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From the Managing Director's desk

Compliance’s world domination


01/07/2012

varadi_laszlo_40010 years or so ago we didn’t even know of the existence of compliance departments, let alone what they did and how they worked. Even here at LAVECO, where we use the banks’ services day in day out, we were blissfully unaware. Of course, we all knew about the legal departments within the banks, just as was the case in general with large, serious companies.
The terrorist attacks against the USA on September 11th 2001 led to new momentum in the fight against terrorism in all areas, and at the financial level they started looking at how these organisations were being financed through the banks. The EU announced a greater fight against the small tax haven countries, accusing them of “harmful tax competition.” At the same time the USA is also trying to clamp down on its own citizens who take their tax savings abroad. The OECD is also striving for the elimination of money from illegal activities, calling for transparency in financial processes. Numerous countries, international organisations and financial institutions adopt the OECD guidelines in order to try and prevent money laundering. Various EU directives are introduced in an attempt to standardise anti-money laundering regulations, and since the beginning of this century every EU member state has passed anti-money laundering legislation, though with only limited standardisation.
Naturally, financial institutions, banks and other companies offering financial services, such as brokers, feature very prominently among the subjects of the anti-money laundering legislation. This makes sense, as without banks it is not possible to launder money, with the illegal funds inevitably finding their way there. For the average businessman this would not provide a problem, since companies are not usually formed for the purpose of money laundering, but for some business activity: production, trade, services, investment etc.
The monitoring of procedures, identification of new clients and continuous tracking of their transactions is the competence of the compliance department, naturally in conjunction with the bank’s legal department. In this way, a new division is born within the bank, and its task is to adhere to the legal requirements. There wouldn’t be any problem with this, except that they too are financed by our money, the money which we, as clients of the bank, pay for banking services. At the end of the day the maintenance of the bank becomes more expensive as it has to employ more staff. But of course, this is all in our interest!
The real problem begins when these people in Compliance start working. It would appear that for them the best thing would be if the bank had no clients at all, as they merely obstruct the bank’s operation. If a client always makes the same transactions, then that is the problem, and if he doesn’t, then that is the problem. The only thing is, the bank also has to make all the usual super profit from somewhere, so sooner or later a conflict will arise within the bank between the business division and the compliance people who carry out the client identification and monitoring. Of course, this is not widely known, as none of the banks wash their dirty laundry in public, but when I had lunch recently on a small island with the management of a not-so-small bank I quizzed them, after a couple of glasses of wine, on the subject of compliance. One of them opened up and said: “If I granted these idiots everything they want, then we wouldn’t open accounts for anybody.” On another occasion, another bank manager admitted that of the 10 requirements placed on clients, his bank would not be able to meet even one.
In the name of client identification compliance departments often ask for documents which don’t even exist, or, if they were ever produced, then would probably be fakes. In countries with the continental legal system, for example, they are unable to comprehend that it is not possible to obtain authentic public documents on a company’s owners or directors in a significant number of Anglo-American law jurisdictions. In many cases, it is only possible to obtain a common-law document. Then, if they accept the common-law document, the next battle begins. Even if the document is authenticated with Apostille, for example, the wording of the text written by the notary public may not be to the liking of the man from compliance.
Their main enemy is the bearer share, because anybody could be hiding behind it. In many cases, they are not even satisfied if the client or the company director declares unambiguously who the 100% ultimate beneficial owner or possessor of the bearer shares is. For them, the bearer share is the devil itself: this is what they were taught, and what is reiterated to them in training courses several times a year. They have never even heard of the “dummy” company. If we think about it logically, even in the case of registered shares, we can not be certain that the name on the share certificate is that of the true owner. It could just be a trustee. It is certainly not worth getting into a fight with compliance about that, though. They have it written down in black and white… where it is not possible to detect the true owners. At the same time, for the client the compliance department is an unseen and untouchable division within the bank. You can’t call them, can’t address a letter to them, and they don’t put anything down in writing for outsiders. They are simply just there, and show how clever they are. True, I have had the chance to speak to them once or twice. It was truly an incredible experience. I explained to the head of compliance of one of the large banks, for example, why their system was lacking as they failed to deal with one of the most basic questions: that is, the reason why this whole compliance thing came about, to see whether a client exists or not. I pointed out to him that in Hungary we still haven’t even reached the point where the banks link the records of the public records office and the registrar of companies to their own databases and are able to see when an individual passes away or a company is dissolved or struck off. As a result, their systems are quite probably showing that the bank still runs accounts for hundreds of dead people and defunct companies. In the world of online banking, anybody who knows the codes can log in to the account and withdraw money, and the bank would be responsible because they had failed to spot that they were maintaining an account for a non-existent client. The banker concerned reacted by giving me a dressing down: “don’t poke your nose into our system, because we are extremely thorough and fully aware of the legal requirements.”
Dear Reader, I wouldn’t be surprised if you had come across similar or even more hopeless cases. For me, the “more than 3 countries involved” problem was the best. Basically, the bank wouldn’t open accounts for companies where more than 3 countries were involved. Maybe, in this globalised world, you can not comprehend this. Let me explain. A Spanish businessman establishes a company in Hungary because corporate tax is 10%, instead of the 35% in Spain. The company then transports beer from the Czech Republic to the UK, but as the businessman had asked his Austrian friend to be the director of the company, the Hungarian company decided to open a bank account in Austria. That is, it would open an account, but the Austrian bank informs them that, according to the compliance department, the opening of an account is not justified because “more than 3 countries are involved in the enterprise.” Logical, isn’t it? Maybe there’s football on and maybe it’s summer, but the English fans can’t drink Czech beer because their thirst is not justified. At least according to the compliance department, here in the 21st century in the middle of a 27-member European Union.
But what can you, the poor victim, do? Sit back in your armchair, watch the Olympics, drink your beer, while you still can, and enjoy life. Leave compliance to us at LAVECO. Unfortunately, we spend a significant part of our time fighting with them, instead of doing something more worthwhile. But we are now used to it, and generally we are winning the battle. Or at least in a significant number of cases.
Wishing you a pleasant and relaxing summer watching the Olympics.
With warm regards,

    László Váradi
    Managing Director
    LAVECO LTD.

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