Episode 06: Jack Blum
AML Talk Show Hosted by Stephen Platt
We need to be alive to the way that AML risk is evolving rapidly during the pandemic and consider whether our business risk assessments are up to date and fit for purpose during the lockdown because, believe me, many of them won't be, particularly those organisations that are utilizing legacy AML control systems. Now is a time for us to stay alert, keep awareness levels high, which is why I think these podcasts play such an important part. They're not just meant for AML professionals, but they should be of interested and should be utilised for all staff in equipping the first and second lines of defense in order to maintain high levels of AML awareness.And on that note, I'm absolutely thrilled to be joined by a man who has spent a lifetime maintaining the highest level of expertise as a lawyer devoted to fighting financial crime in all of its various forms. Jack Blum is a legend in AML circles as a former senior staffer on the senate permanent subcommittee on investigations. He was Senator John Kerry's right hand man investigating BCCI and Noriega back in the late 80s, early 90s. And since then he has advised companies at multinationals, banks, and indeed whistleblowers around the world. All the time maintaining the highest degree of integrity and subject matter expertise...
Good afternoon, folks, and welcome to this KYC360 AML talk show with me, Stephen Platt. The weeks roll on. I hope that you are all staying safe and well. My thoughts go out to everybody who’s struggling in isolation. It isn’t easy, but if we keep the faith we will beat this. As I said last week, the wheels of commerce continue to turn. Crimes continue to be committed and dirty money gets laundered. In fact, the pandemic poses some terrific opportunities for criminals to take advantage at a time when a lot of organisations’ AML systems are being tested and stretched because of the challenge of home working.
We need to be alive to the way that AML risk is evolving rapidly during the pandemic and consider whether our business risk assessments are up to date and fit for purpose during the lockdown because, believe me, many of them won’t be, particularly those organisations that are utilizing legacy AML control systems. Now is a time for us to stay alert, keep awareness levels high, which is why I think these podcasts play such an important part. They’re not just meant for AML professionals, but they should be of interested and should be utilised for all staff in equipping the first and second lines of defense in order to maintain high levels of AML awareness.
And on that note, I’m absolutely thrilled to be joined by a man who has spent a lifetime maintaining the highest level of expertise as a lawyer devoted to fighting financial crime in all of its various forms. Jack Blum is a legend in AML circles as a former senior staffer on the senate permanent subcommittee on investigations. He was Senator John Kerry’s right hand man investigating BCCI and Noriega back in the late 80s, early 90s. And since then he has advised companies at multinationals, banks, and indeed whistleblowers around the world. All the time maintaining the highest degree of integrity and subject matter expertise.
And I say that having had first hand experience myself. I first met Jack about 15 years ago when I was working on the offshore end of the Abacha recovery and then we subsequently coordinated on a number of other asset recovery jobs, including if my memory serves me correctly, the Maluf recovery, the former mayor of Sao Paulo. His council was always exceptionally wise and as a younger lawyer I always felt very privileged to have Jack’s guidance.
Jack is now almost 80 years old, but still very active in the provision of advice and also expert witness testimony. So Jack, welcome. Thank you for taking the time to talk to us today. How are you bearing up over there in DC?
Isolation, which is what you were talking about before. This is beginning to be quite old. Many people are pretty eager to get out and see each other on something other than a small screen.
Yes. Yes, absolutely right. It is proving to be a bit of a struggle, which is one of the reasons I look so much forward to these podcasts. Jack, I wanted to start off … because I know we’ve got a lot of people listening and there’ll be many, many more people that will listen to this podcast after this live recording, I want to go back to the beginning. How did you get into financial crime as an area of legal practice? Because back when you started out in your career, I don’t believe that money laundering was in fact an offense in the United States. In fact, I don’t think that US banks needed to be at all concerned about what their clients did when you started in practice.
So how was an area of law did you first become involved?
To go back maybe, at this point, 60-70 years even the law in banking – and I’m not talking about the laws that developed in the American courts and through legislation – was the bankers were a public utility and they simply did not need to be concerned with what their customers did. The notion was that, like all other public utilities, the telephone company, the water supply, you don’t care what the customer is up to, you’re simply providing a service that moves commerce along.
And that didn’t really begin to change until the 1970s, late, and the early 1980s. The triggering events, the really seriously triggering events were the explosion of drug trafficking in the United States. There was a period in the late 1970s and early ’80s when it was the Wild West in parts of America, particularly Florida, South Florida. Drug planes landing on super highways, gangsters running war wagons through major shopping centers… It’s hard to re-live that period or, for people who don’t know about it, to even figure it out that something like that could possibly happen.
But as that proceeded to get worse, people began to look around and say, “What’s this all about?” And when I began to really work on the issue of financial crime, was first over an issue of, believe it or not, excise tax. In the United States there’s a very substantial excise tax on gasoline and there were a group of Russians who had figured out a way to evade the tax by having it – the gasoline – pass through multiple layers of corporations. And by the time it went through the system, it would come out tax paid, whereas when it entered the system it was tax free.
The clue that something was wrong was when these Russians who were doing it were selling gasoline at below wholesale prices. And at the time I represented some gasoline marketers who said, “This isn’t possible. You can’t have a situation where people are selling below wholesale and making money.” And that led to the discovery of all the evasion and the layering, and all of the things that went on with that problem.
Later I went to work for the Senate Foreign Relations Committee to look into the issues of drug trafficking and immediately came upon people who were really major money launderers. And the issue at that time was cash, currency. We had a couple of people who we came upon who were really perplexed by how to launder large amounts of currency.
There was one witness, who I’ll never forget, a man named Leigh Rich, who described currency as being dirty, and heavy, and dangerous, and very difficult to handle. He was caught bringing about 300 tons of marijuana into the coast of the Untied States on an ocean going barge. He was caught because all of these 18-wheelers were lined up to take the 300 odd tons of marijuana away from the town where the barge landed. But he described what would happen when he brought a barge in, he was always paid in cash and he would have these large mailbags filled with currency, and he’d then have to figure out what to do with them. And as he described it, you could have that currency but you couldn’t exactly hire locals to guard it because as he said they’d shoot me and take the money.
Very difficult to complain to the police about it. Very difficult to get anybody to protect it. So he stored these things in picnic coolers in a house he had rented until he could get an airplane to show up at a nearby local airport and fly the currency back, at that time, to the Cayman Islands. The Cayman Islands were perfectly happy to receive all that currency and the bankers would wait for the plane to come in, meet the plane and take the cash and deposit it.
Well, that went on successfully for a while, but it didn’t go on too long because the Caymans began to return all of this currency to the US Federal Reserve and the eyes began to pop at the Fed because here were a billion dollars in currency coming from an island with 30,000 people, and it was pretty clear it wasn’t coming from the sale of T-shirts to people off cruise ships. So the Fed said, “Wait a minute. You guys better stop this stuff. There’s something really wrong going on here.”
That led in turn to the people who were handling this currency to figure out, “We’ve got to figure out another place to send it. And that led them to Panama. Well, Panama was a very interesting place to deal with because they had a currency, which nominally which called the Balboa, but was curiously like the US dollar. In fact, all of the Balboas in Panama had pictures of Lincoln and Jefferson, and all of the people on our currency. So it was pretty easy to bring US money to Panama and make it into local money to be deposited in banks there.
The man who was the go-to man at the time was General Noriega. So if you were a trafficker and you were piling up lots of cash and you needed to put it in a bank somewhere, you had to make an accommodation with General Noriega. A lot of people made that accommodation and General Noriega had a bank that he very much favored for the handling of the money, and the bank was the Bank of Credit and Commerce International.
Now, it’s a long time since that notorious bank was on the radar of very many people, but it was a criminal enterprise and at the time I think about the 20th largest privately owned bank in the world. It was perfectly willing to receive all of this drug money in Panama and then move it through its system so it was available in the form of bank entries that were pretty easy to use, and these bank entries were in London, in Switzerland, wherever they wanted the money. The drug traffickers could instruct BCCI and the money would be there.
Yeah. Jack, I’m not sure if you’re aware, our last AML podcast was with Bob Mazur, who as you know infiltrated BCCI on behalf of the DEA and laundered about $100 million through BCCI. You know Bob, I’m sure?
Yes. Indeed. And he was pretty heroic in being undercover as long as he was. He was somebody who could’ve any minute been murdered.
And just to give you a kind of flavor of how completely nutty this situation was, at one point I had a walk-in witness who said, “I know all about BCCI.” Okay, tell me what you know. He said, “Well, I was a driver for BCCI and I had a car and my job was to drive around and pick up cash and bring it to the bank so it could be deposited.” Well, why are you here? What happened? “Well,” he said, “I was doing this and they were paying me about $12,000 a year and I thought they were paying me very badly for the risk I was taking, because if anybody figured out what was in the trunk of the car, they’d shoot me and take the money. And I wasn’t going to do that for $12,000 a year.”
“Well, how did the bank cover this money?” He said, “Well, it was pretty simple. They would say that the money came from a nonexistent branch in the Bahamas. Truly. They didn’t have a branch there, but they would report it as having come from a branch in the Bahamas and they would actually file customs declarations, and they had somebody in the Bahamas who shipped cut up paper in mailbags to Miami to make it look like there was currency in it and it was coming in for deposit in the US banking system, which would’ve been perfectly legitimate and raise no questions. Except the mailbags were filled with wastepaper and the real currency were coming from traffickers in Miami.”
It was really quite remarkable.
Absolutely. That walk-in came in during your time advising the Foreign Relations Committee?
Yes. Yes. While we were doing this investigation. But it gives you something of the flavor of how completely crazy the situation was. And it was exacerbated by something that we all came to understand as this went on, which was that there were a number of banking institutions that could operate as offshore banks in the United States. These were called Edge Act banks and as long as they didn’t do business with American customers they were essentially unregulated financial institutions.
So using that loophole, these banking institutions were able to do pretty much what they wanted to do. And in the case of BCCI, it was all criminal.
But they clearly had to have a licence from somewhere? I mean, the BCCI, I think, had a licence from Luxembourg and a Caribbean jurisdiction. But there was no effective oversight?
Yes. That was Cayman and the proposition was the reason they would let these Edge Act banks do what they wanted, the theory was that the home country would do the regulation. And in the case of BCCI, the home country was Cayman and Luxembourg. They had two different corporate headquarters. And the problem was that neither country had any capacity to go around the world looking at the branches.
I think they also had two different audit firms, didn’t they, Jack?
Yes, they did. They had Ernst & Young in one and then PriceWaterhouse in another. And in later litigation it led some wags who were talking about, say, PriceWaterhouse and the job it did, considering what was later discovered at the bank, they said, “The way you identify the PriceWaterhouse account, notice he’s the man with the dark glasses and the white cane.”
That’s hilarious. Oh, dear. But you would say that BCCI and Noriega were a really critical part of the historical context in the development of AML legislation in the United States, and then subsequently around the rest of the world?
Yes. Absolutely, it began to focus people on what was going on. And Kerry came up with legislation that said if a bank was caught laundering money it could lose its licence and that created an enormous storm from the bankers who were incredibly unhappy, but eventually that legislation passed. But surprisingly, we went through a 10 year period of literally struggling with the issues of money laundering because you would’ve thought that that would’ve been quick reform and quick change, but there wasn’t. It was a very slow process all the way through the 1980s, and it was step by step. It involved the Internal Revenue Service beginning to realise that there was an enormous amount of lost revenue and tax cheating that was going on through offshore jurisdictions.
There were a number of very large tax evasion cases that came up, including one that involved the Bahamas, and after the IRS collected, I think it was about $60 million in one case alone, they started to say, “We’d better look into this and we better know a lot more about how it works.”
And that was a pretty pivotal moment for IRS, which then put together a taskforce and started to look at what was going on around the world. And what they found was pretty astonishing for them.
Yeah. Jack, can I just … before we come on to that and delve into it a little bit further, you referred to Senator John Kerry’s legislation, which he proposed and which was eventually passed, and I know that you had a big role to play in the formulation of that legislation and advising in relation to it. How much resistance did it meet from the banking lobby?
It met a fair amount of resistance, but it was the kind of thing that was very hard for the banking lobby to resist because the evidence of this problem was a big one, was overwhelming, and the people who were using the system to launder money were pretty despicable. So in a situation like that it’s pretty hard to lobby and say, “Oh, there shouldn’t be legislation.”
And I guess at the time, Jack, the legislation that was proposed was in relation to, as it were, the narrow but critical issue of drug money laundering.
And the bankers at that time did not foresee a situation in which the legislation would be extended to cover a wide range of predicate crimes.
That’s correct. At that time it was pretty limited and people were pretty well focused on the issue of the drug crimes and related kinds of crimes. There were some other kinds of crimes that were pretty notorious, but let’s say it was focused on drug crime and violent crime in general. It was only later, especially after the tax issues began to come up, that people started to say, “Wait a minute, we’d better look into this a little more,” and began to develop a theory of what this is all about.
Well, the next really pivotal moment in this whole evolution of money laundering legislation came in the 1990s. Remember, BCCI was 1989, the bank was taken down in 1991. Toward the end of the 90s the UN Office of Crime in Vienna began to work on the issue of money laundering and commissioned a study of offshore centres. Well, I was one of the co-authors of this UN study, which became a formal UN document and was circulated in all of the UN languages around the world, which went into, pretty deeply, how the money laundering system worked and what its implications were in broad areas of financial crime.
There was then a general assembly meeting and a large global discussion of the issue of money laundering, and that was followed in turn by a group gathering in the Cayman Islands that included only offshore centers at which people really discussed: how do you bring this under control and what do you do, and what should governments be doing? And of course the UN had no capacity to legislate, but the involvement of the UN brought this to the table for lots of governments around the world and certainly focused the attention of the offshore centers on the problem. And it did get their attention. They began to start saying, “Well, we’d better do some things to clean up our act.”
But this, again, was a very slow process. It wasn’t something that happened overnight.
Yeah. And then as you say following the UN initiative in relation to the offshore centers, what came rapidly on the heels of that was 9/11, which was again another hugely influential event in the development of financial crime legislation in the US.
Yeah. The interesting thing about the 9/11 event was this: for the 10 year period leading up to 2000 from, let’s say 1990-91 to 2000, there had been a lot of discussion about the money laundering issue. In congress, discussing it in the context of taxation, beginning to discuss it in the context of financial crime. But when anybody tried to push legislation, based on that discussion, it didn’t go very far.
Why was that, Jack?
Well, there was pushback. There was serious pushback from the banking industry and the people on the banking committees would listen to testimony, but they didn’t get terribly excited and there wasn’t the kind of public push that would mean, you know, you better do something.
So the members of our congress anyway weren’t eager to move forward. There were some members of course who took it on as an issue, but a lot of them really didn’t pay attention to it.
Well, when 9/11 occurred everybody paid attention to it. And one of the issues there was terrorist financing and where was this money coming from, how did it go to the terrorists, so forth and so on. And it was really, really quite amazing because there came this omnibus legislation, the Patriot Act, which I’m sure most people have heard of, and there was a chapter in the Patriot Act that covered all of the things that different people in Congress had been talking about for the previous 10 years, and in the space of about four weeks it all became law. It was folded into the Patriot Act and, bang, there it was.
Yeah. It was a huge piece of legislation, which contained a lot of provisions that had been on the wishlists of a lot of hawks for a long time.
Yeah. Now, Jack, it’s fascinating to talk about the historical development of this as an area of law and practice. Have we come a long way, do you think, as a finance industry? We know that banks are spending huge sums of money on AML compliance, but I question whether or not they’re getting a great return on that investment when I continue to see so many AML scandals resulting from AML compliance failure. What are your thoughts on that?
Well, there’s quite a bit to be said about that. For one, in the history of the world there’s been no successful attempt to eliminate all criminal activity. It just doesn’t happen. There’s always a certain group of people who are going to violate the law no matter what you do, no matter how you do it. What law enforcement tries to do is create an environment of deterrence where people begin to understand that there’s a risk associated with doing what you’re going to do, and if you are behaving in a criminal fashion there’s a chance you could go to jail.
Well, that deterrent effect is really what you’re looking for. It’s not that you can stop everybody from doing the bad stuff, it’s that you can get them to be thoughtful enough to worry that they might lose their position, they might actually spend time in prison, and in the case of money laundering for drug traffickers, you might actually get murdered.
Yeah. But Jack-
And you want that understanding.
Jack, can I come back on that one? I mean, your point about creating an environment of deterrence is obviously a point very well made, but have we really achieved that? Some of the cases that we see when you examine the anatomy of failure in some of these cases, you get the impression that bankers, at least in certain parts of the world, continue to act with impunity and I wonder whether or not that is a consequence of the too big to fail, too big to jail, moral hazard, … What are your observations on that?
Well, it’s a little bit of all of the above. The regulators are always afraid to go too far in punishing a financial institution. They’ve been very reluctant to deprive the institutions of their licences. They’ve in effect handled many of these cases in what I would call a piecemeal effect, where one agency comes in and says, “Well, you violated this portion of the regulatory scheme,” and another one comes in and says, “Well, you’ve violated another portion of the scheme,” and they punish them for each of the separate violations not putting together that there’s a systemic problem at the bank.
But I’d like to turn it around a little bit and talk about a different problem, which is in these financial institutions, if you’re working in a financial institution at a reasonably high level, the pressure on you to produce profit for the institution is very big. The people who are the executives who are doing the sales and the promotion for the institution have a great stake personally because of the bonus system, and for a variety of other reasons, in producing the most revenue for the bank they can.
It turns out the most revenue comes from the worst customers. So if you’re a drug trafficker, you really don’t care what the bank fees are. If you’re Bernie Madoff, you will pay whatever is necessary to get access to banks, whatever other financial institutions you need to carry on the fraud. And against that, you have compliance departments, and the poor compliance departments are viewed as the anti-business department at the institution.
So the compliance guys can very well say, as for example, JP Morgan’s compliance department said in the Madoff case, “Yeah, maybe you shouldn’t be dealing with that guy. He looks a little suspicious to us.” And their response is, “Are you kidding? This is our bread and butter. This is the meat and potatoes.” And the battle rages on.
What the compliance people need to make the system work is a little bit more spine from the regulatory agency, so a little more support so that when they come and they say, “God, we’ve seen this terrible stuff going on,” the people who are doing the sales are really forced to back off. Of which I say the pressure for that profitability is huge.
Yes. And I think it’s interesting, isn’t it, because post COVID-19 with the biggest economic downturn since the late 1920s, that pressure is not going to abate, it’s only going to grow. So that’s something I think for everybody to keep in mind.
Jack, we talked earlier about offshore and I want to come back to talk about offshore, and I use that term in a loose sense. You were for some time, if I recall, US Chair of the Tax Justice Network.
An organisation which, as everybody knows, has been hugely influential in shining a light into the darker corners of the offshore world and revealing some of the worst examples of the facilitation of tax evasion. Offshore has been under phenomenal levels of scrutiny in the past decade, with a whole range of different initiatives by the OECD and World Bank and EU, and so on and so forth.
But it seems to me that the offshore centers have adapted, or at least many of them have, and many of them seem to be as busy as they have ever been. What are your observations?
Well, the offshore centers did adapt in a very important way, so the better ones have all cleaned it up so that the people who show up had better not be the kind of outright drug dealing criminals who used to show up. Places like Cayman have long since stopped dealing with people who showed up with boxes of money and dubious records as drug traffickers.
The problem in the case of the offshore centers is a rather different one and it’s a rather complicated question because it involves leveraging the difference between the tax regimes in different countries. So the best example of that, that I’m aware of, is the example of Apple, which managed through looking at the tax laws of Bermuda and Ireland, and the Netherlands to figure out how to put its profits in a situation where there was no tax anywhere because one jurisdiction had tax based on where you were incorporated, another one had it where you were the resident, the third on had it where you made the money, and if you were able to move the profits around in a very clever way, you could wind up with what Senator Levin referred to as the Holy Grail of tax planning, which was you paid tax nowhere.
Now, in dealing with very large corporations, their answer was, “Oh. Well, that’s perfectly legal. We didn’t violate any law.” True enough. But can societies have a tax regime in which certain corporations, because of their size and the way that their businesses are built around the intangible intellectual property, walk around the entire tax scheme worldwide? Is that something we can truly tolerate? Whereas, other businesses that are anchored physically in one place or another are paying taxes and they’re contributing to the support of their governments.
And that turns out to be a very difficult problem, and it’s one that it still very much on the table, and it all revolves around having the offshore centers, which are perfectly legal, doing perfectly legal things, facilitating this kind of corporate maneuvering.
Yes. Now, I know that in the past, Jack, you have been, I think it would be fair to say, complimentary about some of the practices that you’ve encountered offshore. In fact, I recollect one occasion when you expressed surprise to me at how diligent a particular business was when you looked at their practices, I think it was in Jersey. Do you think that organisations like the Tax Justice Network have made the mistake of using a bit of an elephant gun approach in criticising offshore centers in their entirety instead of focusing in on the really bad actors and the really bad practices?
Well, there’s a second set of issues. I’ve mentioned tax, but what I haven’t really mentioned, in discussing it, is regulatory evasion, which is another part of this whole problem, which is if you want to go offshore to sell various securities or funds, or whatever, without any public scrutiny, without real checks on what you’re up to, you find yourself free of the regulatory schemes of the onshore jurisdictions and the ability of those jurisdictions to make sure that the marketplace is running in a fair and efficient way.
Now, up to a point you’re right, we should have spent more time acknowledging the work that has been done, especially in the area of cleaning up the outright criminal behavior. Where the offshore centers, the principle ones, have been quite good.
The game, if you will, has shifted to these other areas where we’re not talking about the levels of criminality that we’ve been talking about previously, we’re really talking about how do you deal with this global problem of taxation, how do you deal with the arbitrage of regulatory regimes, and what does that mean for international commerce and regulation of economies generally? And we could see from, for example, a last big financial crisis that an awful lot of loopy financial dealing was going on offshore. It wasn’t criminal but, boy, it sure didn’t help the world’s economy. And I suspect we’re going to see some of the same problems cropping up again.
There’s a famous John Kenneth Galbraith line about how when the tide goes out you find out who’s been swimming without a bathing suit.
That’s right. But the principle sponsors of what you would regard as corporate structuring and shenanigans in order to achieve minimal or zero taxation is big business. The financial centers around the world are happy to facilitate it provided it’s perceived as legitimate. But the principle sponsors are the large corporations themselves, their professional advisors, the big accountancy practices, and so on.
That lobby is phenomenally powerful, Jack. I mean, how optimistic are you that we are going to see real change there?
Well, we have seen quite a bit of change, albeit glacial in its speed. So OECD has been wrestling with this problem now for the last, I want to say 10 years, anyway, and it’s moving inch by inch and step by step toward evolving a new global structure for taxation. That will make an enormous difference.
The countries of the European Union have been working on this issue and have been moving toward coming up with structures to deal with this problem of ever moveable intellectual property. So things are changing, but you have to remember that none of this stuff happens overnight. It just doesn’t.
But Jack, can I ask this question? Because where we started in our discussion was you taking us back to that time where financial institutions were, as you described them, utilities. They were not interested at all in what their customers were up to, they were there just to keep the wheels of commerce turning.
We then have gone through a stage of an introduction of a whole raft of legislation that has imposed obligations on financial institutions to know their customers, to monitor customer and account activity, and so on and so forth. Which by and large, the finance industry has done a pretty good job of complying with, if we look at the number of suspicious activity reports and so on that are made and the value that the industry adds to the law enforcement effort. Everybody acknowledges that its significant.
And now we get to a stage where financial institutions in offshore centres and indeed onshore centers are engaged in assisting large corporations to mitigate their liability to tax. As you pointed out, it’s lawful. Whether it’s morally right is another question. Whether or not it’s something that governments and societies can continue to tolerate, or even be able to afford to tolerate, is a really interesting question.
But are there real dangers in a society, in a system in which financial services professionals are expected to do or expected not to do that which is lawful but which might be morally questionable.
You know, that’s a question that’s been with us in all fields for a very, very long time. Maybe since the beginning of history. What’s the line between morally questionable and illegal? You bump up against it perpetually. Now, there’s been some recent incidents where banks and the financial institutions have assisted in grand corruption. I’m thinking for the moment of the discovery of what’s been going on in Angola and the movement of all of that money by essentially the ruling family of Angola to banks in Europe and Portugal, whole regimes of investment that were set up, and all of it, on the face of it, something that the bankers who took the money in could say, “Well, that’s legal. I have no reason to disbelieve the legality of it.” And maybe they had a little bit of reason, but they could go to their regulators and say, “Look, there was nothing here that should have told us this was criminal.”
Meanwhile, back in Angola you had about five percent of the population living at the top end of global society and the rest of the people of Angola living on two dollars a day or less with some of the worst statistics on child [mortality], public health. Just despicable conditions of poverty and want, hunger, disease, every ill that you could think of in the society.
Now, ask yourself the question, you’re a banker and somebody comes to you with a pile of this Angolan money and you have a pretty good idea what the overall situation in Angola is, how do you feel about dealing with that money? That’s a question that would make a lot of people queasy. There are people who would say, “Well, I’m not going to deal with that because I just simply can’t stomach it.” There would be other people who say, “Well, there’s nothing illegal about it, so I might as well because if I don’t, somebody else will.”
But this is the kind of moral dilemma that we all face in very different fields a lot of the time.
But I mean, do you have a degree of sympathy with compliance professionals and people who steward the risk governance regimes of large finance institutions? You know, their starting point in designing a compliance system is the law. What does the law require of us? Is it really necessary, despite of course the force of everything that you say, Jack, is it reasonable for the critics of the finance industry to think, “Well, actually the basis upon which you should design and build a compliance system is whatever moral compass you want to bring to bear,” as opposed to the black letter of the law.
Well, isn’t that what we’re really discussing when we talk about risk based regulation? And it turns out that whenever you’re dealing with a morally dubious situation you’re also talking about a high risk situation?
And the two overlap. So I can’t say that there’s a bright line one way or the other, and I certainly wouldn’t design a system that is essentially going to do what perhaps an archbishop might do, laying out what is right and wrong. It’s rather more a question of understanding what risks you’re taking, reputational risks and other risks for your financial institution, and being measured about ensuring that those risks are within reason. And those lines are sometimes quite blurry.
But here’s some things, I’ve had to advise financial institutions, and some of them were rather small on the global stage, small in the great scheme of things, but not small otherwise, and they would say, “Well, why are we forced to go through all this stuff? You know that we do everything right,” and so forth and so on. I said, “Well, look. You’re a relatively small institution. If something goes wrong here, you’ll wind up making a terrible mistake and wind up with a real gangster as one of your principal clients. The roof will fall in on you because the roof, for you, is pretty flimsy. You’re not an HSBC, you’re not one of these enormous banks that can weather the storm. Pay the billions of dollars in fines, shrug off the reputational stain that might come from some of the things you’re doing. And you can count on the fact that if you do get caught up on one of these every regulator from every agency will go through your books and do what some people have called, if I may say, a full rectal as to what’s going on in your institution.”
So you have a real obligation to your own institution to err on the side of the caution. And really this is, again, a balancing act. It’s not something that’s simple.
Coming back, Jack, just one final question on the offshore centers. Do you think that the pandemic and economic downturn is going to result on massively increased pressure on those centers? Or do you think that countries like the United Kingdom are going to take steps to protect their offshore islands in order to ensure that they continue to segue more inward capital flows? How do you think this is going to play out?
That’s, again, a very, very difficult question. I think it’s come up before, for example, in the case of the Cayman Islands, the UK has been reluctant to bail out Cayman Islands financial institutions that have gotten into trouble. They just say, “Well, look. That’s your problem, not ours, and you’ve taken the risk and you’ve got to take it on.”
Now, what the UK’s territories provide is a rule of law that people who use them appreciate, and that’s why they go to those centers. There are other centres where the rule of law is a lot more questionable and to the extent that people are using those, nobody’s going to bail them out, and there will be of necessity considerable wreckage.
One of the interesting things is, over the years, as the issues of offshore have evolved, there are various meetings that I go to on the subject and we’ve gone from people who attend these meetings selling the virtues of offshore to lawyers who are engaged in asset recovery and liquidation law. And that tells you an awful lot about what’s changed in the offshore markets.
Indeed. Yeah, indeed. I can’t leave the offshore question, Jack, without asking for your thoughts on the obvious question that always gets raised around perceived US hypocrisy on this subject, with the continual use of companies in Delaware and Wyoming and so on and so forth, and levels of compliance in those states that are markedly lower than the standards that the US seeks to impose on smaller territories around the world. What are your thoughts on that?
I, of course, am disgusted by the levels of hypocrisy, and they’re quite extraordinary. I’ve been involved for the last couple of years in the fight, the question of anonymous corporations. Which, in my view, simply shouldn’t exist. The idea of the corporation was never to hide ownership, it was rather to protect the people who invested in various businesses to be able to make that investment without the risk of being financially ruined. Which is a pretty good idea to make commerce work.
But to use a corporation to simply hide the identity of the person behind the corporation is something that leads to an opportunity to do illegal things, which shouldn’t exist. Now, what’s happened in the US is, as coalitions of groups that are trying to reform the situation here and end anonymous corporations have pushed legislation, the opposition has come, believe it or not, principally, they didn’t believe it, from the American Bar Association, whose hypocrisy in this is, in my view, despicable. And what do we do about that? Well, we’re fighting on and it looks like, finally, after years of fighting, it may be that in this session of Congress, with all the other things that are going on, there will be legislation on the subject of anonymous corporations.
But those corporations simply shouldn’t be.
No. No. Absolutely. Well, it’s very interesting to hear your thoughts on that, Jack. Jack, just as a final question, because I know it’s an area that you’ve been heavily involved in, what are your thoughts on the adequacy of current protection levels for whistleblowers and the benefit of rewards that are given to whistleblowers?
Well, I think the whistleblower business is very important to keeping organisations on the straight and narrow, and there have been a number of cases where the whistleblowers have had a really important effect on law enforcement and enabled law enforcement to move in and take care of situations, and at the same time, the whole structure of protecting whistleblowers adds to the element of deterrence because if people in an organisation know that if there’s bad behavior and somebody in the organisation is unhappy with it, they have the opportunity to step forward and tell the regulators or tell the police what’s going on.
Now, this is also kind of tricky because, truth to tell, there are a couple of problems for people who deal in the whistleblower world. First of all, not all whistleblowers are wonderful people. There are whistleblowers who get involved in things for all kinds of reasons; to protect themselves, to show off, to do various things which are generally considered to be not nice.
On the other hand, the benefit overall I think is positive. Now, as far as protecting them goes, there are certain regimes in the US where the protection works, is adequate, and others where it’s nonexistent. So for example, in the case of whistleblowers in the Securities and Exchange Commission world – these are people who are reporting securities violations and failure to properly disclose what’s going on inside a corporation – those whistleblowers are protected. And those whistleblowers also get their rewards immediately. But the people who have been whistleblowers in the tax field have no protection, and they wind up having to wait until all of the tax has been collected to … and I mean collected, by collected I mean it’s not just that IRS won the case, it’s that there’s money in the treasury before they get the reward.
So I have just completed a whistleblower case where the initial whistleblower filings were made in 2008 and here we are in 2020, 12 years after that, where the man is finally getting his money. He didn’t go into this one to get rich quick.
Yeah. And in the meantime, presumably, was regarded as being … well, he wouldn’t have been at the top of an employer’s recruitment list.
Well, indeed, one of my obligations, and I’ve said this, I’ve done courses for lawyers in the whole arena of whistleblower law, I’ve said your first obligation is to sit your client down and say, “Look, here are some of the consequences you’re going to face: it’s almost certain that your institution will figure out who went to the cops. It’s almost certain that when that occurs you will never be employed in the industry again. No matter what the protections are, no matter what you think they are. Now, if you’re not prepared to accept those things, don’t blow the whistle.”
Yes. No, there are, as you say, very, very real risks. Jack, look, we could as ever talk for hours, but we’re up to our time limit, I regret to say. It’s gone very rapidly. On behalf of our listeners and all the tens of thousands of KYC360 members around the world, thank you for giving us what I can only really describe as a masterclass. I always come away from every conversation with you having gained new insights. So Jack, thank you very, very much indeed.
If you’d like to plug into Jack’s expertise, he can be persuaded, I know, to provide advisory and expert witness services. All listeners will receive an email with Jack’s contact details in the next 48 hours. I can tell you from my own personal and professional experience that there are few more able, more expert lawyers in the field who are held in the highest regard by policymakers and indeed officials in the United States.
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Our next AML Talk Show guest will be Ian Mynot, the head of the UK’s Financial Intelligence Unit. That interview is scheduled to air live on the first of May, when I hope that you will be able to join me. For now, stay safe, stay alert, thank you, and goodbye.