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29 октября 2014

Struggling for Clean Ranks – Among Customers and Bankers

  • August this year marks 13 years since the Federal Law "On Countering the Legalization of Criminal Proceeds and the Financing of Terrorism" was passed. But, as experts say, huge amounts of "black" and "grey" money still pass through bank channels. In his interview with NBJ, Alexander ZHELEZNYAK, Chairman of Financial Group Life, has talked about measures taken by banks to fight money laundering undertakings and fly-by-night companies, and how the Bank of Russia has changed its approach to assessing compliance with Federal Law No. 115 by financial institutions.

NBJ: Alexander Dmitrievich, has FL No. 115 proven to be feasible?

A. ZHELEZNYAK: There are very many necessary and wholesome laws that have been adopted in recent years, but some problems still remain unresolved. It’s all about how these laws are applied in practice. And when it comes to FL No. 115, we have to state that until recently it was complied with only formally – banks confirmed on paper that their anti-money laundering activities were on the right track. But, generally, things stopped at that. Most credit institutions did not conduct a thorough due diligence on customers, evaluation of their business was superficial, relationship chains with other companies were not examined. It should be admitted that many made mistakes.

NBJ: You have said "until recently". But what has changed?

A. ZHELEZNYAK: First of all, the mega regulator’s approach to enforcing the law. Rules in this field have changed. Management of the Central Bank has stated their position very clearly: what we are concerned with is that banks comply with FL No. 115 in substance and not formally. Financial institutions must know their customers in all aspects. That is, they should be completely sure that they deal with entities that conduct real economic activity, and not with fly-by-night companies, money laundering undertakings or money transit companies. This forced banks to change, set themselves up for compliance with clear rules, carry out strict control, and understand that it is impossible to work in the same old way.

NBJ: In order to bar such companies from receiving bank services, extremely clear criteria, that would allow separating clean from shady, are required. Sometimes bankers themselves complain that these criteria are vague.

A. ZHELEZNYAK: The criteria are very precise and clear, even for a person without special banking or economic education. The first criterion is a mass registration address, when a company is registered at the same address with dozens of other firms. The second one – the founder is the company CEO simultaneously performing the functions of the chief accountant, and moreover, being a co-founder of 10–20 other companies. The third one – the company is not located at the address which is stated as its registered address in its constitutional documents. The fourth criterion – it does not pay taxes to the budget or pays them very rarely and in extremely small amounts. And, finally, one of the most important factors which indicates that this is a money laundering firm – the company’s activity is devoid of economic substance.

NBJ: But there are so called transit companies. Very often their registered address and tax payments are perfectly fine.

A. ZHELEZNYAK: Yes, this happens, but such companies can be quite easily detected by such criterion as the nature of their transactions. They simply transfer money through their accounts, and that’s easy to find out.

NBJ: Another area of business that is very common to such companies is moving money abroad.

A. ZHELEZNYAK: You are absolutely right, according to estimates by the regulator, 49 billion dollars or 2.5% of the GDP was illegally transferred from Russia to foreign accounts in 2012. Out of this amount, 14 billion dollars was accounted for by trade operations, and the rest by capital operations referred to as “dubious” in the balance of payments and included in the capital outflow count. As a result, our budgetary system under-received about 450 billion rubles, and if to include fly-by-night companies – over 600 billion rubles.

Typically, companies moving money abroad make advance payments under contracts that stipulate, for example, consultancy services. So called consultants in such a case are mostly offshore companies. Accordingly, the purpose of advance payments under those contracts becomes quite obvious. Therefore the mega-regulator requires that financial institutions study the nature and specifics of operations of their customers. And not only of customers, but also of the counterparties of companies served by a specific banking institution.

The Central Bank forces financial institutions to change their policy towards customers. It has clearly stated that it intends to fight any dubious transactions with ardor, no matter who performs them – banks holding top positions in various rankings or small market players. Results of such vigorous activity of the regulator are apparent. According to official data, over the last six months alone the market for illegal cash-out transactions through banks has contracted by more than one-third.

NBJ: In such case banks will inevitably be subject to additional organizational burden, because a thorough examination of customers will most certainly require staff training.

A. ZHELEZNYAK: Certainly. I’ll say more: this will require retraining of all bank managers, because previously credit specialists did not have to deal with tasks such as studying the customer’s counterparties, comparing tax payments with payments that the company is obliged to make by law. The very approach to managers’ performance evaluation is changing: previously their task was to attract as many customers as possible, but now the point is that these customers have to be quality prospects and transparent for the bank.

NBJ: Can you show how this managers’ retraining is conducted using FG Life as an example?

A. ZHELEZNYAK: Of course. We have set up distance learning e-courses for retraining. In addition, we provide intramural training by conducting case study workshops once a month to look at various schemes used by companies, novel legislation, etc. A manger will be authorized to work with customers and open accounts only after completing a recurrent training course of this kind.

Furthermore, we have added a clause to employment contracts, according to which a manager is personally responsible for compliance with FL No. 115.

NBJ: I believe that making the fight against money laundering undertakings and transit companies more effective would require not only retraining courses for managers, but also upgrading of the bank’s IT.

A. ZHELEZNYAK: Exactly. FG Life has purchased recently and implemented new software which allows monitoring and isolating dubious transactions. I should say that this software is considered one of the best in the world, it was developed on order of the Israeli Government.

NBJ: What do you think, do we need foreign experience in this matter?

A. ZHELEZNYAK: It is this experience that is actually needed now, because European and American banks largely managed to neutralize activities of fly-by-nighters, "laundries", etc. long ago. Banks in the USA and European Union countries simply will not open an account for a company whose activity raises doubts in them. They know perfectly well that serving such company will first of all put the bank in a bad light, and if this is done on a large scale – the whole bank system of the country. We are just coming to this understanding.

NBJ: As a conclusion, I cannot but ask you: Don’t you find it strange that the regulator has started a vigorous fight for clean customer bases of our banks only a year ago?

A. ZHELEZNYAK: No. The Central Bank, Rosfinmonitoring, law enforcement agencies have always fought with cash outs, money-laundering banks. This work simply became more active, more prompt. Our banking system should be purged from bad faith and ineffective players involved in dubious operations either due to lack of unprofessionalism or due to mercenary motives. Currently financial institutions have all necessary tools to reduce the share of dubious companies among their customers to zero: they can close accounts of such companies, refuse to perform transactions for them, etc. So now, indeed, everything is in the hands of bankers themselves, including the reputation and the future of the institutions they head.  

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