Compliance Essentials News - June 2019
Here's the selection of the most informative compliance news stories this month. Scroll down for more details.
- Wish you were here!
- Promise to be good, but not yet!
- Price of medical equipment in China soared due to bribery
- Estate agents and drugs firms investigated for anti-competitive practice
- Needle in a haystack: UK needs to 'up its game' on SARs
- KPMG faces scrutiny over bullying and stolen data
- New harassment claims at Lloyds
- Organised criminal gang guilty of laundering £8m through 'front' companies
Wish you were here!
British Virgin Islands? Bermuda? Cayman Islands? Switzerland?
With the summer holidays almost upon us, you'd be forgiven for thinking we were listing possible holiday destinations. Not quite.
The Tax Justice Network has just released a new Corporate Tax Haven Index which ranks each country's tax system based on the degree to which it is complicit with and facilitates corporate tax avoidance.
The Tax Justice Network estimates that globally, around $500 billion in corporation tax is ducked each year by multinationals which - it also points out - is 20 times more than the UN's entire annual humanitarian aid budget.
Promise to be good, but not yet!
Crown dependencies of Jersey, Guernsey and the Isle of Man have finally agreed to introduce public registers, establishing the real owners of faceless shell companies registered in their jurisdictions ... albeit by 2023!
While there is some concern about why it will take so long, the U-turn is being heralded as an important victory for transparency and a boost to efforts to combat tax evasion and money laundering.
"The era of secrecy is a thing of the past and other tax havens must now make their own moves to bring the real people behind anonymously owned companies out of the shadows. Any state failing to do so will be left behind", said Naomi Hurst from Global Witness, the anti-corruption campaign group.
Price of medical equipment in China soared due to bribery
- It claims that bribes and kickbacks pushed up the price of healthcare equipment by 50% or more in some hospitals, with one MRI machine alone soaring from $1.3m to $1.7m so intermediaries could bank the difference.
- Layering - involving distributors and vendors in the sales process - offers more opportunity for slush funds and funnelling bribes.
- By inflating the price of medical equipment, sales teams used the price difference to fund kickbacks and bribes. This meant hospital administrators and officials were often bombarded with luxury watches, golf club membership, even cash in a bid to influence decisions and secure orders. In 2016, a hospital administrator was paid almost $900,000 to secure the sale of a Siemens MRI machine.
With China predicted to spend $1 trillion a year on health care by 2020 and importing over $22bn worth of medical devices in 2018, it remains an attractive market for companies. But, academics warn that corruption remains a big problem, partly due to meagre salaries.
"The direct result… is that the patients will pay more", said Mr. Huang from the Council on Foreign Relations. Who still thinks bribery is a victimless crime?
- With many anti-bribery laws (eg UKBA and FCPA) having extra-territorial reach, firms can be prosecuted for bribes paid elsewhere in the world
- Companies will be held accountable if bribes are paid by third parties or intermediaries, with or without their knowledge
- To protect your reputation, look out for red flags - specifically, significant pricing differences between direct and indirect or third-party sales.
Estate agents & drugs firms investigated for anti-competitive practices
The Competition and Markets Authority has given four estate agents until September to respond to allegations of a cartel and illegal price fixing in Berkshire. The CMA alleges the four estate agents (Michael Hardy, Prospect, Richard Worth and Romans) had violated competition laws by agreeing to "maintain agreed commission rates" over a seven-year period. Romans had alerted the regulator after it became aware that a "small number" of staff had acted inappropriately. Under the leniency rules, the first company to reveal a cartel escapes prosecution and fines.
Meanwhile, the Competition and Markets Authority has also alleged that four drugs companies worked together in breach of competition laws. King and Auden Mckenzie agreed that one of them would only supply 10mg tablets of the anti-depressant nortriptyline, while the other would only supply it in 25mg tablets. They also fixed quantities and prices. King, Alissa and Lexon also exchanged competitively sensitive information on prices, volumes and entry plans to keep the price of the drug high.
Geoff Steadman of the CMA said, "If pharmaceutical companies get together to restrict competition for the supply of a drug, this can lead to the NHS - and ultimately the UK taxpayer - paying over the odds for what are often essential medical treatments".
- Do your employees know what behaviour is and is not acceptable under antitrust laws?
- Are there legitimate reasons for contact with competitors? If so, what are they?
- Are you confident that employees would do the right thing in a challenging situation?
- Are they aware of the leniency rules and also know who to report approaches of anti-competitive behaviour or collusion to? (If we don't report it, we may be implicated.)
- Do they know how to respond if there is a dawn raid?
Needle in a haystack: UK needs to 'up its game' on SARs
A report by the Law Commission has found that poor-quality suspicious activity reports (SARs) are hampering the UK's ability to tackle financial crime and companies need more training to meet their compliance obligations.
463,938 SARs were filed in the year to March 2018, a 9.6% increase on the previous year. The rise was attributed to the broad definition of 'criminal property' in the Proceeds of Crime Act, inconsistent guidance across sectors and firms engaging in 'defensive filing' - to cover their backs and ward off regulatory action rather than combat crime. Around 15% of SARs of authorised disclosures didn't meet the threshold of 'reasonable suspicion'.
It's a similar story in the US too, which has seen an explosion in SARs, with 3 million reports made by banks and 2 million by other entities, after high-profile prosecutions. Yet only around 4% warrant follow-up.
It's clear firms need to get better at the 'sniff test'. How?
The Law Commission report makes these recommendations:
- Appoint an Advisory Board to oversee the SAR regime and provide advice
- Provide guidance on key concepts - e.g. suspicion - by adopting the Da Silva Test. (A feeling of unease isn't enough)
- Having a prescribed form - so consistent reports are made with essential information for law enforcement
- Limiting the scope of reporting to the most serious crimes only - reducing the burden and ensuring resources are better targeted
Download the report via the Law Commission website.
KPMG faces scrutiny over bullying and stolen data
KPMG's partner Sanjay Thakker - head of its deal advisory unit - has stepped down following reports of bullying.
According to the Financial Times, concerns about bullying were raised in 2017 but senior executives had largely ignored them.
Thakkar was also acquitted last year after reports via its whistleblowing hotline. In February, two female executives had resigned to protest at how the allegations were handled and the matter has now been referred to the Financial Reporting Council.
New harassment claims at Lloyds
It seems harassment claims are never far from the insurance news.
Following reports of a "deep-seated" harassment culture, described as a "meat market" in Bloomberg BusinessWeek, and an independent culture survey underway by the Banking Standards Board, two executives from Tokio Marine Kiln (TMK) are the latest to resign, amid allegations of groping and lewd behaviour.
However, with one of those executives reportedly receiving a £200k payout before he left, some critics are questioning how serious the industry is really taking this.
Less than 24 hours later, a senior VP at broker Guy Carpenter was suspended for offensive comments made via email about a female colleague.
Settling claims of harassment can be costly, with 21st Century Fox paying $45m in Q1 of 2017, according to the Financial Times.
However, the damage to employee relations, reputation damage and talent drain can be far harder to quantify.
Follow this best practice guidance:
- Recognise sexual harassment as a real and serious problem - don't dismiss it as banter or a personal dispute
- Be self-aware and respectful of others - watch how they respond to what you do and say, and take corrective steps to avoid offending or intimidating them
- If you're specifically asked to refrain from acting or speaking in a particular way, then do so - or you may face more serious disciplinary action
- Report any incident of sexual harassment that you witness, even if it is not reported by the victim
- Be supportive of others who report sexual harassment - do not victimise them.
Organised criminal gang guilty of laundering £8m through 'front' companies
A criminal gang which laundered millions of illicit profits from the supply of class A drugs has been dismantled, following a joint investigation by the National Crime Agency and Metropolitan Police.
The gang, run by two men, used encrypted phones to sell class A drugs across England, then deposited the proceeds in cash into 'front' company bank accounts, before transferring it to a destination account in Dubai.
Hidden in plain sight? Certainly.
- The ringleader had a lavish lifestyle, bought designer goods, owned watches worth almost £50,000, leased luxury cars and travelled often to UAE - despite having no legitimate source of income
- Gang members set up sham accounts and businesses with false financial records to legitimise their ill-gotten gains
- At least £345,000 was laundered through UK banks by them over a 10-day period
John Coles, NCA's Head of Specialist Operations, said, "The drugs.. [they].. trafficked will have contributed to violence and exploitation along the supply chain, while their extensive money laundering operation exploited the UK banking system to move money offshore."
"The threat from organised crime continues to grow, and there are many more groups in the UK engaged in similar activity to this group. The NCA and its policing partners are using all the means at our disposal to identify and disrupt them."
They will be sentenced on July 24.
Despite this triumph, it's clear we all need to do much more to strengthen the first line of defence if we are serious about combatting the growing threat of money laundering.
- How were gang members able to exploit the UK banking system so easily?
- What due diligence was carried out when 'front' company bank accounts were opened? (That Companies House overhaul is long overdue.)
- Why weren't questions asked when gang members deposited £50,000 in cash? What checks were made to challenge the source of this new wealth? Who checked the false financial records?
- Why didn't anyone spot the disconnect between the gang leader's lavish lifestyle and lack of legitimate income?
- What checks should high-value traders of luxury goods make at the time of purchase? What signs should they look out for?
Transparency International's recommendations on 5MLD and the latest EU anti-money laundering regulations would be a good place to start.
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