Converging economic crime

At age 19 there was no doubt in my mind that I did not want a career in criminal law. I chose the much more objective (and enjoyable) commercial law. So much for that!  

12 years later fate would lead me into the work of anti-money laundering (AML) and anti-terrorist financing (ATF) compliance. For the two years that followed I tolerated this field, planning to exit at the first opportunity but a further 12 years on I am well and truly wrapped up in it….and more.  

Compliance professionals are now almost all caught up in not only AML and ATF but also complying with sanctions orders and stemming bribery and corruption.

Apart from the subjectivity of criminal law, I believe I was deterred because at such a tender age I did not want to be upset by the evil of the criminal world. Ironic it is, then that I am now playing an important part in halting the worst of that world: organized crime, dictators, terrorists, human traffickers, drug dealers and corrupt politicians. Touché!

Pity all those folk who did not even choose a career in law or compliance of any kind, now also caught up in the world of financial crime compliance! Well most people I have met or trained will agree that the hassle and burden of client due diligence and monitoring is worthwhile, if it is an effective way to curb and stop the abuses of the dark side. Resistance is seen when doubts creep in as to the effectiveness of the processes and whether competitors are doing the same, which is a fair point and reason we need regulation.

Of course most people grumble about increasing regulation and compliance requirements. As has been extolled before, it is not the amount of regulation but the proportionality and appropriateness that is important as it is a natural law; business will always seek new ventures and legitimate ways around rules. In a capitalist world, they may be obliged to their shareholders to do so. A dynamic industry is constantly changing, and the most successful beings in nature are those able to adapt. Not necessarily survival of the fittest but of the most adaptable. Thus new regulation is a way of life and business needs it to secure reputation, trust, confidence and certainty. 

AML, ATF, sanctions and anti-bribery and corruption have been increasingly mixed together over the last two years such that it feels like we are now in a whirlpool of all four, with developments and enforcement cases stirring the pool to greater speeds. The whirlpool is pulling in entities not previously subject to AML and ATF, for example general insurers and U.S. insurance brokers.

The threat of nationalism

Predicting the enforcement of these regimes by national bodies is tricky and often political. As with the Standard Chartered Bank case, relations between NY State Department and the U.K. Financial Services Authority were reportedly strained. Regulation has until recently, like taxation, been a somewhat national matter but as international standards increase and become connected with each other, thereby stronger and more prolific, one would expect to see more enforcement at an international level. At this time, however, international standards are far more principle based and feel less like intervention.

This is largely because bigger markets are more complex and there is less likelihood of agreement among those charged with setting the standards. Whilst at the international level most sovereign bodies are agreed on the need to stop the abuses of power and fight crime, there are some dissenters. 

For example, governments that support terrorist groups either because of intimidation or to serve their own (short-term) needs (Iran, Syria), those that are divided politically with an oppressive regime (Egypt, Libya) or countries that are non-democratic (North Korea) or have little or no control of and are unable to speak for its people (Afghanistan). It is difficult for these countries to come to the international table and commit to objectives to secure world peace, fight crime and end suffering. 

Political scientist I am not, as the crude analysis above will display. But as a compliance professional I am constantly and necessarily pulled into this and similar discussions.

Let’s consider ATF in the U.K. The U.K.’s Terrorism Act and temporary predecessors were originally aimed at Irish Republican terrorism following 30 years of terrorist attacks. It was before the 9/11 attack and the FATF’s nine special recommendations on terrorist financing. The tide had turned when the IRA committed and threatened terrorist attacks on the City of London….as the threats became economic rather than political. 

The IRA bombs at the Baltic Exchange and St Mary Axe1 resulted in devastating losses for the City. There was an immediate lack of capacity for terrorist risks and whilst it was not common for capacity to recede on the occurrence of one event, a closer look at other events of the period provides an explanation, notably Hurricane Hugo in the U.S. in 1989, European windstorms in 1990 and Hurricane Andrew in 1992.

More importantly the IRA made clear that it was launching a campaign of targeting the City and more terrorist activity would follow. It actually wrote to the major banks informing them of such. It was not surprising that there was a withdrawal from the market leaving it without capacity overnight.

The destruction of commercial enterprises, particularly ones of national importance due to a single act of terrorism or any other risk not insurable could have had dire consequences for the U.K. Enterprises of commercial importance and in the public eye became more susceptible to terrorist attacks, with the start of a campaign specifically aimed at the City of London. 

Enter the Reinsurance (Acts of Terrorism) Act 1993 which provided for a scheme whereby a mutual insurer named Pool Re was established by a group of insurers. Members were able to join the mutual if they require reinsurance cover from this source. Premiums were ceded to the mutual in respect of terrorism risks and the mutual provided reinsurance.

These premiums were invested in the usual way and the funds used to pay claims as they arose.2 In the event that Pool Re was unable to satisfy claims then members were required to make further contributions up to 10 percent of premiums paid so far. If claims were still not covered then the investments of Pool Re were realized to pay them and failing that the government acted as reinsurer in the last resort.3.

Whilst providing the necessary cover and stability in the market, Pool Re was also a sound political move. The political dilemma was that if the U.K. implemented measures similar to those used in Northern Ireland the IRA would interpret that as a victory for them by forcing the government to intervene directly. The message was firmly stated: “…ultimately, we hope that all terrorist groups will draw a conclusion from a quarter of century of failure, in the case of the IRA, to move the British government an inch towards the realization of their objectives.”4

Policy exclusions

Geo-politics has been invading and sometimes upsetting commercial decisions in financial services for a long time. For example, there are the difficulties involved in identifying terrorist activity with respect to insurance policy exclusions and endorsements. Long before the application of economic sanctions to financial services including insurance in Spinney v Royal Insurance Co Ltd. 1980, the judge gave an extensive account of the history surrounding the troubles in Lebanon in order to decide whether at the time of loss to the plaintiff’s insured property, certain terms applied, requiring an interpretation of ‘civil war’, ‘usurped power’ and ‘terrorism’.

A striking feature of the Spinney case was the extensive reference to the political and religious history in the country. The judge was endeavoring to assess these events to determine the operation of the policy. He showed great sensitivity to the turmoil in the country and fourteen pages in the Law Report established the extent to which it affected the decision.5 This close connection between the interpretation of terms and financial crime compliance can be an advantage to insurers and it gives commercial justification for ensuring compliance with sanctions and ATF requirements.

Never ending battle

It is positive that the various areas of financial crime are converging and practically there are benefits, e.g. sanctions and blacklists of terrorists make them easier to spot than a transaction that finances terrorism. Increased enforcement and this more holistic approach will lighten the burden for compliance officers but new challenges are waiting in the wings. A primary concern is to address cyber-security threats and next generation ID and secure documents.

Politics, power and crimes of passion6 are the problem but finance can be the key or the lock. As we saw, when the UK was in a political stalemate regarding Northern Ireland, once attacks became financial, action was taken primarily by the market. Governments need business to act.

 

Endnotes

 

  1. 1 It was the largest bomb on mainland Britain since the second world war, killing three people and injuring 91. M McGuiness “The Origins and Objectives of the Reinsurance Act 1993” presented at ‘Policing the Peace’ Conference at University College, Galway August 23-25 1995
  2. The reinsurance is non-proportional in that it only covers losses in excess of £100,000. This reflects the fact that the lack of capacity in the market was only in relation to claims over this amount.
  3. The arrangements for the Government’s involvement were set out in an explanatory note prepared by the Department of Trade and Industry: DTI Explanatory summary “Insurance Cover for Terrorist Risks” 12.8.93, reprinted 13.2.96. Reproduced in part from DTI press notice P/93/254 11.5.93 at (1993) Bus LR 186. For a concise and descriptive version see (1993) 5 Ins LM 7.
  4. N Hamilton MP HC vol 224 col 972 (13.5.93)
  5. In Pan American World Airways inc v The Aetna Casualty and Surety Co 1974 involving an insurance claim for the plane destroyed by Lebanese terrorists, the judge commented; “We have been led by the nature of the insurance questions to touch in the trial upon large topics of history, politics and human sorrow in the Middle East.”
  6. See Monica Bond’s article in this issue.

 

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Lisa M. Bowyer

Lisa Bowyer is a successful project manager and intelligence expert with a high level of understanding of the purpose and risks of regulation, international legal and regulatory requirements and the drivers and strategies of financial markets and products. Highly skilled in drafting of inter alia, legislation, other mandatory provisions, guidance, and policies and procedures, she has an excellent appreciation of policy determining law and regulation.  Prior to joining Liberty, Lisa was a member of the management of the Cayman Islands Monetary Authority, and had been a consultant in the Insurance Firms Division of the FSA (UK) and manager in the Financial Advisory Services Division of KPMG in the UK.

Prior to her career as a regulatory professional she was an academic for 9 years with distinguished publications in the field of insurance and regulation.  She received her first law degree in 1991, her Masters degree in 1994, and her doctorate in 1999.

 

T. +1 (345) 525 5010
E. lisa@liberty.ky 
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Liberty Consulting

Prior to joining Liberty, Principal Consultant Lisa Martine Bowyer was a member of the management of the Cayman Islands Monetary Authority, and had been a Consultant in the Insurance Firms Division of the FSA (UK) and Manager in the Financial Advisory Services Division of KPMG in the UK.

She is a successful project manager and intelligence expert with a high level of understanding of the purpose and risks of regulation, international legal and regulatory requirements and the drivers and strategies of financial markets and products.


Highly skilled in drafting of inter alia, legislation, other mandatory provisions, guidance, and policies and procedures, she has an excellent appreciation of policy determining law and regulation.

Prior to her career as a regulatory professional she was a academic for 9 years with distinguished publications in the field of insurance and regulation. She received her first law degree in 1991, her Masters degree in 1994, and her doctorate in 1999.

 

 

Liberty Consulting Ltd
PO Box 10489
Grand Cayman KY1-1005
Cayman Islands

T. +1 (345) 525 5010
E. lisa@liberty.ky