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John Everett, Director of Funds and Fiduciary made a speech STEP Jersey’s 23rd Annual International Conference on Thursday 5 th November 2015 – in doing so he covered four areas key areas:

1. our supervisory work and findings;
2. change and consolidation in the trust industry;
3. a review of the Commission’s wider work to date in 2015; and
4. change at the Commission itself.

The following is extracted from this speech and Comsure has posted the speech in 4 parts – part 1 follows

Enforcement.

1. As you probably know, the Commission undertakes an intensive visit programme throughout the year, backed up by an annual data collection exercise; in addition to using intelligence received and information on wider trends.
2. We are not an ‘enforcement led’ regulator and where possible try to work with firms to remediate deficiencies through a ‘post examination monitoring schedule’ – with the proviso that in some instances, the seriousness of a case, or the attitude of a firm towards regulatory improvement is such that enforcement action needs to be considered.
3. Some of the findings I am about to discuss have resulted in enforcement cases.
4. One point I have noticed is that we are receiving an increasing amount of regulatory intelligence from ‘whistleblowers’.
5. Often this information is specific, actionable and material, and so of key interest to the regulator.
6. I would like to make clear that, where a member of staff leaves a firm by way of settlement agreement, such arrangements should not seek to prevent either the firm or the individual concerned from speaking to the regulator, about the circumstances of their departure or indeed any other matter.
7. I’m going to feedback briefly on some of the findings from our 2014 and 2015 visit programmes to date, Starting with AML/CFT issues. Of course AML/CFT findings will always be a key area of interest for supervision and I would reiterate that these are based on individual cases rather than industry-wide weaknesses.

SARS

1. Regarding suspicious activity reports, we found examples of weak internal procedures, including some that might have resulted in internal reports not reaching the MLRO.
2. Evaluation of internal SARs sometimes appeared to have taken a disproportionate length of time, even where public domain information was available. The evaluation process preceding the decision not to file a SAR was undocumented. In some cases we believed that the MLRO was under-resourced to carry out their role properly.

Customer Due Diligence.

1. A key area of day-to-day business relates to customer due diligence.
2. In this area we found weaknesses in the identification and verification of customers – for example, lack of information on file, poor understanding of ownership and control and failure to properly verify information or documents.
3. In some cases, services had been provided before the completion of identification measures.
4. The identification of, and then – importantly – the response to, risk factors was unclear – for example, regarding initial and ongoing PEP classification and the carrying out of enhanced due diligence. Often this appeared to reflect a lack of understanding, or at least documentation of, the rationale.
5. From time to time the Commission is told on visits, when there is not much written down, that ‘Fred knows all about this structure’ – which makes us wonder how the business will cope if Fred falls under the proverbial bus…

Enhanced Due Diligence.

1. Regarding enhanced due diligence, it appeared that sometimes ‘red flags’ did not receive appropriate attention. The sort of factors we think of here include:
   • connections to high risk jurisdictions or those subject to sanctions;
   • allegations of corruption or an association with financial crime;
   • uncertainty regarding the settlor of a structure; and
   • lack of information to support the source of funds or title to assets.

Ongoing Monitoring.

1. In respect of ongoing monitoring, we noted that in some cases automated search criteria and screening parameters had been set too narrowly.

BRA

1. We do think that a firm’s Business Risk Assessment is a key tool in the fight against money laundering, but too many documents that we review are still generalised and not reflective of the specific risks facing the individual firm concerned, given its strategy, risk appetite and customer base.
2. Fundamentally, the risks identified through the BRA should then inform the policies and procedures which should serve as mitigating controls to those risks.
3. Nor is the BRA supposed to be a static exercise, for the document to be put on the shelf and perhaps dusted off when the Commission is due to visit. Some firms had not given due attention as to whether the acquisition of a book of business, or some other type of organisational development, necessitated change to their BRA. Given the amount of corporate activity in the sector, this was a concern.

Corporate Governance.

1. Regarding corporate governance and wider internal controls, we continue to see some examples of inadequate identification, recording and management of conflicts of interest, which will always be a warning sign for regulators.
2. In some cases Boards or Committees did  not appear to meet with sufficient frequency, or there were unclear reporting lines or deficiencies in meeting CPD requirements.
3. We also saw instances of missing client records, limitations in compliance monitoring programmes and challenges with the resourcing of compliance functions, which I will return to later.

Treasury Operations.

1. With respect to the increasing use of Treasury operations, we expect to see clear controls for documenting the rationale for placing customer monies with an in-house or group function or other preferred provider, as well as transparency regarding fees. We also noticed some instances of deficient client account reconciliation and lack of escalation of unreconciled items.

‘Complaint’.

1. Finally, some firms appeared to take an overly narrow approach to what was being handled as a ‘complaint’.
2. I appreciate that was something of a dry list of points without wider context, but perhaps I can just give a couple of examples to bring things more to life.
3. First, a disappointing case. In one entity we visited, we found an issue which the Compliance Officer had recommended be disclosed to the Commission, in line with Principle 6 of the Codes of Practice.
4. A considerable email round robin had then developed over time among the firm’s Directors, which culminated in the decision being taken not to disclose.
5. For me, there are two simple takeaways from this: one, without wanting to sound too glib, if you’ve spent more than five minutes debating whether something should be disclosed, then it probably should be; and two, if your Compliance Officer says something should be disclosed then you need strong justification not to do so.

On the positive side, and reflecting the Commission’s desire to work with firms, we have seen a number of examples this year where firms about whom we have had concerns have entered into visits and dialogue in a spirit of co-operation with the Commission.

Sometimes that has coincided with a change at the top of a firm. But a spirit of openness and transparency, unlike my first example, will always be a positive factor in a firm’s regulatory relationship.

Litany of woe over!