8 minute read
AML
Smoke and mirrors
Dr Jackie Harvey and Dr Peter Sproat examine the issues of corruption and beneficial ownership in Nigeria.
Dr Jackie Harvey
Newcastle Business School, Northumbria University
Dr Peter Sproat
Newcastle Business School, Northumbria University
Few would dispute that corruption is an inhibitor to economic development and can undermine the rule of law and trust in public institutions. Such is the global concern that the international community has produced various international conventions aimed at its containment, including the 1997 OECD Convention on Combating Bribery of Foreign Public Officials and the 2005 United Nations Convention against Corruption. More recently, all members of the United Nations signed up to the UN’s Sustainable Development Goals (SDG), which include a pledge to “substantially reduce corruption” (SDG16.5) and strengthen the “recovery and return of stolen assets” (SDG16.4).
A key focus of the efforts to reduce corruption at the international level has been the attempt to prevent criminals from using the global financial system to disguise the proceeds of their crimes. For 30 years, the Financial Action Task Force (FATF) – an inter-governmental body set up in 1989 by the G7 – has attempted to introduce and monitor a set of anti-money laundering (AML) standards across the world. Since being listed in the appendices of the 1990 “Financial Action Task Force on Money Laundering Report”, its 40 Recommendations on AML have required national governments to impose duties on the financial sector to identify their clients, monitor their financial activities and to report any suspicious activities to the authorities for investigation. It also encouraged states to bring in measures to facilitate the recovery of the proceeds of crime, including corruption.
The Financial Action Task Force Recommendations
Its 1990 Report also indicated that the FATF’s approach would be reliant upon co-operation between states. There was an expectation of collective action and that the wider the range of countries applying their recommendations, “the greater their efficiency would be”. So here we come across the problem of applying the same “one-size fits all” Recommendations across the world. Only a small number of academic authors have really challenged the presumption that something considered appropriate and achievable within the G7 could be replicated within countries with different social norms, cultural values and rules of law.
The FATF 40 Recommendations came into being in 1990 following a G7 in Paris in 1989. The agenda for the Paris meeting contained 11 issues, the last of which was drugs. It was in this context that the issue of money laundering was raised, along with references to the recovery of these criminal assets and the creation of a financial action task force. Since then, the FATF has expanded its ideas in a variety of ways: Firstly, it has encouraged countries to look for more than drug-related money laundering.
Incrementally, it widened its purview first to include the laundering of the proceeds of serious or organised crimes and later all acquisitive crimes, and even the financing of
terrorism and the proliferation of weapons of mass destruction. Secondly, it increased the range of institutions that should monitor and report suspicious financial activity well beyond banking into sectors as diverse as the legal profession and casinos. Thirdly, it deepened the duties placed upon institutions within the regulated sector in a variety of ways. For example, the “know your customer” (KYC) rules that surround the initial opening of a financial relationship have been replaced by “customer due diligence” (CDD) – a never ending set of obligations.
One particularly difficult issue in regard to the latter is addressed in Recommendation 24, which requires a country to ensure “there is adequate, accurate and timely information on the beneficial ownership and control of legal persons”. The Recommendation is framed in furtherance of an effective information exchange framework between different agencies within a jurisdiction, as well as bilateral information sharing between different jurisdictions. Unsurprisingly, this has increased interest in ideas surrounding the form, formation and access to national registers of company ownership.
Nigeria: the challenges of AML
Our research on the disguise of beneficial ownership to launder the proceeds of grand corruption from Nigeria considers all of these issues. To this end we have looked at: ● grand corruption and the ways in which the proceeds of corruption in Nigeria have been disguised and moved across the globe; ● the nature and extent of information exchange and cooperation between anti-corruption agencies within Nigeria and internationally as countries attempt to recover stolen assets; and ● the practical limitations faced by Nigeria in creating an open register of company ownership (something to which it has made a political commitment).
Over the years, Nigeria has responded to criticism from the FATF by producing an extensive array of anti-money laundering and anti-corruption legislation. Unfortunately, much is overlapping and has led to the creation of a complex range of agencies. Further, two key pieces, the Proceeds of Crime Act and the Companies and Allied Matters Act, are currently “stuck” in a legal limbo due to lack of consensus over their scope and content.
Reporting requirements
Aside from that, there are a range of practical challenges that immediately present themselves within the context of AML in Nigeria. There are extensive reporting requirements placed upon the banks within the country. The banks are required to monitor and report upon all transactions above 5 million Naira (approximately $13,000)
for individuals and, more significantly, 10 million Naira for companies. They are also required to produce monthly reports of all transactions by those account holders who have been identified as politically exposed persons (PEPs).
Given the importance of the government as a major employer within the formal sector, together with the extensive family networks, there are in practice a very large number of PEPs. With such extensive reporting, the result can be that, in effect, nothing is reported. Outside of the formal banking sector, the designated non-financial institutions fall under the regulation of a single agency, the Special Control Unit Against Money Laundering (SCUML), which has a herculean task of monitoring a diverse and geographically dispersed range of some 20 different regulated sectors with a limited number of staff. Nigeria’s AML efforts are further hindered by the fact that more than half of the economy is cash based; and outside of the main urban areas, if records are kept they will be largely paper based.
Customer due diligence
Aside from the reporting, the regulated sector is required to undertake KYC/CDD. This may be reasonably straightforward when faced with an individual who has been a business client of many years, but generally this is more difficult when that counterparty is a legal person and the bank, for example, is required to identify a company’s beneficial owner or owners.
Currently, to comply with due diligence, banks have to appoint lawyers to undertake manual searches of the largely paper based registry records maintained by the Corporate Affairs Commission (CAC). Moreover, there may be little point to the laborious task for, as with records collated in other countries (including the UK), the data provided to the registry has not been checked for accuracy. One encouraging development in this area is that earlier this year, the Nigerian Extractive Industries Transparency Initiative (NEITI) launched its own register of companies operating within the important extractives industry sector. However, a search of the register reveals information on linked companies but not on who owns whom.
It is clear that information can be open but unless it is accurate it is of little use. In this regard verification methodologies will be key, particularly where information is to be submitted or maintained through annual confirmation statements.
Culture of secrecy
In addition to the problems with data collection caused by reliance on paper based systems and the overlapping mandates of different investigatory agencies such as the EFCC (Economic and Financial Crimes Commission) and the ICPC (Independent Corrupt Practices And Other Related Offences Commission), the observed “culture of secrecy” (Transparency and Accountability Initiative, 2018) within
Given the importance of the government as a major employer, together with the extensive family networks, there are in practice a very large number of politically exposed persons.”
the government has resulted in an absence of collaboration and coordination between various agencies that is longstanding and structural. All of these issues have diluted agencies’ effectiveness in relation to the investigation, prosecution and recovery of the proceeds of corruption.
The operational reality
It is this operational reality that has created the conditions that high profile individuals within Nigeria have been able to exploit for their own ends. The names Sani Abacha, Goodluck Jonathan and James Ibori all spring to mind as individuals who, over a number of years, were able to remove hundreds of millions of dollars from the country.
One of the latest is Mrs Diezani AlisonMadueke, the former Minister for Petroleum Resources under Goodluck Jonathan, who oversaw Nigeria’s state-owned oil company. She was able to use her influence to direct a subsidiary of the Nigerian National Petroleum Corporation to award contracts to shell companies (created in Nigeria) that were owned by existing business associates. From Nigeria, the proceeds of those illicitly awarded contracts were then laundered through companies (and banks) in the BVI, Switzerland, the US and the UK. In the latter two countries, the proceeds were used for the successful purchase of various assets, including extensive property in London, a $50 million condominium located in one of Manhattan’s most expensive buildings – 157 W. 57th Street – and the Galactica Star, an $80 million yacht that was built in the Netherlands.
There would have been multiple points at which Suspicious Transaction Reports or Suspicious Activity Reports could have been made – not only within Nigeria but also within both the US and the UK, certainly from banks and also from estate agents. Greater transparency of beneficial owners is unlikely to provide the panacea; indeed, a search through the UK Companies House shows companies still registered to the named business associates in the Alison-Madueke case.
This research is supported by the DFID funded Global Integrity Anti-Corruption Evidence (ACE) Programme. Further information about the project is available at bit.ly/3dWX9BR.
● Author bio Dr Jackie Harvey is Professor of Financial Management and Director of Business Research at Newcastle Business School.
Dr Peter Sproat is Senior Lecturer at Newcastle Business School, teaching fraud, financial regulation and risk management.
