The International Consortium of Investigative Journalists report into the global banking’s sector use of Suspicious Activity Reports or SARs as flags of convenience for laundering dirty money has laid bare the full extent of global capital movements from illicit origins to respectable destinations. One institution alone, Deutsche Bank, filed SARs that according to the FT totalled $1.3tn of transactions, providing a sobering perspective of the size of the problem at hand. While pretty much every major banking institution has been named in the leak and will be reviewing the efficacy of their Due Diligence and KYC, it is apparent that the sector’s emphasis will now certainly shift to more conscientious use of active investigation of capital provenance and rely less on passive SARs. The question is, how will banks make a fist of this need to more actively investigate the provenance of capital moving through their businesses and how to they claw back money that lands outside the system?
Consistent with most conventional wisdom, the starting point is aiming to prevent dark money entering the system in the first place. What is less apparent is exactly how low the due diligence bar is as a protection against fraud. The SARs scandal has now laid this bare. Most responses in the financial sector commence after the DD stage when deals have collapsed or turned sour applying ‘after-the-fact’ analysis of probity and in almost every case, the primary actor should never have been entertained, as in a recent property investment fraud where the most cursory of checks would have uncovered public records of bad character, or in relation to Wildcard’s COO, Jan Marsalek, about whom red flags had been raised years before his hand in one of the more flagrant financial deceits became fully apparent in June last year.
While prevention is always better than cure, if things do go wrong, investigation conducted through traditional legal protocols such as bankruptcy proceedings or forensic accounting rarely succeed, because these are precisely the toolsets the fraudster aims to outwit from the get-go. In the case of the investment fraud above, a law firm with the full support of the courts, had made no headway on the perpetrator’s whereabouts, any known assets or sources of income after 8 months of enquiry.
In such circumstances, different and far more effective investigative protocols are required, informed by military know-how with law enforcement and cyber insight. In this particular case, within three weeks, an independent investigations firm had applied a targeted methodology and unique intelligence collection tools to develop a full profile of the fraudster, including multiple addresses, known associates and likely sources of income. Further investigation identified a network of cash-rental properties and other laundering enterprises that gave the courts the basis for issuing warrants and seizure of property, all at a cost of 1% of the funds recovered.
If principle one is to go beyond vanilla due diligence, then principle two is to deploy investigative protocols that the fraudster will not have prepared to obviate from the outset of their criminal adventure.
Principle three is to mesh these capabilities into an investigative capability that transcends national boundaries. As the SARs scandal emphasises, it is the very movement of capital across territorial borders that enables it to evade tracing and detection, especially in what might be termed hostile jurisdictions.
In a recent investigation for a European investment bank that had lost $800m in a fraud committed by a Russian oligarch, seven years of pursuit with a legal team with recourse to several European courts had failed to make inroads into recovering the misappropriated money. In short order measured in weeks, pan-national investigators were able to identify a network of people of interest to the courts who manifestly were living beyond their income, and identify a number of key actors who held governmental positions. This development not only gave the courts a foothold to bring individuals into the legal system for redress, but also to charge a state in being complicit in the fraud. This positive outcome has transformed seven years of frustration into legal options that allow damages to be awarded and investor’s money to be recovered.
Investigation of financial crime in the globalised economy therefore must scale across jurisdictions. Criminals understand the playbook of the authorities from the application of predictable, hidebound legal processes to the limitation for many forms of enquiry to simply stop at national boundaries. In short, the investigation capabilities need more firepower than the fraudsters.