I attended today’s Jersey Compliance officers Association monthly workshop which was based on the topic of “culture” – and although the presentation was very interesting it lacked real life case studies – so to add some context here is a classic from Dubai as posted yesterday.

OVERVIEW

Two directors have been fined (BUT NOT BANNED!!) for bullying, threatening & ordering the CEO/SEO & Compliance Officer & MLRO to breach money laundering rules.

The Dubai Financial Services Authority (DFSA), has fined two individuals USD 56,000 (AED 205,520) each for failing to act with due skill, care and diligence, which caused a DFSA authorised firm to breach the regulator’s Anti-Money Laundering (AML) Rules.

WELL DONE SEO AND MLRO

In making their decisions public the DFSA also commends the Senior Executive Officer and the Compliance and Money Laundering Reporting Officer for taking action to mitigate the risks to which the Firm was exposed, and for notifying the DFSA.

I have not seen many occasions where governance, risk and compliance staff are called out for specific praise by a regulator for doing their jobs.  Again, the conduct of these two directors was obviously what the DFSA was going after.

Maybe we will see regulators elsewhere praising as well as criticising ….!!!!

THE STORY

The core to the story is;

• bullying, intimidation and threatening of the chief executive (‘SEO’ Senior Executive Officer) and the compliance and money laundering reporting officer (‘Co&MLRO’) by the Board (and two directors in particular) in relation to the opening of high risk accounts.

One eye catching piece to the story and found in the decision notices is this threat directed by a board director, Mr Raphael Lilla, to the SEO on 21 July 2014 after the SEO and Compliance & MLR Officer had advised on the high risk nature of accounts and the regulatory ramifications:

• “I am reminding you that you are submitted to specific corporate governance rules which means that you have to report to the Board in your capacity of CEO (ad interim)…and you have to execute the decisions taken by the Board. If you do not intend to follow this rule, please advise so that appropriate measures will have to be considered.
• A formal warning is still pending from my side in view of your unfounded allegations made in your email of today and which will require further explanations upon my return of holydays [sic].
• In this situation, you have clearly exceeded your authorised limits….…..
• In conclusion, I am expecting from you cooperation, support and loyalty. If it is not possible, I will escalate to the appropriate level”.   [my underlining]

The SEO and the CO&MLRO faced further intimidation when they raised with the board that the breach should be reported to the DFSA.  This defiance was met with a board instruction which said

• “The Board of Directors….will instruct you if and when the opening of the [M Accounts] will have to be reported to the DFSA”.

The DFSA, observed and said

• Mr Lilla “asserted his seniority, as a member of the Board of the Firm, and warned the SEO of disciplinary action if the Firm did not follow his instructions to open the M Accounts and the S Account, even though the SEO and the CO raised valid concerns about the opening of these accounts.”

Further facts, as taken from the press release, are:

1. Mr Raphael Lilla and Mr Kapparath Muraleedharan were both licensed directors and members of the board of at a DFSA authorised firm.
2. In August 2014, Mr Lilla and Mr Muraleedharan instructed the firm’s SEO and C&MLRO to open three accounts for clients which had been assessed as “high risk”.
3. Under the DFSA’s AML Rules, the firm was required to carry out Enhanced Customer Due Diligence on these clients before opening the accounts.
4. However, Mr Lilla and Mr Muraleedharan dismissed the advice from the SEO and C&MLRO that opening the accounts without the completion of Enhanced Customer Due Diligence would contravene the DFSA’s AML Rules.
5. In their senior positions as board members of the firm, Mr Lilla and Mr Muraleedharan told the staff to follow their instructions.

The DFSA’s investigation found that Mr Lilla and Mr Muraleedharan:

1. received confirmation from external legal counsel shortly after the accounts were opened that the advice of the SEO and C&MLRO was correct;
2. were aware that opening the accounts in such circumstances did not comply with the firm’s account-opening policies; and
3. Attempted to control the SEO and C&MLRO from reporting the opening of two of the accounts to the DFSA.

The decision notice states the actions of the two licensed directors meant that they were;

• “knowingly concerned in these contraventions pursuant to Article 86 of the Regulatory Law; and contravened Rule 4.4.2 of the General Module by failing to act with due skill, care and diligence” in carrying out their functions as licensed directors of the firm.

THE FINE

Mr Lilla and Mr Muraleedharan accepted responsibility for their actions and agreed to settle the matter at an early stage following the conclusion of the investigation. The DFSA therefore reduced the fines by 20% under the DFSA’s policy for early settlement.  Otherwise the fines would have been USD 70,000 (AED 256,900) each.

The DFSA decided not to take any action against the firm because after the accounts were opened, the firm promptly notified the DFSA and other relevant authorities in the UAE that the accounts had been opened and also took steps to prevent the accounts from being used to receive funds.

THIS IS AN INTERESTING POINT. 

It is very interesting to see the DFSA lay accountability at the feet of two board directors.  Despite knowing that opening the accounts would be wrong both in terms of breaching their in-house policy and Dubai AML requirements, the firm is not punished nor criticised.

CONCLUSION

MANY who read the decision notices will believe that the two directors got off rather lightly and may question whether a clear signal that bullying and intimidation of compliance and money laundering reporting officers must have no place in regulated industry whatsoever.

Maybe banning orders like that imposed by the Jersey regulator (ON JARDINE @STM http://bit.ly/1rPVC8G) should have been attached to the DFSA’s decision, regardless if the two former directors hold any other current licensed directorships.

TO MAKE UP YOUR OWN MIND THE DECISION NOTICES CAN BE SEEN HERE

http://bit.ly/1T3jNaU

http://bit.ly/24K6yXw