Briefing note 002- Trust Company Business On-Site Examination Findings from Jersey

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The Jersey Financial Services Commission (“JFSC”) has recently published its 2013 on-site regulatory examination findings in respect of Fiduciary business conducted in Jersey. These findings are pertinent to any financial service business, Compliance Officer and Money Laundering Reporting Officer (“MLRO”) in ensuring that they are adhering to the Guernsey regulatory framework. I believe that key points from the examination findings are as follows:

Evaluation of Suspicious Activity Report’s (“SAR’s”) and reporting to the Financial Intelligence Unit (“FIU”):

  • Delays in the acknowledgement of receipt of an internal SAR to the person disclosing.
  • Lack of detailed investigation by the MLRO to support the decision made.
  • Follow-up action resulting from internal reports not being undertaken or no evidence of follow-up action were noted.
  • Lack of autonomy by an MLRO and the decision to report to the FIU being made by Board rather than the MLRO.
  • Internal reports not being recorded accurately and being overlooked by the MLRO leading to late reporting to the FIU.

Corporate Governance:

  • Board discussions not being fully documented in some instances.
  • Concerns were identified in respect of the Board interaction, reporting lines and the functions of delegated risk committees of cross-divisional functions of a business.
  • Term’s of reference for delegated functions of the Board not being in place.

Business Risk Assessment (”BRA”) and Strategy:

  • Lacking details of the consideration of the following areas;
    • Organisational factors;
    • Jurisdiction of customers;
    • Underlying activities of Customers, including Politically Exposed Person risk;
    • Products and services specific to the business (third parties);
    • Delivery of those products and services;
    • Outsourcing risk to other branches or third parties and;
    • Not separating its BRA assessment from that of the Manager.

Conflicts of Interest:

  • No documented consideration of potential Conflicts of Interest where multiple licences are held and products are provided to customers who are common to both licenses.
  • Consideration and documentation of wider Conflicts of Interests, such as the investment in to customer structures by a Director.
  • Consideration of the risk where a significant shareholder of the business introduces customers.
  • Non-Executive Directors maintaining a direct relationship with a customer.
  • Conflicting roles of Compliance Officers the anti-money laundering function where the individuals also held a primary customer facing role.
  • Consideration of the impact of close staff relationships particularly at a senior level e.g. husband and wife.
  • Policies and procedures for declaring and monitoring were identified.

Compliance Function:

  • Inconsistent attendance at Board meetings by the Compliance Officer.
  • No separate reports in respect of Compliance and the anti-money laundering and combatting terrorist financing (“AML/CTF”) function.
  • Reports not containing the following;
    • Regulatory updates;
    • Progress of compliance monitoring;
    • Updated position on compliance registers, and;
    • Information on periodic reviews and accounting records.
  • In some cases there was a lack of documenting of matters brought to the attention of the Board.

Compliance Resourcing:

  • Back logs in periodic review cycle.
  • Delays in compliance monitoring
  • Not undertaking action in respect of regulatory updates.
  • Out of date policies and procedures
  • Ongoing projects and remedial work not completed.
  • Concerns in respect of the investigation and determination of SAR’s.
  • Meeting the day-to-day requirements of the compliance role, where the Compliance Officer or MLRO held other roles within the business.

Compliance Monitoring:

  • Compliance Monitoring Programme’s (“CMP’s”) task orientated rather than a schedule of testing of the operational procedures.
  • CMP’s not being seen or approved by the Board.
  • Ineffective reporting of the progress or completion of the CMP and of the remediation of compliance findings.
  • Compliance testing of the areas of the business lacking in detail.
  • Ineffective mapping of the business to the regulatory framework.

Business Acceptance Systems and Controls:

  • Procedures not being specific regarding the prescribed due diligence required for higher risk customers and business relationships.
  • Undertaking transactions prior to the acceptance of the customer by the Business.
  • The delay of obtaining verification documents and undertaking risk rating prior to the undertaking of customer transactions.

Customer Risk Management Systems and Controls:

  • Customer risk assessments not capturing fully the risks associated with customers or as detailed by the regulatory framework.
  • Customer risk assessment not capturing the risks identified by the business in the BRA.
  • Customer risk assessments not taking into account adverse information identified on the customer.
  • Weighting scores for risks not being appropriate to elevate overall the risk to high where required.
  • Lack of guidance to assist staff in the completion of the customer risk profile.

Customer Profile

  • Vague customer profiles not capturing the expected pattern and frequency of expected transactions.
  • Customer information held in various places rather than centrally.
  • Where the rationale for the business relationship was recorded as tax planning or mitigation, Licensee’s did not hold the relevant tax advice.

Politically Exposed Persons:

  • PEP’s being declassified contrary to the regulatory framework.
  • Immediate family members and close associates not being designated as PEP’s

In conclusion Licensees and the Boards must ensure that they have up to date compliance procedures, their functions are staffed and resourced appropriately and ensuring that they have suitable and sufficient management information for their compliance status being provided in a timely manner to them.  The role of the MLRO is coming more into focus with Regulators especially its assessment by the Board.  The MLRO function needs to be adequately resourced with a suitable and autonomous person, it is my opinion that this role will become more of a focus of regulatory visits and evidence of its review and suitability will required to be documented.  I would always advise that a separate compliance report and MLRO report is provided to the Board to ensure that matters are easily identifiable to the Board.  Conflicts of interest must be recorded and the risks assessed appropriately.   The BRA must take into account the risks that customers pose to the business and also the AML/CTF risks detailed by the regulatory framework and where they are not applicable they should be noted as such. What I believe is the most important finding to come out is, ensuring customer risk assessments and profiles are detailed and maintained ensuring that all risks are covered in the BRA.  I would advise that you assess your business to these findings and if any matters are found a remedial programme is put in place and signed off by the Board ensuring appropriate timescales and reporting is in place.

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Briefing Note: Jersey Financial Services Commission Onsite Examination Findings.

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?

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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.

Is Client Due Diligence there to stop Criminals and Criminality?

ImageOver the last few years of training people in the weird and wonderful world of AML/CTF I have noticed that people have become despondent with the subject.  I will be the first to admit that it can be a pretty dry subject if not put across well.  One of the areas of despondency that Licensees and their employees have with AML/CTF comes from the task of collecting Client Due Diligence (“CDD”).  Will the collation of CDD actually stop criminals utilising the Bailiwick?  Does this process have any effect on stopping criminality? With some Licensees believing that this burdensome exercise acts as a detriment to business, is this really the case or a misunderstanding?

Stopping criminality and criminals using the Bailiwick by obtaining a passport and utility bill is improbable. It is very unlikely that on production of these documents that they will inform you that they are a criminal and will be using your services and products for their criminality (I have only ever had one unsuccessful drug importer inform me what he was up to when stopped, but that’s another story). These documents are provided to criminals by Government agencies and Utility firms, legitimately, as it is the criminal’s human right after all to be able to live and travel and many do have legitimate incomes.  Criminals will sometimes use fraudulent documents which I’m afraid are prevalent in today’s society.  Fraudulent documents are cheap and easy to obtain and in today’s world of computer technology easy to produce to a very good standard, just look at the print quality of documents that you produce in your office on a day-to-day basis!  Criminals have access to the same if not better technology. Criminals in my experience are only different from ourselves through their moral and ethical values. Ethical and moral values change throughout a person’s life due to the situations they find themselves in and therefore a legitimate customer at a start of a business relationship may change in to a criminal. Unfortunately a passport or utility bill will not tell you if your customer will become a criminal at a later stage.

We are an International Finance Centre respected worldwide for our professionalism and the quality of our products and services and this will naturally be attractive to our customers and potential customers as well as criminals.  Our regulatory framework requires us to identify and verify our customers by obtaining CDD and in my opinion this is not only for us to know our clients and undertake checks to identify any adverse information on them but it also assists Regulators and Law Enforcement Agencies in preventing and detecting criminality and identifying the perpetrators.  By obtaining the required level of CDD when international requests for assistance in investigations are received by either our Regulator or Law Enforcement Agency, it will allow a licensee to react effectively and efficiently, searching their client database to establish if there is any connection or potential connection.

Our Law Enforcement Agency and the Regulator receive requests for assistance from overseas agencies and from my experience the requests are not always the most detailed or extensive and sometimes not totally accurate, this is not the fault of the overseas agency as they are only as good as the intelligence they receive from their sources.  From my time in the Financial Intelligence Service it has never ceased to amaze me that with a little information provided to our Licensees they are able to quickly identify if there is a connection or a potential connection to an enquiry, this is a credit to the professionalism of their employees and commitment in not allowing criminals to prosper.

In one case I dealt with the request for assistance was received from an overseas Law Enforcement Agency who could only provide the suspected person’s name which was very common and a potential address. Not expecting a lot I was surprised to get a phone call from a local financial institution that had a possible match on the suspected person. Relaying this information back to the overseas Law Enforcement Agency their amazement was evident. With a bit more investigative work and liaising between the parties involved it transpired that the local financial institution did have the person the overseas Law Enforcement Agency believed to be involved in criminality, an exercise made easier due to the financial institution having obtained the required CDD which also led to further details being discovered.

I have also been told on occasions by overseas agencies that they always like dealing with the Bailiwick as they are able to establish quickly if there is a connection to their suspect.   This greatly assists them in directing and managing their case and also any potential prosecution. Something positive for all stakeholders in our financial industry to take away with them!

We can safely say that the CDD documents we obtain will not stop criminals utilising the Bailiwick but as you can see they do act as a deterrent.  These documents won’t stop criminality but they will assist in the fight to detect and identify effectively and efficiently suspected criminals when we receive requests from our Law Enforcement Agency or Regulators. The assistance we give to the international community allows the Bailiwick to hold its head up high while discrediting the view held by some out there that we are a safe haven for criminals and their ill-gotten gains, and we do have our supporters out there.

Explaining my view on the necessity to collate these documents, Licensee’s and their employees are able understand the vital importance that they and these documents play in deterring criminals and assisting the international community in the prevention and detection of crime. I hope I have removed the perception that the CDD collation exercise is worthless and burdensome to a business, while demonstrating that it is a worthwhile and a necessary part of doing business in a moral and ethical way. It is interesting to note the recent developments in the on-shore world to pass regulations in respect of identifying ultimate beneficial owners, something we have had in or regulatory framework and have been undertaking for a very long time!

PEP Alert: France recommends eight for UN sanctions list

Financial Crime Asia

Not Asia focused for once, but in keeping with the law of identity (A is A) and more poetically by Gertrude Stein (A rose is a rose is a rose) a PEP is a PEP is a PEP, it is probably worth a glance at the eight Central African politically exposed persons (PEPs) that the  French government has recommended be the subject of UN sanctions.

CREDIT: REUTERS/LUC GNAGO CREDIT: REUTERS/LUC GNAGO

All eight PEPs are connected to the Central African Republic and the select group of individuals includes former President François Bozize, according to this report from Reuters in Paris.

Back in December, the UN backed an intervention to stem sectarian conflict in Central African Republic (CAR), which began when Muslim Seleka rebels seized power in the mostly Christian country. In January, the UN issued a shot across the boughs to the CAR when it mooted the possibility of travel bans and…

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Are we guilty of stopping investment in the developing world?

Compliance monkeyOne of the questions that I am asked when undertaking Anti-Money Laundering and Combating Terrorist Financing (“AML/CTF”) training is “should we just stop dealing with areas and customers that have a higher risk of money laundering and terrorist financing”? Why is it that people believe that Licensee’s and Guernsey must stop any business that may have a higher risk of money laundering terrorist financing? Has this led to a paranoia within our financial industry and could this be leading our industry to be potential uncompetitive and lacking the entrepreneurial spirit that directors, management and compliance officers should aspire to? Most importantly is our paranoia stopping us from providing investment into the developing world and allowing these people to remain in poverty?

The laws, regulations, codes, rules and guidance (“the Framework”) as published by the Guernsey Financial Services Commission (“Commission”) require that licensees have suitable and sufficient policies procedures and controls for the products and services provided to customers in order to protect the Licensee and the Bailiwick of Guernsey from being susceptible to money launderers and terrorist financiers. Licensee’s must not avoid their responsibilities or manipulate the framework, but ensure that at all times they conduct their business within the Framework. The Commission does not prohibit engagement with higher risk clients or Licensees and their customers being engaged in sensitive activities that are of a higher risk of money laundering or terrorist financing, only that licensees mitigate the risks suitably and demonstrably.

The policies, procedures and controls of a Licensee must meet the minimum requirements of the Framework, though there is nothing stopping a licensee from exceeding these requirements. The Framework is merely requiring Licensees and their employees to be able to identify and verify their customers, understand the reason and rationale of their customer in order that they can assess whether the use of the product or service is reasonable. The Framework also ensures that the minimum required information on a customer is obtained and can be provided by the licensee expediently to Regulators or Law Enforcement if required.

The Licensee must assess its customer’s not on prejudice or paranoia but on a risk based approach at the start and during the business relationship ensuring that they have sufficient knowledge and information on their client as required by their risk based approach and the Framework. Just because a customer is a higher risk of money laundering and terrorist financing does not necessarily mean that they are a criminal, just that the activities or the jurisdiction amongst other things may make the customer or their activities more susceptible to money laundering and terrorist financing and that more frequent monitoring is required to be undertaken.

 There are many opportunities in the developing world that will not only allow our customers to prosper but also the people of these jurisdictions to also prosper and be able to move themselves out of poverty.Telecommunications, mining, agriculture and cash machines are some of the business propositions that I have seen being presented to licensees by their customers only to be met by the paranoia that these may expose the licensee to money laundering or terrorist financing and must be avoided or declined.

Should the question that licensees ask when they take on customers or provided products or services to a client relate to the Licensee’s knowledge and experience of the customers activity, and if the policies, procedures and controls of the licensee are suitable and sufficient for this type of activity? If the answer is no can the Licensee enhance their knowledge or policies, procedures and controls or oversight of the customers activity to become comfortable in undertaking the engagement.

By acting in paranoia it is the Licensee and their employees not the Commission or the Framework that is letting customers down and the people of these developing countries. In some ways it could be argued that we are allowing money laundering and terrorist financing to prosper by not engaging with the development of legitimate business and opportunities in these developing countries.

We can never eradicate money laundering and terrorist financing, but by ensuring that a Licensee’s policies procedures and controls meet the requirements of the Framework I believe that they can engage with customers and activities that will provide a benefit to people in developing countries and enhance the living conditions and education for all. Would it not benefit these countries and people if by applying our high standards that money laundering and terrorist financing in all guises could be reduced?

Diversity in the Boardroom

Lloyds Banking Group have committed to diversifying its business dynamics by pledging to make 40% of its senior executives women by 2020.  This good news story has though, been followed up by the news the Women attendees at Davos have slightly decreased, in essence still showing that the female proportion of the world population remains largely undervalued, unrecognised and potentially discriminated against.  Why is it that this amazing untapped natural resource remains under used and underappreciated?

It is well-known that to have a successful business you need to have an entrepreneurial Board that considers the risks faced and applies their collective experience to the issues while individually challenging ideas and mitigating risk.  Diversity in the Boardroom allows a safeguard against reckless behaviour or the undertaking of risk for self-interest allowing entrepreneurial spirit to flourish.  Diversity brings different skills, knowledge and backgrounds allowing the Board to collectively become stronger allowing greater stewardship of a Business whilst decisions and business opportunities can be openly challenged and investigated. With this in mind why is it that there is still a gender gap? Why is the Boardroom still the domain of the male executives in general? Should we go further than gender itself in order to continue to ensure that our financial industry remains at the forefront of the international finance sector and global financial community?

I believe that the reason that the Boardroom remains a bastion of the Male senior executive is down to education, opportunity and succession planning. Without education or equal opportunities the calibre and number of candidates to undertake these roles is significantly reduced. Whilst without the long-term succession planning of a business, education and career advancement opportunities for employees cannot be identified or put in place, this worryingly may lead to potential candidates becoming disillusioned.

Throughout my various roles I have had the opportunity to work with people of all genders and I truly believe that this has allowed me to develop personally for the better and has advanced me in my role as a compliance specialist.  I have always fitted a person to role in respect of knowledge and experience they possess rather than preconceived ideas of gender. I now find myself in a position where some of these people have succeeded in obtaining their goals, some have even surpassed me and this gives me the hunger to continue to challenge myself and achieve. I can’t help but smile at their achievements.

I have been lucky enough to be invited into the Boardroom to deliver my reports and provide advice.  Where the Board has been diversified by gender, I found that they were more confident, open to challenge and discussion. These Boards reviewed in-depth my reports and advice and sought through their individual integrity to collectively come to a decision that benefited the company from a holistic approach of regulation, best practice and the business of the company.

It is unfortunate to say that I have also delivered my reports and advice to Boards that have been male orientated and at times had a stagnant corporate governance culture.  In some of these cases my reports and advice were treated more as hindrance to the business and not considered in-depth due to a lack of challenge by the other Board members.  This has led to regulatory consequences that could have been avoided with the regulator pointing to a failure in corporate governance.  I can’t help but feel sadden by the cost in remedial action and reputation and the personal cost this has caused, due to a lack of diversification.

Though I believe in diversification I am against positive discrimination, as this can unintentionally lead to the achievements of people being discounted and discredited, this serves no purpose but to demoralise the person or a workforce and at worst create distrust and aggression through bullying.  By businesses taking the Lloyds example, over a period of time they can establish suitable practices for education and opportunity for all persons and allowing for successful succession planning to be put in place.  Allowing for people of any gender to be enthused to obtain education and seek challenging opportunities, this can only lead to a better and stronger corporate governance culture.

While the negative connotations surrounding gender must be challenged and put to the annals of history, I believe that the attributes of a person must be considered above gender.  It is often too easy to follow a fashion and rather than enhancing the Board or the Company, you increase the likelihood of a weak or defunct corporate governance system with a greater potential for reduced productivity or business capability, reputational damage and regulatory sanction. It also does not assist in the challenging of gender inequality.

The Board need the best people for the job at hand regardless of gender and we are in times where decisions made by Boards are being challenged by various stakeholders.  There are high-profile cases where failure of a business was down to self-interest, and unacceptable risk taking due to a failed corporate governance framework that could have been avoided by diversification of the Board by suitable qualified and knowledgeable persons, allowing for the challenge of business practices and decisions.

The need for effective reporting at Board level

The current financial crisis has brought many failings to the forefront, none more so than the failings of the Corporate Governance framework in businesses. The Corporate Governance framework allows for both business objectives and ethical drivers to be incorporated into a business whilst seeking to protect both the Business, its stakeholders and investors or customers. Are failings in Corporate Governance solely as documented in the newspapers and media reports down to the Board’s greed and disregard for its stakeholders, or was the compliance framework in these businesses defunct by opaque reporting by key functions?

We have been lucky in Guernsey to have been insulated from the crisis at large, but I know from experience and we all know from the Commissions industry presentations that Corporate Governance is a key regulatory theme that will be assessed on their regulatory visits to licensees, to assess the risk and reward culture of a business and assist in mitigating these risks successfully. While it has been acknowledged by the Commission that they believe that this is a healthy area, could there be licensees that have put together a good document but the statements made by them do not resemble their Business or their Business’s current prudential business plan or their current regulatory compliance status?

What must be remembered is that any Corporate Governance assessment undertaken by the regulator on a licensee will look at a multitude of documents and reports that make up the core of any Board meeting, such as compliance reports, risk mitigation, internal audit as well as the business plan. These reports must be factual, clear and concise and encompass the whole status of the business in order that the directors can evidence their oversight and rationale for their understanding of the business. Theses documents and reports must all fall into the Corporate Governance assessment by the Board of the Business.

Has the Board questioned the effectiveness of its compliance framework, from the Compliance monitoring programme to the actual board reports it receives? Has the Board allowed the compliance function and other key functions to provide an independent review or are these key functions in fear of upsetting the Board and reporting only what they deem the Board should know or focus on? The importance of independent, full and factual reporting by these key functions is of the up most importance. It is vitally important that those of us who undertake these key roles provide effective reporting on all areas of the Business so that the Board can discharge their obligations successfully. We must not be in fear of providing reports that show areas that require action or gaps as by doing so we only assist the Board in becoming ineffective.

I have been privileged to have worked for and with Boards who have proactively sought to allow their key functions to independently report to them allowing the Board to successfully document and encompass their key functions in to their Corporate Governance framework. This has assisted the Business in the formulation of strategy, goals and effective work practices. For those licensees who I have assisted in remedial work in this area, though it has been hard to start off with the end result has been commented on by these Boards as being beneficial to their Business, optimising understanding and discussion on current and future business opportunities, obligations and assisting in evidencing of why certain opportunities were not followed up.

In my experience the failings in a Business’s Corporate Governance framework are down to opaque and ineffective reporting by the Business’s key functions leading to the blind following the blind. Where ineffective compliance reporting or monitoring has been identified during a regulatory visit the Board are often criticised and this is generally reported by the Commission as a failure in Corporate Governance. While the business of the Business is vital the understanding of the Board as to its current regulatory compliance is as important and cannot be underestimated. If the Board are aware of issues that require to be enhanced or remediated it can deal with them, most of the time hand in hand with fulfilling its business objectives, but to be effective the Board must have the oversight by effective reporting.

The culture of Corporate Governance must not be seen as a tick box exercise or as a regulatory obligation that serves no practical use to a business. I would advocate that a good culture need not be expensive in time or cost but rather a tool to optimise the Business for all stakeholders. As stakeholders move from being passive the need to document and show your culture of Corporate Governance becomes more of a focal point in the overall success of your Business and its cost effectiveness, and in the next few blogs I will go more in to detail on this. An effective Corporate Governance framework adds to safeguarding a business by requiring effective reporting from the key functions allowing for the dynamism and entrepreneurial spirit that has become part of our industry to be exercised by the Board in the continual development of its products and services.

Introducing the Intermediary

There are many tools in Guernsey’s Anti-Money Laundering and Combatting Terrorist Financing framework (“AML/CTF”) that can be used to allow customers to access the financial services and products as efficiently and effectively as possible. One of the most interesting and often wrongly utilised of these tools is the intermediary route and I would like to try to de-mystify this tool for you.

An Intermediary is a Financial Service Business (“FSB”) who enters in to a business relationship with you on behalf of its client or clients. The FSB must meet the provisions as stipulated in The Handbook for Financial Services Business on Countering Financial Crime and Terrorist Financing (“the Handbook”) at chapter 6. For example the FSB must be either an Appendix C business or a wholly owned subsidiary vehicle of an Appendix C Business, a wholly owned pension trustee subsidiary vehicle of an Appendix C Business and Lawyers or Estate Agents operating in Guernsey for the purposes of purchasing Guernsey real estate, though the funds must have been received by a bank operating in an Appendix C jurisdiction or Guernsey Bank.

Not all FSB’s who are Appendix C businesses can be an Intermediary and it relates to the products and services that are sought and the type of FSB who requires these products and services, these are listed in the Handbook and chapter 6. It must be stressed for Fiduciaries that they can only be Intermediaries if they are licensed under the Regulation of Fiduciaries, Administration Businesses and Company Directors, etc. (Bailiwick of Guernsey) Law 2000.

Where you have deemed that the FSB meets the requirements of the Handbook and is an Intermediary you can obtain reduced Customer Due Diligence. The Intermediary must confirm to you in writing that it has appropriate risk grading processes to differentiate between high and low risk clients, that it has effective policies and procedure to identify and verify Politically Exposed Person’s and obtain enhanced due diligence. The Intermediary must provide you with sufficient rationale in order that you can understand the purpose and the nature of the proposed business relationship and most importantly that Intermediary will only operate the account. You must assess that the Intermediary can undertake these obligations and requirements throughout the course of the business relationship.

When assessing an intermediary relationship I believe the key is who is authorised to provide you with instructions. If it is the underlying customer or customers who can provide you with instructions you have an introducer relationship and not an intermediary relationship. Where this is the case you must cease to treat the intermediary as such and obtain the required due diligence on the underlying customer or customers.

The current framework in Guernsey does not allow for Prescribed Businesses such as Guernsey Advocates to utilise the intermediary route, is this right? Advocates when conducting or preparing for transactions generally do so for other Appendix C Law firms, who must comply with international standards in AML/CTF. The Guernsey Advocates are generally acting on instructions from an Appendix C Law firm in preparing for transactions that are occurring outside Guernsey but involve Guernsey legal bodies, such as the issue of shares for a Guernsey entity listed on the AIM market or the purchase of a property held in a Guernsey legal body. The Appendix C law firm’s customer may not even be aware that a Guernsey Advocate firm is or has been engaged to assist or prepare for the transaction. I would contend that there is an argument that this route be opened up for Advocates to allow for the efficient and cost-effective provision of legal services to the international community and assist with promoting Guernsey as a destination for business and also for the use of Guernsey legal bodies.