Month: April 2014

Briefing Note: Jersey Financial Services Commission Onsite Examination Findings.

Sara Barclay AML/CTF, Compliance Monitoring, Corporate Governance , , ,

Compliance monkey

The Jersey Financial Services Commission (“JFSC”) conducted an onsite examination of one of its fiduciary licensee’s which has resulted in a public statement being issued. The findings provide an insight in to the areas that our sister Island regulator is focusing on and the regulatory action they are taking in respect of their findings. I believe that the key points of the onsite examination are as follows;

Anti-Money Laundering and Combatting Financing of Terrorism (“AML/CTF”)

The key points made in respect of the examination of the area of AML/CFT noted the following areas as failure to comply with the AML/CFT regulatory requirements:

  • Out of date CDD.
  • Lack of sufficient evidencing of source of funds and source of wealth.
  • Lack of evidence to demonstrate that CDD had been sufficiently evaluated.
  • Inadequate evidence of EDD having been undertaken on High Risk customers
  • Inadequate evidence of the review of risk assessments.
  • Providing registered office only business and the issuance of Powers of Attorney with little control of the risks and oversight expected to be applied to these products.

 

An investigation was also undertaken into a customer entity that had received funds that may have been connected to a fraud. The investigation found the following matters of concern:

  • Mind and management not with the Jersey appointed Directors but with the beneficial owners.
  • Lack of questioning and properly understanding the activities of the customer entity.
  • Allowing payments to be made by the Customer entity without knowing or assessing whether adequate funds would be available to complete transactions.
  • Over reliance on the ultimate beneficial owners instructions and did not challenge the rationale for acquiring assets.
  • Receiving loans which did not have formal loan agreements and were from entities that had the same beneficial owners.
  • Failing to understand the source of funds through the customer entity.
  • Failing to consider adverse information made available to it regarding the source of funds received by the customer’s entity.
  • Receiving funds without knowledge of the remitter and paying them out the next day.
  • Failing to keep adequate books and records for the customer entity
  • Being re-active instead of pro-active in the management of the customer entity.

 

Breaches of the Code of Conduct of Trust Company Business

The key points that led to breaches of the Jersey regulatory framework and principles for the conduct of Trust Company Business were as follows:

  • Failing to act with skill, care and diligence.
  • Failing to evidence in writing decisions made.
  • Failing to identify conflicts of interests.
  • Failing to ensure adequate review procedures were implemented to monitor Trust Company Business.
  • Failing to maintain adequate internal systems and controls.
  • Failing to exercise an adequate level of Corporate Governance.

These failures led to remedial action having to be implemented as follows:

  • Directors stepping down and the appointment of new local Directors and a new Non-Executive Chairperson.
  • Review in conjunction with an external resource of the processes and procedures of the business to effect changes to strengthen its systems and controls.
  • Initiation of a review process of customer files to remedy customer due diligence deficiencies.
  • Remediation programme has been put in place to rectify issues identified by the investigation.

In conclusion I believe that a robust compliance function and a compliance monitoring programme encompassing the regulatory framework would have alerted the business to its deficiencies and assisted in the evidencing of areas of concern that required remedial action that were subsequently identified by the JFSC .  I recommend that the points raised are taken in to account in any Financial Regulated or Registered Business and assessed against its current compliance framework. If you do find that you have issues of concern or that you cannot adequately evidence compliance to the regulatory framework my advice is to form a remediation plan and inform the Commission as soon as practical. A problem shared is a problem halved, I cannot give any guarantees that you will not face regulatory sanction but being open and honest has the potential to reduce or negate the use of regulatory sanctions, as William Mason Director General, mentioned in his December 2013 address to the Industry.  If the regulator in our sister Island is looking at these areas I believe that the Guernsey Commission will also be.

Part of the Problem or Part of the Solution?

Sara Barclay Compliance Monitoring, Corporate Governance , , ,

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One of the great things about compliance is that you get to assist licensees in creating and maintaining a suitable compliance framework. It is not just about meeting the regulatory requirements, part of the role is to also make a compliance framework that is suitable to also achieve the aims and objectives of the licensee’s business. I have worked as a compliance consultant, compliance officer and MLRO in the Regulated, Prescribed and Registered sectors of our financial services industry and each Licensee I worked for or provided advice to, was unique in its aims and objectives as were their products and services. For a Licensee to be successful in their business, aims and objectives as well as adherence to regulatory requirements, make up a bespoke compliance solution.

We are in an ever-changing business and regulatory climate, it’s not just the rules and the regulations that are changing but the approach the Commission takes in its supervision to Licensees. This leads to a real business problem for Directors in ensuring that their business meets the requirements and expectations of the Commission as well having to meet its own business aims and objectives. Compliance professionals can assist Licensees through their greater exposure to changes in industry practice and their exposure to the Commission and an understanding of the current supervision expectations. It’s really a no brainer having a compliance professional on tap and this will take away the worry of ensuring you are meeting the regulatory requirements and expectations while having a compliance framework that meets the aims and objectives of your business, or is it?

Having worked in many sectors of our financial services industry undertaking various roles to do with regulatory compliance and anti-money laundering and countering financing of terrorism does not mean that I am the font of all practical or theoretical knowledge in this area to be paid homage to and worshipped, I can assure you all I am not always right! Like everyone I am strong in some areas, adequate in others, and weak in a few (well maybe one or two). I always ensure that anything I undertake is something I can do well, and I believe it is refreshing to Directors when I turn round and tell them that what they are asking is out of my remit and refer them to compliance professional’s or experts who is more suitable. It is what compliance professionals and experts are there to provide isn’t it?

For compliance professionals contracts are their bread and butter.  This can lead them to grab everything that comes their way, with potentially their financial security coming at the expense of the quality of service and relations with a Licensee.  There is also the potential to obtain contracts for the financial security of the compliance professional rather than the financial best interest of the Licensee, leading to conflicts of interests.  I have previously advised Licensees to keep projects in-house due to the cost involved and more importantly that they were actually best placed to do the work themselves. It was great to be contacted later to be advised by the Licensee that they had decided that they were actually best placed to do the work and offered me a smaller contract which they did not have the expertise to undertake on their own.  Honesty means that Licensees will come back to you and also recommend your services, trust is a currency of the highest value.

Part of any compliance professional’s work is in writing and producing compliance documents and programmes to facilitate the Licensee’s compliance framework. It is all too easy for Licensees, who do not have the necessary compliance expertise in this area to unknowingly engage and pay for an all singing all dancing document that meets the regulatory requirements and some more, but won’t easily facilitate the achievement of the businesses aims and objectives. I once assisted a Licensee on review of the suitability of their compliance procedures that had been previously provided by a compliance professional. Their manual was at a very high level having a multitude of committees and quangos written into their procedures that would not be out-of-place in a global financial institution but totally unworkable for a firm that employed less than ten people locally and had a Board of six directors (inclusive of two employees). Though this document showed the theoretical prowess of the previous consultant, the manual was unworkable for the Licensee’s business and showed a lack of understanding of the regulatory framework. The Licensee had abandoned trying to follow the draconian requirements of this manual and had instead reverted to good industry practice, leading to the corporate governance headache of not following their own procedures. In this case the Licensee ended up paying twice to ensure that they had a suitable compliance procedures for their business.

Unfortunately there are compliance professionals out there who take on business they can’t service or do not have the expertise to manage effectively and/or facilitate adequately. There are compliance professionals who gold plate policies and procedures to impress their knowledge on the Licensee and obviously fail by not tailoring the policies and procedures to the business, leading to further costs being incurred by the Licensee. Unfortunately some compliance professionals negatively portray the Commission as a Vlad the Impaler archetype to scare Licensees into taking on unnecessary work due to potential misunderstanding of the rules or regulations or work the licensee would be best place to undertake themselves.

What can a Licensee do to minimise getting something that they do not require and ensure that they get the service they have paid for? It is all about doing your due diligence and I believe that the following points will be able to help a licensee.

  • Understand what knowledge and qualifications a compliance professional has.  They should be able to provide qualifications and a resume.
  • Get references or speak to previous customers of the compliance professional to get a feel of the suitability of the compliance consultant. The benefits of Guernsey is that it is quite easy to find out about people.
  • Talk to the compliance professional get a feel of their experience and knowledge, are they just about enhancing themselves, are they financially independent and are they interested in actually providing something that will enhance your business.
  • Is the compliance professional informing you as to potential or actual the regulatory issues or are they about scaring you into using their service.
  • Has the compliance professional got the capability and capacity? If it’s a firm is the actual person that will be undertaking work for you qualified, suitable and have the time?
  • Shop around with other compliance professional’s to see what they have to say about the work you need to be undertaken.

At the end of the day it is the Licensee and its Directors who are responsible for the suitability of their compliance framework and adherence to it, the Commission will hold them accountable for any failings regardless of who undertook the work. A compliance professional can be part of the problem if you do not do your due diligence on them or understand the needs of your business but, if you have done your research and you are aware of the requirements that you need to meet, they can definitely be part of the solution in achieving a suitable and sufficient compliance framework that meets the regulatory obligations, expectations and the business aims and objectives of the Licensee.