the transaction history.  Now, maybe if the transaction kept on continuing over time with larger volumes, then ‘red flags’ would have appeared.

Then once ‘Red Flags’ appear, the institution has to impose enhanced due diligence which perhaps Argos-Heraeus did.    And it does appear that Argor-Heraeus must have been concerned because by 2005 it had terminated the business with Hussar Limited.

Of course in retrospect, it is so easy to say the Argor-Heraeus should have known from the beginning that the origin of the gold was from illegal means.  And this observation could or could not be true  – I certainly do not know.  And we have to remember that the incident occurred in 2004 and not 2013 where we now work in a heightened state of compliance alert.  This situation is of interest because as a financial institution today, we just cannot take for granted anymore as to the compliance acceptance of a customer.  Now, unfortunately we have to run the extra step of actually knowing our customer’s customer compliance with laws.

– Allan Ramlall

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Is Objectivity Possible for Compliance Consultants?

MSB Talk 4

Two articles appeared in the New York Times on September 13, 2013 which caught my attention because of its relation to ‘objectivity’ in the Compliance Consultant industry.    The two articles appeared in separate sections of the New York Times and had no bearing on each other in any way.  It was my reading of the articles which raised an interesting thought.

The first article entitled ‘ 2 Consultants to Banking Industry Come Under Scrutiny’ by Ben Protess and Jessica Silver-Greenberg concerns the Promontory Financial Group and Pricewaterhouse Coopers  being subpoenaed within the past few months by the New York Department of Financial Services.  It appears that there is a questioning of the Compliance Consultants being able to have total independence when reviewing a bank.  There is a possibility that there could be a conflict of interest  for the Compliance Consultant in giving independent assessments when at the same time it is the customer who is choosing and paying for the consultant work.  This situation is also causing concern to the Regulators  because of its own use of Compliance Consultants to correct and institute AML compliance processes for the banks.

The second article appearing in the New York Times the same day was ‘When Accountants Act as Bankers.’ By Floyd Norris.    In this particular case, Deloitte L.L.P was fined 14 million English pounds and one its retired partners Maghsoud Einollahi – 250,000 English pounds  for failure in its professional responsibilities for work conducted for MG Rover.  Apparently in the U.K, there are ethics rules of the Institute of Chartered Accountants which require accountants to consider the ‘public interest.’  In this particular case, the U.K Financial Reporting Council ruled ‘ They placed their own interests ahead of that of the public and compromised their own objectivity.’

After reading these two articles, the terminology of ‘ the Public Good’ is so very appropriate when it comes to Anti-Money Laundering and the Countering of Financing of Terrorism issues in the U.S.A.   These two serious issues if not controlled and thus prohibited at the banking level can be considered as being for ‘ the Public Good.’  And we would expect the compliance staff at the banks and the supplemental professional assistance from the Compliance Consultants to set up maximum procedures to prevent the infiltration of drug money and other criminal finances from entering the U.S Banking system.

I am under the belief that Compliance personnel are indeed very serious about their responsibilities in the prevention of money laundering and terrorist financing.  But there could be the tendency of trying to be lenient with their Customers not for financial gain but perhaps not wanting the hurt the ‘bottom line’ of their customers.  The areas of Compliance and Business Development do come under different mentalities.  On the one hand, if the compliance group institutes such strong compliance rules then from the business development point of view – it means a loss of revenue from operations.

Somehow we have to come to a level whereby there is a regulation of some sort which ties into the concept of the ‘Public Good’ which will clearly spell out the objectify role of the compliance consultants.   Then once this rule is established, both the customer and the compliance consultant would clearly understand seriousness of the U.S Compliance Regulations.  The consultant would then have no choice but to demonstrate a strict compliance assessment.   In a way, the rules will then provide more comfort to the consultant when conducting compliance work on an objective basis.

– Allan Ramlall