Compliance Is Like A Hospital

Managing a department like Compliance is tricky. I’m not saying anything new, I hope. If it is news to you, then you have some catching up to do. With all of the various functions and subject matter experts, managing the department might benefit from a similarly complex organization that has been managing itself or more than a century longer than Compliance: Hospitals.

Say what you will about the broken healthcare system of the US, it still saves lives and keeps non-compliance to a minimum. How does this happen? Part of it is culture. Many receive the call to the profession because they want to do good in the world. And then there is a respect for people’s expertise. The human body is so complicated, no one person can know enough about a single area to save every life. For that matter, there is a competition to solve the most difficult problems that hinder or kill lives. Lastly, there are serious consequences to the professional who is found to be misbehaving.

Compliance, as a profession needs to do all of these things, but there are things a manager can do right now. Since issues of mindset does not require industry-wide scale of economy to work, a manager should:

  1. discuss the goals of compliance on a regular basis to instill a sense of moral calling,
  2. show respect to employees who know a product, function, business, subject matter better than you,
  3. give freedom to employees to work while holding them accountable for their decisions and actions.

Professionalizing the department this way will make a big difference in finding and keeping the right talent.


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. He is the author of the forthcoming book History of Money Laundering: How criminals got paid and got away.


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Sex, Gambling and… Ice Cream?

credit Got Defense Attorney
credit Got Defense Attorney

People working for Department of Defense, both employees and contractors, have been found to be issuing Department issued credit cards to pay for gambling and “adult entertainment.” The Department spokesperson was quick to point out that that doesn’t mean the Department paid for the activity. The way things work there is that the cards are not directly billed to the Department, instead to the individual and then the individual fills out a form requesting a reimbursement from the Department. This could mean that the employees wanted to hide the activities from their spouses. (From UPI and Politico.)

If that wasn’t salacious enough for your… hahaha… excuse me, I couldn’t help myself. Benjamin Netanyahu, the Israeli Prime Minister was audited by his nation’s Comptroller and found lavish spending. Among the usual types of lavish spending was $2,500 a month on ice cream. That’s right. Ice cream. People have already begun to make fun of this in ways that are hilarious, even if you don’t understand Hebrew.

credit Calcalist
credit Calcalist
credit Israelly Cool
credit Israelly Cool
credit International Business Times
credit International Business Times

CVaR Mean Conditional Value At Risk

CVaR is a variant of VaR,  Variance at Risk.

History

VaR was developed by JPMorgan risk group in the early 1990s. Most of that risk group left to start a consultancy to sell the risk management calculation to other banks. It was originally developed because the executives at JPMorgan wants a simple way to wrap up all of the risk into a single number. VaR is the amount in dollars that the institution is expected to lose before trading begins the following day, and therefore required to borrow overnight. The calculation was inserted into a report called the 4:15 Report, which was a report that came up at, you guessed it, 4:15 PM, or fifteen minutes after each trading day. The tool became very effective and useful, so much so that Basel II Accord incorporated it.

CVaR is nothing more than taking the various risk variables and then weighting them for what a risk manager believes is a more accurate view of the market risk. Obviously this has some subjectivity to it. The idea is that VaR doesn’t weigh risks from, say, lending equities differently from trading on the bank’s books.

Controversy

There has been a long running controversy over VaR, and therefore CVaR. VaR is a probability calculation and therefore it doesn’t tell its reader how much the firm could lose. It tells the reader how much the firm will likely lose. The qualitative difference between the statements is the former is a definitive number while the latter is a forecast. The former is accurate and the latter is prediction, which is inherently inaccurate. The quantitative difference is $0 and infinity. Since VaR is used to either insure against losses through borrowing or hedging, it is merely spreading the risk of loss and therefore, making the whole capital markets system bear the risk of a firm. The benefit is that because it is probability-based, it is very good when the markets are normal. VaR opponents says there is no such thing as normal.

Opinion

Both sides are right. VaR is an effective tool to manage risks that stem from business-as-usual. But management rely heavily on it, and the system gradually build up risks for firms and eventually implodes. And it is a poor way to forecast extraordinary large risks, also known as tail risk. As a matter of fact, it is specifically designed to truncate the tail risk so that it can arrive at a dollar figure. One way to think about how this cannot work in all situations is to think about shorting a stock. If you buy a share of XYZ for $10, the most you can lose is $10 because the value of the shares cannot go below $0 and shareholders are not liable for debts beyond the the value of equity and assets. But if you short XYZ, it means you lose money every time XYZ’s price goes up. Well, there is no upper limit to how high the stock price can go. This is the reason why, as long as a bank holds shorts of any sort, it can lose infinite amount of money. Not likely, but possibly.

So, while both sides are right, only the side in favor is wrong. Easy to say, but hard to swallow if you are managing a bank and you need some way to reduce market risk for your bank. VaR is a very useful tool.


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. He is the author of the forthcoming book History of Money Laundering: How criminals got paid and got away.


Say Hello To My Little Friend…

… I call him FinCEN.

FinCEN, the Financial Crimes Enforcement Network, a division of the US Department of Treasury, issued  a GTO, or Geographic Targeting Order. This is a rarely used order, for the obvious reason that money laundering is usually not concentrated in any one place. But Miami businesses are going to receive closer scrutiny from the sub-Treasury group because of money laundering related to drug trafficking. Effectively, this lowers the currency reporting threshold from $10,000 to $3,000.

'You've not been involved with money laundering before have you Joe!'This is a good time as any to discuss Black Market Peso Exchanges, or BMPE. This is a money laundering scheme often used by Colombian drug cartels to repatriot their US earnings back to Colombia. The exchange serves as the middle man. The exchange imports good into Colombia from the US, the imports being products that the cartel wanted, either to sell to the local market or for themselves. Cartel gives the exchange US funds, which is used to purchase goods for export. Effectively, it looks like the exchange is shipping many small orders from retail customers in Colombia, but actually, it is just laundering money.


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. He is the author of the forthcoming book History of Money Laundering: How criminals got paid and got away.


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NPA Means No Prosecution Agreement

I have written about DPA‘s before, so, it shouldn’t be surprising to find out that there is an NPA as well. Obviously, NPA is a better deal than a DPA, although often a DPA is a de facto NPA.

Leslie Caldwell
Leslie Caldwell

Leslie Caldwell, Assistant Attorney General, is reported to having told ACFE (Association of Certified Fraud Examiners)  that NPA’s and DPA’s may be taken back and financial institutions could be forced to plead guilty.

This isn’t earth shattering news for big banks since most of them have plead guilty to something over the last couple of years. Caldwell’s statement comes when many of the major problems of the 2008 financial crisis are coming to a close, raising concerns about whether legal reserve funding has been adequate. The fines have been, at times, in the tens of billions of dollars, so this is a big deal. One bank, does doesn’t matter which one so I won’t name it, was fined more than the income earned on the activity that generated the income to begin with. These fines are no longer just a slap on the wrist. It is a warning for bank to brace themselves. And they had better make sure their businesses are ready to comply going forward, not just mitigate the damages of the past. Otherwise, they will be facing negative returns.

 


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. 

Stealing from an investigation about stealing

The News

Two federal agents are charged with stealing digital currency during the Silk Road investigation. Two secret agents were from the DEA and the Secret Service. The charges are wire fraud and money laundering.

http://www.occupy.com/sites/default/files/medialibrary/ross.jpg
Ross Ulbricht

About Silk Road

Silk Road was an underground online marketplace where everything and anything could be sold in secrecy using Bitcoin and other digital currency. Silk Road was run by a user named Dread Pirate Roberts, the famous character from the movie The Princess Bride. Silk Road was shut down in October 2013. Dread Pirate Roberts is presumed to be Ross Ulbricht, who was charged for conspiracy to commit drug trafficking and money laundering. Ulbricht denies that he is Dread Pirate Roberts.

Opinion

Cryptocurrencies, especially Bitcoin, will play a big role in transactions. Bitcoin, only because it is the most accepted cryptocurrency. Cryptocurrencies because their value is material economically. Transactions using cryptocurrency on markets like Silk Road provide privacy that the non-cash economy we live in no longer does. The cost of transaction is very small. There is little chance of hyper inflation due to over-creation of the currency. There are some major downsides of Bitcoins for the user as well, but for governments and financial institutions, the main issue is the lack of transparency. It is not that governments want to get rid of privacy. It’s just that where there is privacy, crime is more likely to take place.


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. He is the author of the forthcoming book History of Money Laundering: How criminals got paid and got away.


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