3.2 Corruption

In the past six years there has generally been a steady increase in the number of SARs citing
corruption as the suspected criminality. The first quarter of 2014 suggests that a sharper rise
in this trend is currently taking place. Forty-four SARs cited corruption as the suspected
criminality in this period compared with seventy-six in the whole of 2013. A broader
increase in the incidence of corruption being cited since 2008 is demonstrated in the chart
below.

Figure 1: Incidence of corruption as suspected criminality in SARs reports

3.3 Laundering the proceeds of corruption with PEP involvement

Individuals entrusted with prominent public functions frequently have access to significant
public funds and the knowledge and ability to control budgets, public companies and to
award contracts. They hold a unique position of influence, which may allow them to
circumvent AML/CFT measures by influencing, controlling or evading regulations, or
awarding contracts in return for illicit personal financial reward.

The global reach of Jersey’s financial services industry can pose challenges for relevant
persons in identifying individuals entrusted with prominent public functions, their close
relations and associates (collectively referred to as PEPs).

As well as the difficulty of identification, there is sometimes reluctance on the part of relevant
persons to ask more detailed questions of customers who are PEPs about sources of wealth
and funds. The absence of such information is revealed in some of the cases when further
information is requested by the JFCU in support of SARs that have been filed,
notwithstanding the requirement to apply enhanced CDD to PEPs. It is important for each
relevant person’s Money Laundering Reporting Officer to understand that requesting further
information from a customer as to sources of wealth or funds does not amount to “tipping
off” following the filing of a SAR.

There is an indication that some members of industry appear to view high net worth
individuals with a higher degree of trust and, as such, may ask fewer challenging questions
posed where suspicions of wrongdoing exist. This may be due to commercial pressures.
The JFSC’s on-site examinations have observed this trend; often a relevant person’s risk rating
methodology is found to be too open to subjectivity of the user, which can result in the
failure to apply a high enough score to individual risk factors to raise the overall rating of
the customer, despite there being a clear need to do so.

Notwithstanding the identification of this typology, given the global reach of Jersey’s
financial services industry and client base containing a not insignificant numbers of
PEPs, the vast majority of products and services, and legal persons and legal
arrangements, are used by PEPs for legitimate purposes and current intelligence suggests
only a small minority are used for the purposes of criminal activity.

Corruption typology 1

Company A is a British Virgin Islands’ company specialising in the trading of wines and soft
drinks. The company is settled into a Jersey trust administered by a T&CSP in Jersey. The
managing director of the T&CSP is also its MLCO.

The settlor of the Jersey trust is the executive chairman of Company A. He is a high net
worth individual and prominent businessman domiciled in the Central African Republic.
He is reported to have been a significant financial supporter of the current President’s
election campaign. He has settled a valuable London property into the Jersey trust and also
intends to settle a portfolio of shares in the near future. The Jersey trust is in the top 10 per
cent of fee earners for the T&CSP.

The business relationship was introduced to the T&CSP by a small solicitors’ firm based in
London.

The settlor has been appointed as a special adviser to the African government’s housing
department and is actively engaged in the negotiation of contracts to secure cheap
prefabricated homes for the country’s resident population. In participating in such
negotiations, the settlor has been engaging with companies located in Europe specialising in
providing such homes. The project is being supported and co-funded by the World Bank.

The successful bidder (company based in European Union) pays Company A €1,000,000 as a
consultancy fee. Company A then pays €50,000 to key government figures with
responsibility for approving the housing project contract in the Central African Republic.

The T&CSP files a SAR and seeks the advice of the JFCU. The JFCU issues a “no consent”
letter effectively freezing the funds.

Warning indicators:

• The business relationship was introduced by a small firm of solicitors which may have
  limited compliance resources and could have a vested interest in either assisting the
  customer (due to other business interests) or putting distance between themselves and
  the housing project deal.
• By using a British Virgin Islands company settled into a trust, the settlor may be seeking
  to disguise his connection to the company.
• A small Jersey T&CSP was selected to administer the trust where the managing director
  is also the MLCO. Balancing the conflict between the need to secure new customers and
  the risk posed by a particular customer may be difficult. A small T&CSP may be more
  inclined to accept a high-risk customer in an effort to remain profitable. The customer is
  an important fee earner increasing the risk that the relevant person may be less prepared
  to challenge the customer on the source of funds.
• A developing African state may be more vulnerable to corruption and the settlor’s
  political connections make him particularly high risk.
• Company A is engaged in buying and selling wines and soft drinks. Receiving €1,000,000
  from a company selling prefabricated homes is out of keeping with its business model.
• The settlor could be using the Jersey trust as a vehicle to layer the proceeds of corruption
  by purchasing a London property and a portfolio of shares.
• As the executive chairman of Company A, the settlor is retaining a high degree of
  control of business being conducted by the company.
• Receiving a large payment from a firm supplying products to a high risk jurisdiction,
  followed shortly thereafter by payments to senior government employees engaged in the
  negotiation of the original contract suggests that Company A’s accounts may be used as
  a money laundering vehicle to launder and distribute the proceeds of corruption.
• The cost of the prefabricated home may have been inflated to cover the €1,000,000 bribe.

Corruption typology 2

Mr A is the settlor of a Jersey trust which was established to settle funds that were received
from civil engineering contracts in the US and Africa.

Mr A fails to mention that he held public office in Mozambique and that he was, in his role
as a public official, responsible for awarding construction contracts. As a result of a separate
UK led investigation, a contractor who admitted making corrupt payments identified Mr A
as being responsible for receiving bribery payments.

A review of Mr A’s trust accounts identifies that the contractor paid substantial funds into
Mr A’s Swiss bank account which were then transferred to his bank account in Jersey and
then settled into the trust. Mr A was also unable to provide evidence as to the source of his
funds and also attempted to hide the existence of the trust from his family.

Warning indicators:

• Mr A held public office in a country which was prone to corruption. Notwithstanding
  the inadequate CDD held by the T&CSP, which initially failed to positively identify Mr
  A as being a PEP, such information that identified Mr A as being a PEP was in the public
  domain and, the T&CSP should have been alerted to the fact that Mr A was connected to
  a country with corruption problems.
• The commercial rationale for the use of a Jersey trust to receive payments in relation to
  civil engineering contracts in the US and Africa should have been questioned.
• Mr A’s position as a public official, which was a matter of public record, gave him the
  power to award construction contracts. It is not simply the fact that Mr A had PEP
  status, but more importantly he was in a position that was vulnerable to abuse through
  his ability to award contracts. Further, bribes paid to public officials can often be
  comparatively small compared to the overall size of the contract and therefore the
  amount being laundered can appear immaterial despite the level of the corruption. This
  is particularly true of low level corruption.
• The use of multiple jurisdictions commingled with personal and corporate bank
  accounts used to channel the funds indicates that Mr A may have been attempting to
  distance himself from the original source of the tainted funds.
• On questioning, Mr A was unable to provide evidence as to the source of funds. Where
  customers, who are either prospective or existing, are unable to answer questions and
  provide evidence as to source of funds, this should immediately raise concerns and
  increase the risk that money laundering might occur.

Corruption typology 3

A government minister, Mr P, from a high risk jurisdiction forms a corrupt business
relationship with the chief executive officer, Mr L, of a government utility supplier. Both
individuals then begin to accept bribes from foreign business suppliers that are contracted to
the utility supplier.

Mr L forms a Jersey registered company (Company R), which is administered by a T&CSP.

Mr L ensures that he has no public association with this company. Payments from foreign
contractors are then paid into the accounts of Company R and then paid into the personal
accounts of Mr P and Mr L in Jersey and other corrupt government figures.

Company R recorded these payments under the guise of “commissions” or “consultancy
fees”. Company R was also unable to provide any proper documentation recording the
source of the payments. Payments from Company R’s accounts were recorded as either
“shareholder dividends” or “interest free loans”.

Mr P and Mr L created a further layer by incorporating a company in a different jurisdiction
which was then used to receive funds originally transferred from Company R. These funds
were then passed on to the final beneficiaries.

Warning indicators:

• The use of corporate structures as opposed to holding accounts in personal names
  without a legitimate rationale can be a warning signal that a money launderer wants to
  distance himself from the source of the funds. Company R formed a barrier between the
  accounts of the foreign contractors and those of the personal accounts of Mr P and Mr L.
  This layering technique was further enhanced when the foreign contractors paid
  Company R through intermediate companies registered abroad.
• A further use of the technique was evident when Mr P and Mr L created an additional
  layer by incorporating a company in a different jurisdiction, which was then used to
  receive funds from Company R. Relevant persons should ensure that they understand the
  rationale behind the use of multiple trusts and companies within a structure. In this case
  Mr L created complex layers of financial transactions to separate the illicit proceeds from
  their source and in so doing attempted to disguise the audit trail.
• As Mr L was the chief executive officer of a government utility supplier he was in a
  unique position to influence the awarding of contracts. The receipt of funds from
  foreign contractors should elevate the risk of money laundering. A legitimate question
  to ask would be why an offshore entity is required and why an entity based in the
  customer’s home jurisdiction would not be more appropriate.
• Relevant persons should be wary when dealing with structures that involve the receipt of
  commissions or consultancy fees. These terms are frequently used as euphemisms for
  bribes or other illicit payments. While not all commissions or consultancy fees constitute
  illicit payments, relevant persons should have a firm and documented understanding of
  the services that have been provided in order to generate such payments. T&CSP that
  provide director or other fiduciary services need to be equally mindful of their fiduciary
  duties.
• In a similar vein, the use of interest free loans which have no security or any realistic
  prospect of repayment should also raise the risk of money laundering. This may be used
  as a method of facilitating the channelling of funds with little or no prospect of the funds
  ever being returned to the company.

Corruption typology 4

The case of AG v Bhojwani highlights various aspects of the corruption typologies
identified above, principally the role played by close business associates of individuals
holding prominent public functions, the use of bearer financial instruments that allow a
degree of anonymity and the inflation of invoiced amounts for goods supplied.

The Defendant was convicted under the Proceeds of Crime (Jersey) Law 1999 of two counts
of converting the proceeds of criminal conduct and of one count of removing the proceeds of
criminal conduct from the jurisdiction of Jersey.

In 1996 and 1997, the Defendant negotiated two contracts with the military dictatorship of
General Abacha, then the President of Nigeria, for the supply of army vehicles to Nigeria at
vastly inflated prices. The illegal surplus of some US$130 million was paid into the
Defendant’s Jersey bank accounts, from where he transferred large sums to accounts in other
countries, including Switzerland, accounts which he knew to be beneficially owned by
Abacha family members and others linked to the regime. The Defendant personally made a
profit of US$40 million out of the two fraudulent contracts, which he held in the name of his
front company at Bank of India (Jersey) between 1997 and 2000.

In October 2000, the Financial Times published a report exposing the late President Abacha’s
corruption in which they revealed that the Swiss authorities had identified accounts
connected with General Abacha into which millions of dollars from Nigerian government
corruption had flowed.

The Defendant, aware that those accounts included sums paid through his company,
immediately converted all the proceeds of the accounts he controlled at Bank of India,
totalling $43.9 million, into freely negotiable drafts. These he then had delivered to London.
The sums remained out of the banking system for 12 days before the Defendant delivered
the drafts back to Jersey to be credited to accounts in the names of different companies
under his control.

After a lengthy trial, the Royal Court found that each of these transactions had been
undertaken for the purposes of avoiding prosecution for an offence in Jersey, or the making
or enforcement of a Jersey confiscation order against him.

The Bhojwani case demonstrated the potential difficulties in prosecuting complex, multi-jurisdictional
offending, and thus the necessity of identifying issues in a timely fashion and
gathering evidence early. Quite often, by the very nature of the offending, those being
prosecuted have considerable resources and influence both in Jersey and beyond, which
they will seek to deploy in trying to avoid the consequences of their crimes. The defendant’s
legal team used an array of applications and challenges throughout the proceedings, from
abuse of process and jurisdictional arguments to judicial review of prosecution decisions.

To help reduce the difficulties in bringing any subsequent prosecution, relevant persons
should be aware of the absolute requirement to make SARs at the earliest possible
opportunity.

The ability to prosecute such a case depended greatly on evidence that could be obtained
from Nigeria, such evidence being relevant to the underlying criminality and the subsequent
laundering of the criminal proceeds. A large degree of cooperation was essential. There is
thus great value in an active and robust SAR regime: the intelligence that SARs provide is
vital in identifying matters that need to be investigated.

Notwithstanding the sums involved, the laundering of proceeds in this case was described
by the Royal Court as “amateurish”. Money laundering can take many different forms and
levels of sophistication. Just as small sums are not necessarily indicative of a less
professional enterprise, so large sums do not always display a high level of professionalism.

The money laundering in this case was undertaken over a short period in an unplanned
reaction to external events.

Warning indicators:

• The use of freely negotiable drafts provides a disconnect between the customer and the
  funds. Any instruments that provide such anonymity should be handled with extreme
  caution.
• Nigeria is a jurisdiction whose public sector is perceived as having a high level of
  corruption, as determined by expert assessments and opinion surveys of corruption
  matters. The Defendant’s political connections ought to have easily identified him as a
  high risk individual. Extra vigilance should be shown by relevant persons in CDD in cases
  of this kind.