Countering Financial Crime - The Importance of Effective Training

COUNTERING FINANCIAL CRIME
FEBRUARY 2016
The Importance of Effective Training

Countering Financial Crime - The Importance of Effective Training
KNOWLEDGE AND TRAINING: OVERVIEW
2
• As criminals become ever more sophisticated at exploiting
weaknesses in the global financial system, authorities seem
to be perpetually one step behind. Simultaneously, the
stakes for risk and compliance staff - and indeed all
employees of financial institutions - have never been
greater given increasingly tighter regulations and personal
liability inherent in their roles. With recent changes in anti-
money laundering regulations of Western countries,
including the UK and U.S., demands on bank staff can only
be expected to broaden.
• In such an environment, how can firms and their staff feel
comfortable or confident taking on a risk or compliance
function? How can financial institutions avoid being
exploited for criminals’ illicit purposes?
• The answer lies in knowledge and how firms obtain relevant
knowledge which enables their staff to perform effectively,
in this case, the role of a risk and compliance officer. The
collective knowledge of a firm’s staff can serve to protect
it from the multitude of threats common in financial
services today; including financial crime. Conversely, a lack
of knowledge can cause significant harm – commercially
and to reputation and integrity – for firms, individuals
involved and the wider financial system.

REGULATORY LANDSCAPE
3
TRAINING, AS DEFINED BY THE FCA, MUST
BE APPROPRIATE AND EFFECTIVE FOR THE
FUNCTION BEING PERFORMED.
• Training has always been one of the pillars of anti-money
laundering (AML) and financial crime compliance however
it is often considered a cost rather than an investment. In
today’s strict regulatory framework, merely having a
training programme is insufficient.
• The Financial Conduct Authority (FCA) requires that
individuals have appropriate qualifications, be assessed as
competent by their firm and maintain their competence
through training. Training, as defined by the FCA, must be
appropriate and effective for the function being
performed. It must also be periodically reviewed and
updated, ensuring its continued relevance.
• What constitutes appropriate training depends on both a
firm’s characteristics (i.e. type of organisation, product
base, client base, geographical footprint) and particulars of
the employee (i.e. level of authority, years of experience,
job description, existing knowledge).

REGULATORY LANDSCAPE: SENIOR MANAGERS AND CERTIFICATION REGIME
4
• The imminent start of the Senior Managers and Certification
Regime in March 2016 highlights the importance of
competence of employees. Competence requires
knowledge, which in turn necessitates appropriate and
effective training.
• In the wake of the 2008 global financial crisis, regulators and
authorities received significant criticism from political
leaders and in the media for not holding executives of
financial institutions personally and criminally liable for their
contribution to the crisis. The Senior Managers Regime (SMR)
aims to ensure that senior managers can be held accountable
for any misconduct that falls within their areas of
responsibilities.
• Individuals subject to the SMR will continue to be pre-
approved by regulators, however, firms will also be legally
required to have procedures in place to assess senior
managers’ fitness and propriety before applying for
approval, and at least annually afterwards.
• Under the SMR the FCA also has the authority to mandate
that a particular individual undertake additional training or
receive mentoring to enhance their competency, should the
FCA find it to be deficient.
• In assessing a person’s competence and capability to perform
a significant-harm function, the FCA will consider, in
addition to other criteria, whether the person has
demonstrated by experience and training that they are or
will be suitable if approved to perform the function.

REGULATORY LANDSCAPE: SENIOR MANAGERS AND CERTIFICATION REGIME
5
Under the Certification Regime an annual
evaluation of competence is compulsory
• Similarly, the Certification Regime (CR) and
implementation of Rules of Conduct require firms to
assess whether more junior staff are also competent to
carry out their roles.
• The CR and Conduct Rules effectively cover a broader
range of employees than previous regimes and increase
the expectation that firms have ‘the right’ people in their
respective roles.
• Under the CR an annual evaluation of competence is
compulsory, while staff not captured under this regime
are still required to undergo training on Conduct Rules
before 7 March 2016.
• Firms therefore need to expand their training programme
to include additional staff and tailor these to ensure that
employees are trained appropriately for their function
and level rather than having a one-size-fits-all training
programme.
• Training and competence requirements are expected to
be met even while a firm is transitioning to the regime.

INDUSTRY STANDARDS
6
The JMLSG requires that relevant employees
are trained on money laundering and
terrorist financing issues and the use of a
risk-based approach to AML and CFT.
• The Financial Action Task Force (FATF)’s recommendation #15
states that an on-going employee training programme is an
essential component of a firm’s anti-money laundering and
counter terrorist financing framework. A financial institution’s
commitment to having effective controls is contingent on both
training and awareness.
• In accordance with FATF’s risk-based approach, training
must:
 Be tailored to the appropriate staff responsibility.
 Be at the appropriate level of detail.
 Be at a frequency commensurate with the risk level
of the business line involved.
 Include testing to assess knowledge commensurate
with the detail of information provided.
• The EU’s 4th Anti-Money Laundering Directive, adopted in 2015
and required to be implemented into EU member states’ laws
by 2017, is closely aligned with FATF’s guidance, containing a
strong shift to the use of risk-based approach.
• Similarly, the Joint Money Laundering Steering Group (JMLSG)
requires that relevant employees are trained on money
laundering and terrorist financing issues and the use of a
risk-based approach to AML and CFT.
• A risk-based approach naturally requires sound analysis and
judgement which can only be achieved with proper knowledge.

TRAINING IS AN INVESTMENT: FINANCIAL IMPLICATIONS
7
Comprehensive staff training can prevent
the kind of mistakes which can lead to fines
therefore preserving the value of the brand.
• Cost effectiveness: “Time is money” and when staff are
properly trained they are less likely to make mistakes
which can result in the need for costly re-work. One of
the most important controls over the prevention and
detection of money laundering is to have staff alert and
trained to identify potentially suspicious activities.
Competent staff can safeguard a firm from enforcement
actions and costly fines and remediation.
• Brand Reputation: The Parliamentary Commission on
Banking Standards noted that how a firm manages and
assesses its risk is crucial to the success of the
organisation. Fines and enforcement actions are inevitably
accompanied by a media-frenzy of negative press on the
target firm which erodes customer confidence in the brand
and can reasonably impact a firm’s bottom line.
Comprehensive staff training can prevent the kind of
mistakes which can lead to fines therefore preserving the
value of the brand.
• Wasted Expenses: A firm can spend a considerable amount
of time and money in the creation of robust policies and
procedures. However, the effective application of even
the best designed control systems can be easily
compromised if the staff applying the controls are not
adequately trained.

TRAINING IS AN INVESTMENT: GREATER GOOD
8
“Employees need a sense of broader purpose,
grounded in strong connections to their clients
and their communities. To move to a world that
once again values the future, bankers need to
see themselves as custodians of their
institutions, improving them before passing
them along to their successors.”
Dr. Mark Carney, Governor of the Bank of
England
• Dr. Mark Carney, Governor of the Bank of England notes
that: “Employees need a sense of broader purpose,
grounded in strong connections to their clients and their
communities. To move to a world that once again values
the future, bankers need to see themselves as custodians
of their institutions, improving them before passing them
along to their successors.”
• Financial institutions find themselves in unique positions of
amassing considerable information on their clients and
thus are able to detect criminal activity from a vantage
point but only if they know what to look out for.
• Through training, financial institutions are able to help
protect and maintain the integrity of the local and global
financial systems; acting not only as custodians of their
institutions but of the system as a whole. When financial
institution staff are equipped with the knowledge to
identify and report suspicious activity they can prevent
financial institutions from being exploited by criminals and
help thwart illicit activity.
• The Proceeds of Crime Act (POCA) and the Terrorism Act
carry stiff penalties for staff failing to report criminal
activity where they should have reasonably known it was
occurring. It is therefore imperative for staff to be made
aware of their obligations and trained in how to properly
fulfil them.

TRAINING IS AN INVESTMENT: ENFORCEMENT ACTIONS AND MONETARY PENALTIES
9
• As FCA fines have steadily increased and the Serious
Fraud Office (SFO) has issued its first Deferred
Prosecution Agreement, financial crime training is
likely to begin featuring more prominently in UK
enforcement actions, as it already does more
extensively in the U.S.
• Any company with U.S. operations is already subject
to oversight by tough U.S. regulators.
• Some fines notable for deficiencies in training
components are as follows:
SANCTIONED ENTITY DETAILS DATE AMOUNT AUTHORITY
John Joseph Financial Services Limited
(JJFS)
JJFS is an independent financial advisory firm. JJFS failed to take reasonable
care to ensure suitability of its investment advice for customers; failed to
recognise associated risks; and failed to assess the needs and circumstances
of its customers. The FCA noted that JJFS failed to maintain written training
material but cited the firm’s providing its advisors with additional
professional qualifications as a mitigating factor for its violations.
September
2015
GBP 20,000 FCA
Craig McNeil (case related to JJFS) Mr. McNeil’s violations included failing to disclose necessary information to
authorities; and failing to act with due skill, care and diligence. Mr. McNeil
was deemed by the FCA as “not fit and proper” to perform regulated activity
and noted that he failed to satisfy training and competence requirements.
He was expected by the FCA to have had knowledge of regulatory concerns
regarding the business under his control.
September
2015
GBP 350,000 FCA

10 Countering Financial Crime - The Importance of Effective Training
B.A.K. Precious Metails Inc, Bogos
Karaoglanyan, Arman Karaglanyan
B.A.K. is a wholesale precious metal and stone dealer cited for violations to
the Bank Secrecy Act (BSA- primary AML regulation in the US). Among its
violations, B.A.K. failed to implement an AML programme until 5 years after
the company was established; failed to assess its money laundering and
terrorist financing risks, conduct due diligence on high risk customers and
implement procedures to identify and mitigate red flags. The compliance
officer further failed to provide training- including to himself. FinCEN’s
order required- among other things- that B.A.K. establish a training
programme and report its progress annually to FinCEN.
December
2015
USD 200,000 FinCEN
and FRB
Oak Club Room d/b/a Oaks Card Club Oaks Club was a card table casino in California whose employees were
convicted of loan-sharking, racketeering and selling controlled substances.
Whilst Oaks Club was not included amongst the criminal defendants, it was
fined by FinCEN for failing to report the aforementioned suspicious
activities of its employees. Among its violations, Oaks Club failed to provide
adequate BSA/AML training; whilst the club did have a training programme
it was found to be deficient and staff lacked basic BSA knowledge.
December
2015
USD 650,000 FinCEN
Lee’s Snack Shop Lee’s Snack Shop operated as a money service business. The shop failed to
fulfil MSB requirements under the BSA including establishing proper
controls, failing to file required disclosure reports (CTRs and SARs) and
failing to conduct proper AML training.
June
2015
USD 60,000 FinCEN
Bank of Mingo Bank of Mingo facilitated structuring of cash transactions by its corporate
customers- a criminal offense- and subsequently failed to file related CTR
and SAR reports. Among its violations was its failure to maintain an
effective BSA training programme. Employees of the bank lacked basic
knowledge of BSA requirements. Whilst the bank did have a training
programme it did not “provide comprehensive training tailored to the
needs of specific positions, departments, board members and other
personnel.”
June
2015
USD 4.5
million
FinCEN,
DoJ, and
FDIC

North Dade Community Development
Federal Credit Union (NDCD)
NDCD AML violations included failing to adequately monitor, identify and
report suspicious activity, primarily related to foreign MSBs. As well NDCD
was cited for failing to provide adequate training to employees and not
providing any training to board members. The FCA notes that JJFS failed to
maintain written training material but cited the firm eventually providing
its advisors with additional professional qualifications as a mitigating factor
for its violations.
November
2014
USD 300,000 FinCEN
TD Bank N.A. TD Bank N.A. was the subject of a consent order for failing to detect
suspicious activity and file SARs. The activity related to the Scott Rothstein
USD 1.2 billion Ponzi scheme. Mr. Rothstein, a former Florida-based
attorney, used a Ponzi scheme to fund his political contributions, law firm,
life-style and even philanthropy. He pleaded guilty and received a 50 year
prison sentence. FinCEN noted that TD’s training on IOTAs (Interest on
Trust Accounts) was inadequate and thus compliance staff was unable to
recognize the suspicious activity or file SARs in a timely manner. The order
notes, “A lack of adequate training for both the business and the
[BSA/AML] staff contributed to the failure to recognise this suspicious
activity.”
September
2013
USD 37.5
million
FinCEN and
OCC
A lack of adequate training for both the
business and AML staff contributed to the
failure to recognise suspicious activity

TYPES OF TRAINING: ONE SIZE DOESN’T FIT ALL
TRAINING PROS CONS
Computer-based Easy delivery to a wide audience. Minimal loss of work
time; no logistics required. Cost effective for larger
audiences.
Often only provide general overviews. Does not account for firm’s
nuances, particular characteristics. No customisation.
Internal, Instructor Led More effective and tailored training based on staff
and organisation’s needs.
Generally only very large firms can afford to retain an internal training
functions. Logistics of providing face-to-face, on-going training to all
staff in an organisation pose a significant challenge.
External Course/Workshop Provide a significant amount of information. Provide
forum to potentially network with industry peers.
Information is not tailored and different parts may not be relevant for
different attendees. Attendees can spend various days out of the office
to attend these courses. May not represent the most cost-effective
method of training a large number of employees.
Third-party, In-house More cost effective manner of providing training to
various attendees from a single firm. Less work-time
lost than with external workshops. Can, depending on
the firm, be tailored to a firm’s specific needs.
More costly than computer-based training. Generally cover specific
topics which may not be suitable for a broad audience, rather for a
particular department.
• Financial institutions and third party firms have created various methods for
delivery of training. Each carries its own advantages and disadvantages.
• In accordance with a risk-based approach, there is no one-size-fits-all training model.
• Firms must assess their overall risk profile and exposure and then implement commensurate training. What works
for one firm might not work for another firm.
• It is generally good practice to use an on-going combination of training methods which increases retention of
relevant information, ensures knowledge remains current and encourages a risk-aware culture throughout the firm.

CHALLENGES TO EFFECTIVE TRAINING
Cost: Training staff is not inexpensive. Courses,
irrespective of delivery method, cost money and time
which staff would normally use for work must instead be
devoted to training. Moreover, “back-office” departments -
those which generate cost but not profits - often have more
limited budgets, which can impact their decision when
selecting appropriate training.
Time: With increasing business, onerous regulatory
requirements, remediation projects, staff cuts, and
looming deadlines, time is a scarce commodity in the
financial services industry. Devoting work hours to
training can be a dissuading factor for firms.
Offer: There are variety of companies which provide
training services and it is often difficult to distinguish
which might provide the most effective and efficient
training relevant to the risks of a firm.

CHALLENGES TO EFFECTIVE TRAINING
Culture: Banking ‘culture’ has recently become
a focus for industry associations (such as the
BBA), standard setters (FATF) and regulators
(FCA). Mark Steward, FCA’s Director of
Enforcement and Market Oversight, in describing
banking culture, noted that “Good rules and
standards describe the expectations and set the
boundaries. But they’re not like the rules of a
board game: they don’t determine the moves
made by every player. Alone they cannot create
the environment in which good governance,
regulatory compliance and fair process magically
appear – more is needed.”
A bank’s culture is driven by management’s
ethical values and its business strategy. A bank
that values its bottom line over all else creates a
culture where risk and compliance training is not
an essential component of proper controls,
rather a tick-box exercise to appease regulators.
In such a case, the effectiveness of the training
is less important than fulfilling the requirement.

CONCLUSION
15
• The value of training has been repeatedly highlighted by
regulators and standard setters, and is set out in regulations.
• Subsequent to the global financial crisis, authorities are
looking to hold leaders - and indeed staff at all levels -
accountable for how a firm follows the letter and spirit of the
law. The Senior Managers and Certification Regime as well as
discussions on banking culture by relevant authorities
demonstrate a clear need for effective training in order for
staff to successfully carry out their roles and establish a
positive bank culture.
• Effective, on-going training is an important component of a
successful control framework which can help avoid the types
of mistakes and violations that have over the past two
decades led to record-breaking fines of numerous financial
institutions.
• There are a variety of options for training programmes, but
the most important factor to consider is their relevance to a
firm’s risk profile. There is no one-size-fits-all programme
and the general shift to risk-based approach across the
financial industry is applicable to training programmes as
well.

ABOUT APERIO INTELLIGENCE
We are a corporate intelligence and financial crime advisory firm
based in the City of London. We specialise in: conducting
enhanced due diligence on high risk customers and third parties;
integrity due diligence on critical acquisitions and investments;
market entry and political risk analysis; and investigations. We
provide tailored training and advisory services relating to financial
crime, in particular anti-money laundering and sanctions
compliance. Our clients include some of the world’s leading
regulated financial institutions. Our team has decades of
collective experience in advising clients on financial crime and
intelligence gathering, helping them to manage risk and maximise
potential.
Contact us today for further information on how we can help you.
Aperio Intelligence Limited
125 Old Broad Street
London EC2N 1AR
t: +44 (0)20 7073 0430
e: info@aperio-intelligence.com
www.aperio-intelligence.com
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© Aperio Intelligence Limited 2015. All rights reserved. Aperio Intelligence and the Aperio logo are registered trademarks of Aperio Intelligence Limited.
For further information, please contact:
Ana Perez-Sepulveda
Head of Financial Crime Training
+44 (0)20 7073 0438
ana.perez-sepulveda@aperio-intelligence.com
Greg Brown
Senior Client Partner
+44 (0)20 7073 0433
greg.brown@aperio-intelligence.com

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