Asset Recovery, Compliance Culture, and Why Financial Crime is Outpacing Enforcement

Asset Tracing Trends & Challenges

Financial Crime Digest: You moved into the private sector in 2020. A lot has happened since then. We’ve entered a new era in financial regulation. Can you discuss the biggest changing trends you are seeing regarding asset tracing capabilities, challenges, and innovation from 2020 to the present?

Barry Faudemer: From the work that we’ve done, particularly in Africa as an example, we’ve seen a real thirst by those countries to develop their asset tracing capability and understanding of how to recover assets located beyond their borders. For them, it’s not just a case of dealing with domestic cases, they recognise that the proceeds of corruption inevitably end up overseas, and they want to seek recovery in the most effective way possible. We help them develop their recovery strategies using a range of different tactics.

That thirst to prove effectiveness is of course driven by FATF standards, national risk assessments, and grey listing. Getting off a grey list means proving that you are using your powers and conducting effective investigations. Jurisdictions also realize the damage that that can be caused to their economy by being grey listed. A change of Government often results in a strong desire to recover assets that have been plundered. In major cases the returned assets can be used in vote winning projects, so it is appealing to the new regime. The complexities of the layering that occur are substantial, often over many years Unpicking all of the layering and having the expertise to do that is sometimes in short supply.

With fraud and corruption, we have seen a remarkable increase. Fraud just seems to be unstoppable with annual increases in the amount of fraud being successfully perpetrated. Given the statistics I believe we will all fall victim to a fraud during our lifetime. The victims are a combination of companies and private individuals. We see lots of private individuals suffering frauds where they’ve been duped over the telephone but with the fraudsters deploying sophisticated techniques. The internet and telephone access makes it easier for the fraudster to target individuals in their own home. It’s rare for face-to-face meetings with the fraudster. It does happen occasionally, but mostly it’s being perpetrated via telecommunications and, unfortunately, the fraudsters now have access to some very vulnerable people. The retired, with “resources sector” as I call them, are being hit very hard indeed. The older you get the more you stand to lose to fraud.

The volume of banking fraud puts considerable strain on the banks to ensure that their systems and controls are as effective as they can be. Anti-money laundering generally, has improved in that account monitoring has becomes more advanced; AI helps. Despite businesses spending significant sums of money on AML defences we’re still seeing the kleptocrats and fraudsters using other sophisticated means, professionals, and third parties to be able to navigate through those defences. Banks are not moving quickly enough to plug a gap when a fraudster identifies and exploits a weakness, and the fraudsters see that as an opportunity. Outsourcing call handling, account monitoring and fraud investigations simply creates more opportunities for the fraudster.

Who is winning the use of AI? Regulators or criminals?

FCD: There is often a “cat and mouse” dynamic in RegTech: the use of AI for compliance versus criminals using AI to evade detection. In terms of fraud prevention and asset tracing, who do you think is currently winning, the regulators and private sector, or the illicit actors?

BF: It feels like the fraudsters, the illicit actors, seem to be winning the day. It’s a very sad thing to say when I’ve spent my career trying to fight financial crime and protect the vulnerable, but it does feel as if the illicit actors are winning.

You’ve only got to look at the fraud stats in the UK, showing growth in the volume of fraud being reported and what feels like a terminal decline in detection rates. The UK National Crime Survey identified that the majority of frauds were not being reported to the authorities. Law enforcement has very, very limited resources when it comes to actually going after the assets and recovering them. Law enforcement is having great difficulty in combating the tsunami of fraud that’s actually occurring. They do not have the finance or sufficient numbers of skilled people to combat fraud. Criminals rarely commit armed robberies; they have turned to fraud with low risk of being identified and very little chance of detection… and they can work from home!

So, it’s a very sad statement to make, but it’s the truth we are losing the battle when it comes to fraud.

How regulators can claw back stolen assets

FCD: Let’s pivot to success stories. Can you share some examples of victories that demonstrate how regulators and the private sector can still effectively claw back stolen assets?

BF: The global development of AML standards is making life difficult for the criminal, the AML training that helps spot red flags supported by the qualifications that need to be obtained by compliance professionals all help bolster the defenses in a jurisdiction. Telecoms companies play a very important role and in Jersey they have been very effective in using technology to hinder criminals from using telephone systems to gain access to their victims.

Working collaboratively with different jurisdictions is absolutely crucial. Criminal gangs know no boundaries, and law enforcement needs to ensure that boundaries don’t inhibit them and that they can work collectively as a joint investigation team. There’s an awful lot of cross border cooperation, far more than there was 20 years ago, for example. So that’s really positive. Things like seeking mutual legal assistance between jurisdictions need a drastic overhaul and rethink. It takes far too long to secure evidence in another jurisdiction and extraditing fraudsters in some jurisdictions can be unachievable. My advice would be to employ can do people rather than individuals who seem to find excuses not to process a mutual legal assistance request.

I do think that things like non-conviction-based forfeiture, where it’s easier to actually restrain the assets and return them to victims, is definitely the way forward. Jersey and the USA have been particularly effective in deploying non-conviction-based forfeiture to seize assets where securing a confiscation using other means would have been difficult.

But we have now seen lots of other jurisdictions adopt non-conviction-based forfeiture powers and a more streamlined process. Nigeria, for example, has just revamped its proceeds of crime law in 2022. They’ve adopted some significant powers, so that will help in the future. Putting a criminal money laundering case or fraud case together takes time, effort, and money, not to mention the pain of extraditing the person from whatever jurisdiction to face trial. Extradition is very hit and miss in my experience. Using non-conviction-based forfeiture enables you to seize the assets very, very swiftly, and the cost is considerably less.

Unexplained Wealth Orders in the UK have been used very sparsely, and I think it’s time for a rethink. I’d like to see more non-conviction-based forfeitures occurring using the sort of powers that are now surfacing across multiple jurisdictions. The reverse burden of proof with non-conviction-based forfeiture is a game changer.

In the UK private prosecutions are permitted and perhaps it’s time to allow such a practice to occur in other jurisdictions. We need to be more inventive if society is serious about tackling fraud.

Deferred prosecution agreements, introducing the offence in the UK of failing to prevent fraud, developing the protections afforded to whistleblowers and in the UK increasing the banks responsibility to compensate victims of push payments frauds are all welcome initiatives and whilst it is early days, we are yet to see them having a huge impact on the dramatic increase in financial crime.

Intelligence-led asset tracing for modern financial institutions

FCD: I’d like to get into the weeds a bit. From your vantage point, what does an intelligence-led asset tracing workflow look like for a modern financial institution in the private sector? Can you walk us through the roadmap from initial signal to actionable output?

BF: The private sector has developed the ability, using lots of open-source information sources, to put very detailed intelligence reports together. And these are a massive help when trying to assess at your onboarding, whether a client poses a risk. So, the risk assessments that are completed in the private sector can be incredibly detailed although the standards vary widely. We use Sqope Intelligence reports given their quality and accuracy. The finance industry has developed very sensitive monitoring tools to highlight red flags indicating that money laundering might be occurring. The problem I see is that many innocent people with entirely explainable money movements end up having their assets frozen for months whilst they explain the provenance of their funds. The distress it causes is immense.

Because I now work for a litigation firm, seeing how litigators go about tracing assets has been very interesting for me compared to my approach as a criminal and regulatory investigator. They have an incredible range of discovery powers at their disposal and I see that the civil litigation route being used more and more particularly given the limited effectiveness of the criminal process. The intelligence gathering capability in civil litigation cases is very impressive.

Is lack of information the biggest challenge for the private sector?

FCD: Would you say the biggest limitation in the private sector compared to law enforcement is the immediate lack of information?

BF: To a degree yes. The public sector has the advantage of receiving intelligence in the form of suspicious activity reports or in the case of regulators receiving vast volumes of information from those they regulate but the private sector also has extensive discovery powers. So, I think at the beginning the private sector struggle to build the picture but once the litigation investigation gets underway the lack of early intelligence becomes less of a hindrance.

I do believe that the private sector and public sector could work more collaboratively. Let me just give you an example of a good public/private partnership. All the telephone calls coming into Jersey come through a couple of telecommunication providers. They screen for fraudulent numbers and block the number if it’s being used to commit fraud. The Police encourage complainants to contact their telecoms provider and provide them with the number. The telecoms provider then blocks the number to prevent others from being targeted. Simple but effective public/private partnership.

Methodologies to follow the money

FCD: Regarding the reconstruction of beneficial ownership and control within opaque, multi-layered arrangements, what methodologies are you seeing in the private sector that are most effective for following the money?

BF: Well, I think what’s helped is that there’s been a real focus on not just who the person is behind the legal entity but who is controlling it. So, for example, in Jersey there’s a three-tier test. It takes you through what percentages qualify as an ultimate beneficial owner, who the controllers are, and individuals exerting influence over that entity. So, the institutions are being encouraged to take a broader view beyond just the UBO. Let’s face it, if you’re a kleptocrat, you are not going to put assets it in your own name. You’re going to seek the assistance of some associates who do not feature in open-source intelligence reports. We see such individuals putting a lot of effort into the layering of their ill-gotten gains and using nominees.

Some jurisdictions are targeted because they’re not robustly applying the three-tier test. As soon as you start seeing those jurisdictions with weak AML standards featuring in your structure chart at the commencement of an investigation, you start to become concerned that you may be dealing with a large-scale money laundering case. I would urge readers to read Shell Games by Professor Jason Sharman if you want to learn more about jurisdiction risk. Although dated, it is still a brilliant piece of covert research in my view.

On a positive note, with international AML standards improving globally it is making it more difficult for the kleptocrat to conceal their funds in places like Jersey, Guernsey, and the Isle of Man, which have remarkably high standards. But of course, they have only to find a weak link with a service provider blinded by the fee rather than complying with their AML obligations. Such cases are becoming increasingly rare in the Crown Dependencies but that is not the case in many other jurisdictions. I always describe it as being a bit like a bee around a honeypot. As soon as you find a business willing to flout the rules, bad actors pile in as word spreads. Compliance officers have a critical role to play in keeping businesses safe and avoiding such a scenario from occurring.

Reliable indicators of concealed assets

FCD: When analysing professional intermediaries, such as lawyers, accountants, and gatekeepers, what behavior patterns are the most reliable indicators of concealed asset positioning?

BF: I would say those businesses who are not in a strong financial position, a dominant director who rarely refuses business and ignores their compliance officers’ advice are red flags. High turnover of directors and compliance staff are often associated with a business willing to flout the AML rules and taking a relaxed approach to assessing source of funds and source of wealth for high risk clients.

In short, a business with a poor culture of compliance will emit strong indicators. A lack of SAR reporting or a low rate of submission of internal SARs to the FIU are also strong indicators. You usually find the board of such a business has not undertaken their AML training for many years!

This is where you start to worry about the likes of private equity firms, because they’re piling on the pressure to improve profitability short-term. And it’s a concern for me that it can promote bad behaviour.

The Jersey Commission has issued in their handbook, very helpfully a list of red flags that could arise from a poor AML culture. Those red flags apply across the board to all types of business. If tasked with making an assessment, then I would strongly recommend reading the list within the JFSC AML/CFT/PFT handbook.

First steps for investigators in the first 72 hours

FCD: Once freezing orders or compelled disclosures are in place, what productive steps do investigators often overlook? What should practitioners prioritise in the first 72 hours to identify secondary assets?

BF: It all depends on where the investigator is located. It depends on the powers that they’ve got available to them. Preservation of the assets is a priority but before you get to the stage of overtly issuing compelled disclosure or freezing assets there are important steps to take. The older I get the more I realise the importance of thinking through a detailed investigation plan. When putting your plan together to trace assets that may have been moved overseas ask yourself do I understand how assets are moved around the world through different jurisdictions, and what powers might those jurisdictions have to help me? What willingness will they have to assist, and what information are you likely to glean if you follow the money? Everybody knows you’ve got to follow the money, but it’s how that’s been layered becomes very, very important. So, it’s very rare in this day and age for the money to be stolen, layered, etc. in one jurisdiction. If you’re talking about very significant amounts, I’m not talking about small-scale frauds, I’m talking about kleptocrat type scenarios, they’re going to use several jurisdictions. If you study 1MDB from Malaysia, I think it’s 10 or 11 jurisdictions that were involved. The inexperienced investigator usually fails to plan their investigation adequately. Failing to plan is planning to fail, often leading to lost opportunities.

So that’s probably the most significant limiting factor. Some of the mistakes I see are that people don’t understand what information they can get from the different jurisdictions. So, for example, as soon as they see a trust involved everyone glazes over and thinks, oh well, the money’s gone. Well, that’s not the case at all. Trust records are usually meticulously kept and a rich source of information.

As an investigator you need to have your exhibit handling tight from the outset. Make sure you’ve got the right powers in place to seize and restrain the asset. This all goes back to your investigation plan and making sure you have the answers carefully thought out. Managing a complex financial investigation in the absence of a written plan can prove very costly and ineffective. If you’re putting a plan together expose it to someone with a great deal of experience and be open to suggestions. I always listen very carefully to such advice despite 44 years of investigative experience. I hope my wife doesn’t read this as she is convinced that I consistently fail to listen!

And understanding the jurisdiction, I think is really important because let’s just take Jersey, Guernsey, Hong Kong, the FIU can issue a ‘no consent’ following receipt of a suspicious activity report. There’s no time limit attached to it. So that’s really important if you’re an investigator, to know that such a power exists and the asset you are investigating could be ‘no consented’ by the FIU on the back of a suspicious activity report. In some jurisdictions, of course, it’s time limited. So, after 28 days if the institution hasn’t received a court order, it’s business as usual. They can pay away. Pick up the phone and speak to an investigator in the jurisdiction holding the asset.

Asset Tracing: The Future Breakthroughs

FCD: Where do you see the next genuine breakthroughs in asset tracing? Is it enhanced intelligence sharing, automated nominee detection, or perhaps AI-assisted reconstruction of fragmented beneficial ownership data?

BF: I see that the depth of intelligence reports from the private sector have come on in leaps and bounds and their ability to access legitimate data will only increase further. With geolocation technology it will be possible to verify where you are and have been, creating asset tracing opportunities unseen before. Company Registers in various jurisdiction will become more open as political pressure is brought to bear. The ability to link companies and build a picture of associated structures is now so advanced that it is making life very dangerous for the criminal. The challenge is that you need someone to put a case together and take it before a Court and that is not happening in sufficient numbers.

How to reduce undetected asset flight risk

FCD: Looking ahead to 2026, if you could give every MLRO and Head of Compliance in the UK three practical steps to materially reduce undetected asset flight risk in the coming year, what would they be?

BF: The first one I would say: Report your suspicions in a timely way. If you go back to my point about the retired sector. The quicker you can report something and add to the picture, the more people can be saved from losing their life savings. Train your staff not only on the legal requirement but the human cost of not filing a SAR. I can give you true heart-breaking accounts of cases where victims have suffered irreparable harm. I suggest analysing staff who have not filed a SAR for a number of years and ensuring that they receive more detailed training particularly containing the human element to it.

Secondly, research a client at the point of onboarding thoroughly. It can result in huge cost savings. Take a look at a scope intelligence report and use it as a benchmark against your current provider to ensure you are drawing upon the most effective and in-depth intelligence report as possible.

And the third one is if you have any doubts about whether this is suspicious or not, and you’re receiving pressure not to make a suspicious activity report, never sacrifice your integrity. Seeking to recover your integrity, is very, very difficult. Do the right thing even if it may be unpopular.

Originally published by Aperio for the Financial Crime Digest.