Tech-up Compliance Now with CompliTech!

ABA Center For Regulatory Compliance
ABA Compliance Central

Compliance has a much bigger role in the business of banking than responding to regulators. Compliance must prevent mishaps.

Banks are continually investing in technology to defend themselves against cyber crime. But because Compliance as a function of its own only has come into prominence in the last few years, there aren’t any status quo compliance technologies. Plus, Compliance is an area that covers a lot of ground. There are the core Compliance functions like AML, Compliance Training, Compliance Audit and Compliance Advisory. And then there are both support functions and regulatory groups. The knowledge required to have a fully functional Compliance department is as large as the number of products and services the financial institution has. The major investment in technology right now support monitoring, reporting and analysis. And these tools are fairly rudimentary.

The solution is to have startups who partner with law firms and compliance professionals to develop Compliance products and services using a SaaS model. SaaS is Software as a Service. If you’ve never heard of it, you have definitely been involved with it. Cloud computing is generally SaaS-model business. Dropbox is a SaaS-modeled business. It provides the customer with storage space on a need-basis. Amazon has a cloud system for web businesses. Tumblr uses Amazon’s cloud.

The SaaS model is perfect for most banks. Most banks do not have profits in the billions. Investment in tailored technology is just not feasible. Community banks sometimes eek out a profit in the hundreds of thousands. Credit Unions are theoretically profit neutral, but if there is a surplus that can be set aside for technology investment, they are just trying to keep up with all of the various online and mobile banking products and services that are available for customers.

So, someone needs to marry Compliance with Technology for these smaller financial institutions that simply cannot afford the develop their own technology and yet they face all of the same AML risks and most of the same Compliance requirements.

I would be willing to to join someone who is interested in doing this. I am not a Luddite but I am not a query master. My area of expertise is in managing Compliance departments, relationships with regulators and operations. A truly well rounded CompliTech firm should have the following people as founders or early on: lawyer, AML specialist, statistician, UI/UX developer, database developer and Compliance specialist. I fulfill two of those areas. If you think this is a viable business, let me know.

About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.


Wall Street Is Caving In

GE in the news from Bing
GE from Bing News

GE announced that it will spin off its real estate portfolio and private equity. Last year, it spun off its consumer banking business. What remains is commercial banking.

This type of segregation through divestiture and sale is exactly what Dodd-Frank wanted to Wall Street firms to do but didn’t say so directly in the law. Dodd-Frank, the landmark legislation that requires, among other things, to segregate investment banking activities with commercial banking activities. This, in effect, undoes Gramm-Leach-Bliley and reinstates Glass-Steagall. Or, in plain speak, commercial banks can no longer have investment banking operations and must focus on lending products with depository funds.

For GE, this makes sense. It was a weird mix of businesses when CEO Jeff Immelt took over. Such conglomerates were out of favor for all the right reasons. When people can choose to buy equities of companies in a mix of their own choosing, why would a company need to have a broadcasting business, medical devices, commercial lending, credit cards, mortgage banking, healthcare financing, airplane capital leasing, home appliances and grand licensing businesses? I’m sure I am missing other businesses as well.

Immelt is keeping the commercial banking business of GE Capital because it is in line with other businesses GE has kept over the years. But this means the business has shrunk immensely and quickly, from $363 Billion to $90 Billion. At its peak, it was $538 Billion in 2008.

Shareholders are generally in favor of this. The real question is how Immelt intends to deploy the funds from sale of businesses? But that’s for another blog. For Money Compliance Blog, Immelt has made the decision that Congress wanted to make. Will others cave?

About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.


Switzerland, Private But Not Criminal

Attorney General of Switzerland, Michael Lauber, froze $400 Million of Petrobras’s assets in the Alpine private banking hub. Lauber has identified more than 60 suspicious transactions spanning over 300 accounts in more than 30 banks. Aside from an investigation in the Brazil-owned petroleum firm, Lauber has opened nine investigations on individual. Eight of the nine are Brazilian nationals.
Michael Lauber, Attorney General of Switzerland

“The Brazilian bribery scandal affects Switzerland’s financial center and its anti-money-laundering strategy,” said Lauber.

The money laundering schemes stem from sides deals made on corporate deals. Funds were skimmed from contracts as fees for making deals, which were then paid through Swiss banks to conceal their true sources and beneficiaries.


About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.


Inversion Mergers Raise Compliance Concerns

In 2014, many firms merged with foreign firms to execute an inversion so that they will be subjects of a different tax jurisdiction. The idea was to answer to foreign taxation first, only paying the difference, if anything at all, to the US government, creating massive savings. Inversion is a cross-border merger where the smaller foreign firm takes over a larger domestic firm. It is truly an inversion of the classic merger, but for the recent inversions, this is legal mumble-jumble. While technically the foreign firm took over the larger firm, the larger domestic firm is assuming a subsidiary role in name only. For this reason, The Department of Treasury started cracking down on foreign inversions.
image from Bloomberg Business

Now that the mergers have happened, in order to maintain the inverted status, a true merger must take place. That requires merging the operations of the two firms. All of the usual headaches of merger implementations apply. One of those headaches is compliance.

Inversion generally took place outside of the financial services world because that was an industry already global in nature on a firm to firm basis. So, the regulatory compliance issues pertaining to inverted firms are unique to each merger.

What isn’t unique is the US operations having to comply with foreign regulators. Here is where the US firm will need to be guided by their foreign counterparts, who may not be all that eager to help since the executives at the smaller foreign firm might be out of a job by the end of the year if the merger implementation goes smoothly.

And then then there are labors laws. The EU has TUPE — Transfer of Undertakings Protection of Employment. (Most of the inversion took place between US and Europe.) This protects many employees when transferring to new employers. Americans have long left unions behind but Europe is much more labor friendly. Shedding the European workforce after the merger might get tricky. Even complying with simple issues like mandatory national holiday and vacation day rules might create an inequality on which the US counterparts may demand parity.

And then there is the tricky situation of US expatriates working for the newly formed non-US firm. Are they still expatriates or are they immigrants? How these employees get paid, now that they are no longer working abroad for their firms?

A successful merger is a one time expense and, hopefully, in the mad rush to find foreign dancing partners, Americans didn’t partner up with one with two left feet. Constantly replacing one shoes will get expensive.

About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.


Cuckoo Smurfing Means Criminal A Pays Criminal B In Different Countries

Cuckoo Smurfing is a way for criminals to move money from one country to another, usually. Sometimes it is used to move money from one bank to another within a country but with so many ways to move money these days, intra-country movements don’t requires an elaborate procedure.

large Cuckoo chick and smaller non-Cuckoo surrogate

The term comes from two things. First is cuckoo, which is a sneaky bird. When a bird of a similar or slight smaller build lays eggs and leaves the nest to find food, a cuckoo will push off some of those eggs and lay its own. What happens is that the cuckoo eggs will be taken care of by the unsuspecting bird. The bird will take care of it after it is hatched and because cuckoo chicks tend to grow more quickly than other bird, it will compete better when asking for food, causing other chicks to be malnourished and often die. Second is Smurfing, which is a verb created by the creators of The Smurfs, a Belgian television show from the 1960s that became very popular all over the world. The smurfs often replaced verbs with the word smurf. So, a smurf might say, I feel like smurfing some bread, replacing “eating” with “smurfing.” Combined, Cuckoo Smurfing is discretely replacing funds to take care of a transaction that criminals needed done to begin with.

It is important to note, in order for cuckoo smurfing to work, a money remitter must be knowledgeably involved.

Here’s how it works:

  1. NY Criminal (NC) has a need to pay London Criminal (LC) $10,000.
  2. A London Merchant (LM) has a need to pay NY Supplier (NL) $10,000.
  3. LM goes to the London Bank (or any money service that can make this transaction), and provides $10K with instructions to have it transferred to NL to the New York Bank.
  4. Banker at London Bank is part of this cuckoo smurfing operation. He instructs NC to deposit $10,000 to NL’s New York Bank account. Then he gives LC $10,000.
    Neither LM nor NL know that the fund was never transferred because what matters to them is that LM paid $10,000 and NL received $10,000. But doing this transaction this way, NC has successfully paid LC the $10K he owed.

There are many places that describe this on the internet but what almost all of them fail to describe the procedure in any meaningful way. They fail for two reasons. They do not:

  1. start by what criminal need creates the need to make the transfer to begin with, and
  2. explain the significance of having performed this transaction this way.

I hope I was able to describe it in a way that is more enlightening. I may do a video about this transaction since there doesn’t seem to be one that exists.

UPDATE Feb. 18/2016: There is now a video explaining Cuckoo Smurfing.


Marcus Maltempo is a Certified Anti-Money Laundering Specialist and a Certified Fraud Examiner with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses. 

Bank in Andorra helped money launderers
Banca Privada D’Andorra Logo

Do you know where Andorra is?

Probably not. It is the Switzerland of the Pyrénées.

It shares many traits as Switzerland. It is a tourist economy. It has a successful ski resort industry. It is a tax haven. And it has bank secrecy laws that make it a attractive for the wealthy to hide their wealth.

Anywhere bank secrecy laws make it easy to hide wealth is a place that attracts those who acquire wealth through illicit business. Andorra is no exception.

The Chief Executive Officer of the Banca Privada d’Andorra is facing money laundering charges. He is accused of helping clients from China, Russia and Venezuela and possibly others after a more comprehensive investigation commences. The arrest is a reaction to the bank being placed on US Treasury list of “primary money-laundering concern.” Entities and persons on this list are often barred from the US financial system, which, in return, cascades to reciprocal severances from other financial systems.

About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.


Cyber Attacks Compromising Credentials

731px-US-FFIEC-Logo.svgOn Monday, the Federal Financial Institutions Examination Council (FFIEC) released a statement warning and advising financial institutions about hacking and phishing that is leading to stealing credentials to bank accounts, credit card accounts and other financial accounts. This is an issue that has been around a while but the advice has generally been going to consumers. This message was to institutions. There was a special note for community banks. Rightfully so since community banks tend to have less resources available to protect themselves from these attempts. The attempts are not being made to the institutions, but it is still in their interest to protect their customers as best as they can. Detecting fraudulent transactions early will mitigate risks, reduce liabilities and keep insurance premiums down.

The highlights can be found HERE and the full statement can be found HERE.

About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.


China’s New Corporate PR Problem

Corruption in the People’s Republic of China is nothing new to Western media consumers. The usual story is some corrupt politician in one of the ministries or provincial government who has been giving favorable contracts to friends and family for kickbacks. But in the past couple of years, a rise in a new type of corruption has been coming to light: corporate corruption.
from China Daily Mail

Major Chinese corporations are generally state-owned and state-controlled. This makes these corporations arms of the government, even though they are participating in the private sector like other private sector firms. So, when corporate corruption takes place, the Chinese government is on the hook for them.

Chinese state-owned enterprises, especially China Construction Corporation (CCC), have been bidding for construction contracts in South Asian, Middle East and Africa against, primarily, South Korea. With the financial backing of the Chinese government, these firms have been winning the contracts for building infrastructure in Africa and private real estate projects elsewhere. Though these firms are working outside of China, their practices haven’t changed. Client-governments have been receiving bills that are twice as expensive as comparable projects, environmental studies and other feasibility studies have not been performed, and local officials have been getting offers to look the other way on these activities.

In a bold move, the Chinese government has primarily taken to defending CCC, asking client-governments to respect the contracts and pay up. Local governments find it hard to swallow such counter-accusations when China won’t produce evidence of work being done properly or at all. The Chinese government has a difficult time with diplomacy under such circumstances because they are considered intimately involved in these firms.

Corruption for Chinese firms like CCC puts Chinese government in a bind because it has been trying to crackdown on corruption in the government and cleanup its image. In the technology sector, firms like Xiomi has been able to prove to the world very quickly that it can compete fairly by producing better phones. If other sectors in China are to attempt to work across its borders, it’ll have to learn to compete with rules it can’t break.

About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.


Death-Spiral Compliance

Have you heard of a Death-Spiral Convertible? This isn’t some car gone-bad. It also isn’t a new roller-coaster ride. It is a type of debt. It is a convertible because it can be converted into equity. It is called a Death-Spiral because it is an option only taken by public companies who are strapped for cash with no better options. Taking this option is could be a quick way to the death of the corporation, so, it should be only taken with no other options available.

Jason Sason of Magna investments
Jason Sason of Magna investments

Death-Spiral Convertibles recently came up in the news because of a young investor named Joshua Sason, who owns Magna Investments, recently made headlines by becoming a multi-millionaire using this lending method.

Here’s how it works:

A publicly traded company with low equity valuation in dire need of operating cash with no where to find it goes to an investment fund. They strike up a deal. The fund gives the company money in exchange for an IOU. One of the conditions of that IOU is that if the company cannot pay back the loan, the company will give equity instead. The value of the payment with equity is lower than the market value. Not just lower but a lot lower. Often, it is 25% or 25% of the market value. So, if the company’s shares are trading at $1 per share and the company was supposed to make $1,000 payment but did not have the cash to do so, it could pay 5,000 shares instead. Those share, of course, are valued at $5,000. Normally, a fund wouldn’t want to own shares of a company that can’t even pay its loans, but in this case, the shares are discounted so much that it can immediately sell the shares at a profit. If the conditions are right, the company cannot ever pay the monthly payments and the fund keeps getting those shares. The fund then sells those shares at a price that will guarantee them being sold, often at 50% of their market value. So, even though the fund was holding onto $5,000 worth of equity, since the fund doesn’t believe in the company’s ability to pay back its debt, it tries to unload the shares as soon as possible. Even at $2,500, the fund would have been paid, essentially, $2,500. That payment, of course, is made by the market, not the company, but the neither of them care. The company needs to keep cash and the fund wants to be paid back. Continue doing this every month for 6 months, and the fund would have diluted the equity in the market, it would have been paid handsomely, well above what it would have received it if the company could service its debts, and the share price plummets toward $0. This is a loan designed to kill the equity value. A fund that is interested in doing this would have to find a company that doesn’t have a chance of surviving.

This brings up an interesting compliance issue. Section 3 of the Securities Act of 1933 that deals with exceptions to normal equity underwriting requirements. Specifically, section 3(a)(10) deals with paying with equity for claims against the borrower. It allows these transactions with some conditions. So that not every equity offering doesn’t goes through this exception, the SEC allows the lender to sell the securities as a payment after holding onto it for at least three months. If the lender sells the equity into the public market in short order, the lender will be considered an underwriter, who may not be licensed to be an underwriter, let alone considered to be issuing unregistered stock.

For practical purposes, if you are a lender who wants to take advantage of this, selling the shares on the first day of the fourth month is a bad idea. Lenders who are interested in doing this have taken to doing it around six months. So, lenders are taking a risk for six months and hope that the company survives at least that long. SEC sees this as holding the securities long enough to be taking on a credit risk.

About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.