For HSBC, Questions Remain Following Moldovan Asset Seizures

KYC360.com readers will be aware of the asset forfeiture order granted to UK authorities in February to seize more than £466,000 from a London student living in a luxury apartment off Cadogan Square in Knightsbridge.

The young man, as one might imagine, was no ordinary student. Rather, the agency had targeted 22-year-old Vlad Luca Filat, the son of former Moldovan Prime Minister Vladimir Filat, who as head of state was believed to have helped siphon off $1 billion (£646 million) from three Moldovan banks—a sum roughly equivalent to 12.5 percent of Moldova’s annual GDP.

By the time the National Crime Agency (NCA) seized young Luca’s funds, his father was nearly two years into a 9-year prison sentence for the so-called “theft of the century,” and the government of Moldova had agreed to rescue the three financial institutions in order to safeguard the country’s economy. The bailout contributed to a subsequent collapse of Moldovan currency.

With no declared UK income, Luca had his HSBC accounts and living expenses funded by large deposits from overseas companies, predominantly based in Turkey and the Cayman Islands, though additional deposits were also made in cash at bank branches throughout the United Kingdom, including an aggregate £98,100 paid over the course of three days.

Following his arrival in London in July 2016 to commence his studies, Luca led an extravagant lifestyle, indulging his expensive tastes by purchasing a £200,000 Bentley and other luxury goods.

Such were the red flags, for the NCA and HSBC alike.

Flexing new powers

That the NCA might apprehend such funds has been apparent since the 2017 enactment of the Criminal Finances Act, which empowered the agency to confiscate suspected criminal proceeds in instances when prosecutors have yet to win a conviction. Under the law, the NCA can seize suspicious accounts only if it is able to convince a magistrate of the probability that the money is derived from criminal acts.

Law enforcement authorities have welcomed the new powers, which offer a simpler route to freezing and seizing suspicious funds than did the Proceeds of Crime Act 2002, or POCA. Whereas the 2002 law mandates a £10,000 minimum threshold for targeted accounts, the Criminal Finances Act can apply to balances as low as £1,000, and orders can be obtained without a High Court hearing.

In response to the NCA’s request to seize Luca’s funds, a London magistrate’s court ruled that he was “satisfied on the balance of probabilities that the cash derived from his father’s criminal conduct in Moldova.”

Compliance questions

Given the fact that Luca fits the criteria for being a politically exposed person (PEP) under global anti-money laundering (AML) standards, and would thus be deemed a high-risk client for most banks, this case raises a number of questions regarding HSBC’s compliance efforts that KYC360.com readers at other institutions may wish to consider.

1. Were HSBC’s money laundering reporting officers aware that Luca’s family connections posed high compliance risks at the time of his account openings, particularly in light of his father’s former role as prime minister and his recent conviction for substantial fraud at three Moldovan banks? 

2. What level of HSBC senior management approved the opening of Luca’s accounts and why did the bank’s management believe the accounts fell within the institution’s risk tolerance?

3. Knowing that Luca was a student without any declared income arising from UK sources, did HSBC identify funds being credited to his accounts from overseas companies, particularly Turkey and the Cayman Islands, especially as there was no apparent link between those jurisdictions and Moldova?

4. Did HSBC detect that the accounts received frequent cash credits paid at HSBC branches across the country, particularly in light of the fact that UK banks will not accept such deposits without a pre-printed paying-in slip or a valid debit card?

5. Did HSBC ask itself how a student could afford to pay £390,000 up front in rent for a luxury apartment, knowing that the monthly rent far exceeded what most students pay for an apartment in an entire year?

6. Did HSBC ask itself how a student could afford £200,000 car and its associated motor insurance premium, or why he would need such a car when he was living in central London with its access to numerous public transport links?

7. Considering all the issues revealed through the forfeiture order process, did the bank file suspicious activity reports to the NCA, bearing in mind that the reporting threshold is “mere” suspicion of illegality linked to the funds? 

8. Did HSBC seek a Defence Against Money Laundering from the NCA in operating the account or making payments from the account?

Unfortunately, the answers to these questions may never be known outside of the agency and the bank. The NCA, which neither rebuked nor praised HSBC in its statement, offers no further details on HSBC’s compliance efforts. A spokesperson for the bank had “no comment” to queries by KYC360.com.

Ongoing oversight

While much about the case remains unclear, what’s known for certain is that HSBC is no stranger to regulatory troubles. In 2012, the U.S. Justice Department inked a deferred prosecution agreement (DPA) alongside related regulatory enforcement actions requiring HSBC to pay $1.9 billion, upgrade its AML controls, and work in coordination with an appointed compliance monitor to resolve allegations that it had permitted Mexican cartels and sanctions dodgers to exploit its services.

At the same time, the UK’s Financial Conduct Authority (FCA) deemed that the U.S. monitor would also serve as a “Skilled Person” under Section 166 of the Financial Services and Markets Act 2000. Following the cessation of the DPA in December 2017, the bank revealed in its 2018 annual report that the monitor continued to function as “skilled person” at the request of the FCA and the Federal Reserve Bank.

Readers may ponder what view the skilled person has taken of the circumstances surrounding the seizure of Luca’s funds.

Broadly considered, the case reflects the reality that suspected money launderers do not need sophisticated methods to make use of the financial system. Diligent financial institutions should be able to answer positively and substantially to the questions posed above, in part to assure other financial institutions that they have necessary risk controls in place.

But whatever the answers, the NCA action provides a new case study that might be used in financial crime training for bank staff.

Denis O’Connor is both a Fellow of the Institute of Chartered Accountants in England & Wales and the Chartered Institute of Securities and Investment. He was a member of the British Bankers’ Association Money Laundering Committee from 2003 -10; and a member of the JMLSG’s Board and Editorial Panel between 2010 and 2016.

He has been a frequent speaker at industry conferences on financial crime issues, both in the UK and abroad.

This article is expressing personal opinions and is meant for information purposes only. The article does not intend to replace professional or legal advice. It is recommended that readers seek independent professional or legal advice, or speak to authorised persons/organisations.