Corporate Monitorships – measures in the fight against money laundering.

On 19 February this year, Transcendent Group did receive representatives from the largest banks in Europe and the Nordic region gathered for an exclusive "Round-table" discussion and exchange of experiences, thoughts and ideas with some of Transcendent Group's Financial Crime experts regarding the supervisory concept "Corporate monitor". Corporate Monitor is a legal coercive measure which, under certain conditions, can be used against both financial institutions and companies which have identified criminal offences or serious deficiencies in their activities complying with anti-money laundering rules.

Corporate Monitor (or its synonyms – skilled  persons, independent investigators,  compliance  accountants, etc.,) is not a new concept in the fight against money laundering (hereinafter abbreviated as AML). Law enforcement authorities in the U.S. and the United Kingdom have long effectively applied such means of supervision through the Deferred  Prosecution  Agreements (DPA). A design that can be simply described as an indictment agreement or settlement agreement between the law enforcement authority and the party (company) subject to investigation of money laundering or other sanction-related offences.

Over the years the financial institutions that have entered into DPA settlements with the US Department of Justice  (DOJ) or the Financial  Conduct  Authority  (FCA) (UK) for sanction-related offences such as money laundering, terrorist financing etc. have incurred an amount of billions in the form of administrative fines and costs of appointing an Corporate Monitor. A known example is HSBC Holdings Plc, which in 2012 entered into a settlement with US authorities to pay the equivalent of $1.25 billion in fines, as well as the addition and payment of a Corporate Monitor function for a period of up to 5 years[1].

Other European countries have also recently begun to become aware of the concept of a Corporate Monitor as an effective supervisory tool to curb sanction-related crimes in the financial sector. As recently as 2018, the German federal regulator BaFin appointed, in accordance with the provisions of the “Kreditwesengesetz” (German equivalent banking and financing movement Act), an independent ‘representative’ of Deutsche Bank AG in order to address ongoing problems with the Bank’s AML compliance[2]. Similarly, Credit Suisse AG (Switzerland) became the subject of similar measures in respect of their AML compliance in the same year[3]^.

Two question remains; can Nordic banks become subject to foreign law enforcement authorities and can the requirement to set up a Corporate Monitor can be exported?

The answer to this question obviously depends on the circumstances of each case. But without delving into the complex legal mechanics, this scenario is possible for Nordic banks and companies, especially with international ties.

As an example. In 2015, Deutsche Bank AG entered into a DPA agreement with the US DJO – after maladministration disclosed regarding currency and interest rate (“LIBOR”) manipulations at the bank’s UK branch operations[4]. It is therefore quite possible that Nordic financial institutions and companies may be forced to make similar arrangements for the appointment of a ‘Corporate Monitor’. This is particularly true when foreign interests and parties (customers, shareholders, trade in currency, etc.,) are concerned.

In Denmark the Political Agreement on the fight against Money Laundering, the Financial Supervisory Authority have been given the access to appoint an expert person who, based upon a mandate from the Danish FSA for a shorter period may follow the day-to-day operations of the institutes (including attend board meetings)[5].

At Transcendent Group’s Roundtable in February representatives and representatives of major Nordic banks were given the opportunity, together with specially invited guest speakers  Nana  Heidier, Roundtable   “Head  of  AML and  Sanctions Office at Deutsche Bank, Frankfurt” and Florian  Seiferlein,  member  of  BCG’s  Risk &  Regulatory  Compliance  Team for  Financial  Institutions, as well as Transcendent Group’s own experts and moderators  Holger  Pauco  Dirscherl  and Emanuel Gedeon to immerse themselves in the subject.

In addition to discussions about the Basel framework on the three lines of defence for ensuring effective internal governance and control, participants also received experience from Deutsche Bank on the challenges of a Corporate monitor, the requirements for administration and communication between companies and the external Corporate Monitor, etc. At the other end of the spectrum, Florian Seiferlein contributed experience in leading and managing complex “Corporate monitor” missions towards European and US financial institutions.

Corporate monitoring – Reflections  from  round-table  discussions:

• The ever-growing regulatory requirements, as well as increased regulatory pressure for countering, among other things, the need to ensure that the European union is fully regarded as a factor in the protection of human rights and the rule of law. AML has led financial institutions to develop increasingly sophisticated and robust internal frameworks for managing governance and compliance. This in itself is positive – but at the same time represents a major challenge in anchoring and ensuring internal governance throughout the chain, so that a culture of compliance and risk management is embedded throughout the organization, from front line to back
• As a financial institution, being subject to a “Corporate monitorships” is in addition to the obvious negative consequences this usually entails – associated with many major challenges.  However, it is important to bear in mind that a “Corporate Monitor” is not in itself a punitive construct, but meant to help financial institutions manage and improve their compliance programs. But herein lies also some of the challenges that can follow.
• A “Corporate Monitor” is usually given a fairly broad power to monitor corporate compliance efforts. When the framework and terms of the assignment have been set between the party and the supervisory authority, there is often little opportunity for companies to influence the outcome, in particular the costs of the assignment as such, but this also applies to the action requirements and costs thereof as a Corporate monitor can order,
• Companies under investigation by the supervisory authority where a “Corporate monitor” may arise should therefore act very proactively. This applies both in negotiations on the terms of the settlement between the supervisory authority and companies, but also already during the investigation phase of a possible supervisory matter.
• Strong action taken of its own personally may limit the scope of the mission and thus curb any runaway costs that a carte blanche “monitor” mission would most likely entail
• Integration, coordination and communication between stakeholders and the framework for this are extremely important in order to ensure the most effective monitoring programme possible.

Concluding reflections: The fact that Nordic financial institutions’ interest increases in knowing about and understand “Corporate Monitor” has its natural explanations. The financial sector and its services are a highly regulated market. Financial institutions must also take into account laws and rules that have extraterritorial effect. The financial sector today represents a closely intertwined international network of transactions, business and parties – this applies both to foreign and Nordic companies. As far as the AML problem of financial institutions, it is reluctant to be limited to the Nordics only. On the contrary, it is cross-border – which is why it is only a matter of time before Nordic operators may be embraced by the regulators and measures of other states – such as a “Corporate Monitor”.

Please reach out to us at Transcendent Group if you want to know more.

Sources

[1] DOJ Press Release No. 12-1478, ‘HSBC Holdings Plc. and HSBC Bank USA N.A. Admit to Anti-Money Laundering and Sanctions Violations, Forfeit $1.256 Billion in Deferred Prosecution Agreement’ (11 December 2012).

[2] BaFin Press Release: ‘Deutsche Bank AG: BaFin orders measures to prevent money laundering and terrorist financing’ (24 September 2018), https://www.bafin.de/SharedDocs/Veroeffentlichungen/EN/Massnahmen/60b_KWG/meldung_180924_60b_deutsche_bank_en.html; Olaf Storbeck, ‘Deutsche Bank ordered to tighten controls on money laundering’ Financial Times (24 September 2018), https://www.ft.com/content/42d8f1c4-bffc-11e8-8d55-54197280d3f7.

[3] FINMA finds deficiencies in anti-money laundering processes at Credit Suisse’, https://www.finma.ch/en/~/media/finma/dokumente/dokumentencenter/8news/ medienmitteilungen/20180917-mm-gwg-cs.pdf?la=en

[4] Deutsche Bank’s London Subsidiary Agrees to Plead Guilty in Connection with Long-Running Manipulation of LIBOR’ (23 April 2015), https://www.justice.gov/opa/pr/deutsche-banks-london-subsidiary-agrees-plead-guilty-connection-long-running-manipulation.

[5] Aftale mellem regeringen (Venstre, Liberal Alliance og Det Konservative Folkeparti) og Socialdemokratiet, Dansk Folkeparti, Radikale Venstre og Socialistisk Folkeparti om STYRKELSE AF INDSATSEN MOD FINANSIEL KRIMINALITET Af 27. marts 2019