Author Archives: Reid Wegley

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Silk Road, Bitcoin and the Secret Servicemen – Medium

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Two Secret Service agents, both of whom were members of the Baltimore Silk Road Task Force charged with breaking Silk Road’s ring of illegal online activity (primarily drug sales), have pled guilty to money laundering and other charges. Shaun Bridges was sentenced on December 7 to 71 months behind bars, and ordered to forfeit $651,000 of the $820,000 he reportedly stole and laundered. Bridges’ colleague, Carl Force, was convicted of a similar crime last October, sentenced to six and a half years in prison and ordered to pay $340,000 in compensation.

Two members of a task force ordered to bring down an online black market, become criminals themselves; how does this happen? To read the rest of this story, please click here.

Bank Fraud: More Common Than You Think – Medium

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When you think of financial fraud, you might envision money laundering activities conducted by members of organized crime syndicates. Or you might think of how a stolen identity helped thieves take your money or leverage your credit cards. In truth, the laws intended to help financial institutions thwart financial fraud are broad enough to cover these acts and much more involving everyday criminals — some who are not so smart, and some who are so sophisticated that it takes time to bring them down.

Last month, a used car dealer in Florida pled guilty to bank fraud for a check kiting scheme that defrauded an unnamed financial institution of over $1 million. The crime happened in 2011, and I’m willing to bet that the bank’s Know Your Customer (KYC) policies and its internal processes for approving check drafts against uncollected funds have since been tightened.

Also this past month, a woman who embezzled money in 2014 from her employer was convicted. . . to read the rest of the article, please click here.

From the Laundromat to Wall Street: a History of Money Laundering – Medium

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I talk a lot about money laundering, but exactly what is it and how did it become a popular topic of conversation?

According to the U.S. Treasury, money laundering is simply how someone or some organization makes illegally-gained proceeds, or dirty money, clean. Typically, it involves three steps — placement, layering and integration — so that illegitimate funds can become part of the legitimate financial system.

As an illegal activity, it’s been going on for several thousand years; for example, we know that Chinese merchants were hiding their wealth from rulers as early as 2,000 BC. They would either move it, invest it in remote provinces (or outside of China) or bury it.

Fast forward to today, and. . .to read the rest of this article, please click here.

Fourth Anti-Money Laundering Directive Underway in EU – Medium

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5 things you need to know about the fourth anti-money laundering directive underway in the European Union.

It isn’t always easy to get multiple stakeholders to agree to change. But after much discussion (and some bickering), the European Union finally passed the Fourth Anti-Money Laundering Directive earlier this year. Financial institutions operating in an EU member state have until 2017 to meet the new reporting and disclosure requirements aimed at disrupting terrorist financing, corruption and money laundering. And in just a few months, financial institutions need new account onboarding procedures put into place no later than January 1, 2016.

In a nutshell, here’s what you need to know:

  • The entire gambling spectrum is now subject to these regulations, not just casinos.
  • Enhanced customer due diligence is required.
  • The cash payment threshold was lowered to €7500.
  • Click here to read the rest of this post on Medium.com.

Financial Risk Management is a Global Issue – Medium

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The story unfolding in Poland, with politicians running electoral campaigns based on promises to curb bank profits, could have a profound effect on other countries, depending on the outcome.

We casually talk about the global economy, and how one venture outside of our borders can have a dramatic effect on our financial health. The story began during the financial crisis of 2008, when Polish banks were largely insulated from the global recession due to their strong fiscal management policies and the financial management tools offered to customers. At that time, many Poles took advantage of the Polish currency’s strength (zloty) against the Swiss franc and financed mortgages in the Swiss currency Today, that balance is reversed; the Swiss central bank abandoned caps on the franc’s value earlier this year. As a result, the franc became stronger, with the move affecting more than half a million Poles who now find themselves paying much more for their mortgages. To read the rest of this article on Medium.com, please click here.

Global warming heats up risk management

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When we think of risk management within a financial institution, we usually associate it with the operational risks related to fraud, money laundering, damage to reputation, etc. But an interesting article recently reminded me that risk presents itself in many forms…including ones that banks must have the foresight to control, such as mitigating the impact of global warming.

A recent report by Canada’s Shareholder Association for Research & Education (SHARE) suggests that banks need to establish a climate change strategy that allows for them to recalibrate risk management quickly as the earth’s surface temperature rises. Why is this important? Because banks are vulnerable to the economic, social and political impacts that are caused by global warming.

For example, financial institutions are usually heavily invested in energy sector, including fossil fuels. As global warming increases, fossil fuels become a less-viable energy resource – increasing the bank’s exposure to risk in carbon-related assets.

Climatic change can also affect a financial insitution’s real estate investments, sometimes in very surprising ways. Warmer temperatures lead to an increase in the number of damaging storms, and while today’s building codes require developments to use materials made to withstand wind, they are usually less resilient to flooding. As temperatures rise, banks need to take into account the changing value of assets located in exposed areas, particularly those along coastlines and other waterways. This may cause a financial institution to proactively alter the geographic location of its asset portfolio to mitigate risk.

According to the World Economic Forum, climate change is a major long-term threat to investment and economic security. In fact, industry observers note that if the world’s largest asset owners (including pension funds and insurance companies) don’t change their risk strategies to correct the imbalance between high and low carbon investments, it could precipate another global financial crisis similar to the one in 2008.

With so many potential risks, including those that come from unexpected natural causes such as global warming, banking institutions today are forced to rely even more heavily on technological advancements to help them navigate the financial waters. It’s a brave – and warmer – new world in the development of financial risk management strategies.

JPMorgan’s London Whale Problem

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As a banking behemoth, JPMorgan is frequently the target of lawsuits and allegations of suspicious activities.  None of them have proved as problematic as the London Whale scandal, which entered a new chapter this week.

Since the banking crisis in 2008, JPMorgan has encountered criticism for its poor risk management practices.  The biggest outcry began in 2012, as the flawed risk strategies deployed by trader Bruno Iksil and the bank’s London employees with derivatives trading caused the bank to lose $6.2 billion.  Dubbed the London Whale, this scandal showed that JPMorgan supported Iksil despite understanding the risks involved with his approach to derivative bets.  The bank went so far as to try to cover up the massive losses, initially only acknowledging a loss of $2 billion when restating its 2012 first quarter earnings.

JPMorgan eventually paid more than $1 billion in fines and admitted its mistakes to settle government investigations in the U.S. and U.K.  Former traders have been criminally charged in the U.S., with trials pending.

But it’s not over yet.  Resulting shareholder lawsuits have been dismissed over the years, but this week, the U.S. District Court in Manhatttan ruled that a class action suit could proceed.  Led by shareholders in pension funds in Arkansas, Ohio and Oregon, the suit contends that JPMorgan knowingly hid increased risks.

Just how big is this?  JPMorgan will be facing potentially hundreds of thousands of investors in this suit, some of whom bought shares after the bank’s partial disclosure of the loss.

The lesson to be learned from this story is one of oversight and compliance.  JPMorgan had been using the risk measurement tool known as Value at Risk, or VaR – something the bank itself had helped to develop and popularize.  But despite the fact that its VaR identified the London Whale trades as exceeding the bank’s risk indicators by more than 330 times, no actions were taken.

Risk and compliance guidelines are only as strong as those who implement them.  While it appears JPMorgan has since learned this, that knowledge is coming at what may eventually be an ever-increasing cost.

It’s not that easy to KYC

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It sounds pretty straightforward.  Banks should know who they are doing business with in order to halt illegal activities.  But Know Your Customer (KYC) programs as a risk management tool aren’t all that easy to implement.  Quite often, they are at the  polar opposite end of delivering superior customer service – a differentiator that all banks are trying to capitalize on in this competitive market.

Let’s assume you want to open a new account at a private bank.  Before the institution of the U.S. Patriot Act in 2001, you could probably have just walked in the front door, showed the teller or bank officer a passport, driver’s license or even a utility bill, and voila! Your new account is up and running.

It’s a much different picture today.  Anti-money laundering protocols now mean that the bank needs to know the origin of your money.  For example, how did you acquire your savings, and can you prove that it came from your hard work? Off the top of your head, could you list all of your assets and attach a dollar amount to them?  Remember that small parcel of land you inherited from Aunt Edith – exactly how much is it worth?

After this interrogation, which will include a discussion of your family and your politics, you MAY be approved for a bank account.  By this time, you are probably frustrated and out-of-sorts; after all, aren’t you supposed to be the client, and shouldn’t the bank be falling all over itself to get your business?

The key to adhering to KYC regulations and mitigating the impact on customer service is rapid customer onboarding.  This is an agile business practice that uses technology to eliminate manual compliance checks. By leveraging integrated data collection and search, banks can keep approval decisions on the fast track and ensure that the data is simultaneously submitted to its risk management and fraud detection programs.

As an example, here’s a story of how improved KYC processes helped one bank simultaneously save $1.4 million while increasing its focus on customer-facing activities.  Enhanced KYC policies do not necessarily have to mean more client aggravation.

Can the public’s paranoia curb corruption?

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by Richard Paxton

“I think our childish, simplistic view of corruption has become, like a youngster’s fascination with zombies, simply a manifestation of our fears. A scary word, yet an essentially vague abstraction. . .”

— Heather Marquette, Birmingham University

Corruption is a dirty word, especially at big banks and prestigious Wall Street investment firms. It’s difficult to prove, especially on Wall Street, because the criminals are very smart and use advanced methods and technology to cover their tracks. Of course, corruption is committed in secret where all the players are part of the crime.

In an article published by the Motley Fool and USA Today, columnist John Maxfield argues that Wall Street banks and bankers are corrupt by nature, but then also states in his conclusion that, “of course, it’s impossible to forensically prove that corruption is woven into the fabric of Wall Street banks.”

Maxfield falls into the classic mind-trap in regards to corruption – something is amiss and he knows his world has been impacted negatively, but he doesn’t have the hard evidence needed to truly label the duck a duck. His perception of wrongdoing is driving his opinions and in turn, fueling the content behind his writing. And Maxfield is not alone in relying on his perceptions as they relate to corruption. In fact, a recent data study shows public suspicion of corruption in the Americas and EU is much higher than the actual corruption taking place.
Alacer Group’s data science team crunched two separate pieces of data gathered by Transparency International and discovered that North Americans are the most paranoid citizens in the world in regards to corruption. They’re suspicious of bankers, the government and its representatives even though North America is one of the least corrupt regions of the world, second only to Western Europe in public facing transparency. And those Western Europeans are plenty suspicious, too. The hard data shows that, regionally, citizens in the the European Union and Western Europe gauge corruption to be as severe a problem as citizens in the Middle East and North Africa (3.92 and 3.96 respective averages based on Transparency International’s Global Transparency Barometer – GCB) despite the fact that corruption is a much more severe problem in the Middle East and North Africa (33.9 and 61.84 respective averages based on the Transparency International’s Corruption Percentage Index – CPI).

Citizen perceptions of corruption in the Americas are the highest of any region (4.34 average based on the GCB), even though in reality the Americas, on average, experiences the second lowest level of corruption (55.16 average based on CPI).

Perhaps citizens’ collective corruption paranoia actually helps curb corruption? Or is the data saying that our view of corruption is skewed, and therefore inaccurate? Maybe it is time to change the conversation around corruption.

One proponent of changing the conversation around corruption is Heather Marquette, the Director of research for the Developmental Leadership Programme at Birmingham University in the UK. She recently published an article in The Guardian titled, “Is fighting corruption like fighting zombies?” in which she explores the nature of the global conversation around corruption and compares it with trendy discussions surrounding a potential zombie apocalypse, using her son and his nuclear blaster as the protagonist.

Corruption comes in so many forms, according to Marquette, that it becomes difficult to decipher which corrupt acts to condemn, because in all cases there is collateral damage. She says that when “we understand that the police officers demanding payment to protect their fellow citizens haven’t been paid for six months, condemning corruption no longer looks so straightforward. They also have families to feed, and rent to pay.”

Therefore, do we let up on those banks and Wall Street firms when the evidence is shaky, or where the definition has injured those merely trying to survive a broken system, or do we continue forward with new regulations designed to curb corruption? Do we really take the effort to change the conversation around corruption? I’d say no to letting up and yes to working towards changing the conversation, but in the meantime keep hammering on those we suspect as corrupt and keep pushing a healthy paranoia agenda socially. To date, at least according to the data we’ve analyzed, this paranoia has prevented even further corruption.

 

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