How to Avoid Becoming a Money Launderer Like Ozark’s Marty Byrde

Vigilance and maintaining a slightly circumspect posture, especially when things seem off, are key to avoiding mistakes.

Wealth managers are terrific targets for money launderers. There are a number of reasons for this, the primary one being that although they are eager to bring in new clients, wealth managers tend to have smaller internal compliance teams and fewer resources at their disposal.

Larger banks would probably not even consider taking on a client from outside the 37 international jurisdictions that make up the Financial Action Task Force network, an intergovernmental organization founded in 1989 whose member countries comply with the stated goal of combatting money laundering and, more recently, terrorism financing activities.

However, smaller wealth managers who are competing for every asset may more carefully consider turning away such a client, given the financial consequences of rejecting the account.

For these smaller shops, an overseas account worth, say $5 million, may represent a terrific boost to the bottom line. Unlike their larger competitors, smaller organizations don’t have the ability to turn away clientele if they don’t meet the standards set by the multiple layers of compliance and risk professionals. This can pit the compliance team against the business development team, while the general counsel looks to be peacemaker and appeals to both sides.

By now it should be understood that potential money launderers love moving their funds to smaller wealth managers, and the more acquiescent the better. In addition to criminal and civil penalties, it should also be understood that fines for money laundering violations are stiff—up to $1 million per infraction—and noisy to the street. These can literally put a wealth manager out of business.

Business development people should avoid searching for and engaging with prospects in certain parts of the world and with questionable cash flows, and there should be a clear understanding that potential anti-money laundering fines don’t constitute just a “business risk,” nor should anti-money laundering decisions be made on the basis of the likelihood of detection. In the current administration, even with its emphasis on reduced regulation, AML violations are taken very seriously and are on the watchlist of a number of regulatory bodies, not just financial regulators like the SEC, OCC and FinCEN but also law enforcement agencies like the FBI, DEA and ATF. Both the business and those involved could face severe punishment.

Simple Guidelines

Most legal issues are far simpler by nature than they are often perceived to be; AML is one of them. Here are a few rules of the road that compliance officers at wealth management firms need to note:

People lie, especially criminals: It should be understood that dirty money is necessarily the fruit of some illicit activity, be it trafficking, terrorism, racketeering or other criminal endeavor. Hence the need to “launder,” or make the assets appear to be legitimate by concealing the true source. The person or group who engaged in drug trafficking or some other form of racketeering is not going to feel some special remorse related to concealing the true nature of the assets or identities in question. So, remain circumspect when it comes to source of wealth and all transactions, especially those of a suspicious nature.

Don’t be flattered: They may not be bringing assets to you because they are in love with your investment platform. There are many talented financial professionals who understand effective asset allocation and global markets. Ensure that what the prospect is telling you lines up with reality.

Scrutinize what they want to do with their money: Compliance officers are often frustrated by scenarios when prospects want to park large amounts of money in cash, or cash-like vehicles for extended periods. Firms need to pay attention to what is actually being done with the assets and whether or not the client has conformed to the same or similar strategy as other clients in the same type of circumstances. If the client is a “special type of circumstance” that seems at odds with sound investment strategy or one in which it appears that the money is just being “parked” for a period of time, that should tell you all you need to know.

Develop a true risk profile for the client: Every compliance officer understands that there are a number of accounts that are more worrisome than others. Make sure these are flagged for regular follow-up. In other words, listen to your own instincts. If you don’t like or trust the prospect, develop a risk profile and follow-up strategy that fits with the way you have sized the matter up.

Develop a testing program that fits the risk profile: Even if you’re currently satisfied that the source(s) of a client’s wealth are legitimate, there are certain transactions that could change your mind in a hurry. For example, an extremely urgent client request to execute a transaction immediately—without questions or context—could raise a red flag. A consistent preference to leave large sums of cash uninvested, inexplicably, for long periods of time could be another signal that something may be amiss. Ensure that you review the size and frequency of transactions on a regular basis and reserve the right to re-open the enquiry when facts dictate that you should.

Focus on complex structures: With the current regulatory emphasis on beneficial ownership, the distinction between the “true” owners of an asset (those receiving its benefits) versus its legal owners (the owners on paper such as an administrator, custodian or special purpose vehicle), authorities are wary of structures designed to mask the proper source of investments. For this reason, make sure that you understand that the structure has a business purpose and is not designed as a subterfuge to conceal the real ownership structure. Few questions are unreasonable in these circumstances, especially if the model is complex and international in scope. If there are changes to the ownership, that should trigger renewed scrutiny.

Do they need a small wealth manager? People tend to come to small wealth managers for the level of service and attention to detail they can provide. It’s a high touch business where clients expect their phone calls to be returned and can generally be demanding. However, if the client is missing in action, doesn’t return phone calls, or doesn’t seem to need the services of a small wealth manager, it’s worth a look as to why they chose your firm.

There is a real need for boutique wealth managers with a penchant for client service and follow-up. Because of their desire to provide excellent service, these types of managers can be targets for money launderers who in turn can use their charm, sophistication, and bankroll to flatter a firm into taking risks it wouldn’t otherwise have taken. The current pro-business regulatory climate has not diminished either the difficulty or the scrutiny of policing AML rules. This is especially the case for boutique wealth managers who have sophisticated clients with complex tax and estate structures. Maintaining a circumspect posture and keeping things simple and understandable is the key to avoiding mistakes in this area.

Don Andrews is Partner and Global Practice Leader of the Risk and Compliance Group at Reed Smith.

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