Introduction
Last week there was media coverage of a story in the United States. It concerned legal proceedings brought by the US authorities against a group of individuals who formed a charity to raise funds to build the infamous wall between the USA and Mexico.
It’s alleged that members of the public were asked to make donations to a charity set up for this purpose. Despite promising that 100% of the funds collected would be for the wall, it’s alleged that at least $100,000 was illegally diverted to an account opened in the name of a shell company. The transfers to that account, described as being for “social media”, were intended to benefit some of those individuals.
I’ve previously written about adverse media and the challenges firms encounter in assessing its independence, reliability and relevance when it relates to their customers. The widespread coverage of the wall case, along with the publicly accessible written indictment, for example, are two factors likely to give firms a degree of assurance as to whether the information being reported is credible. But in most cases, it isn’t always clear how a firm should respond to this type of adverse media, once discovered.
This story reminded me of another financial crime case I researched earlier this year involving a charity. The media coverage, combined with a regulator’s reporting, illustrate the challenges firms face when conducting adverse media screening.
Mismanagement of a Religious Charity
In July 2017, the UK Charity Commission (“Commission”) opened a statutory inquiry into a religious charity formed and operated in the UK (“Charity”). The Charity was made up of several different companies registered at Companies House. The Commission did this because the Charity had failed to file annual accounts with the Commission by the due date for several consecutive years.
Two years later, in May 2019, the Commission published its findings why the Charity kept failing to file its accounts on time. Three of its findings were:
Lack of management / oversight to make sure the Charity’s branches submitted information needed by the main office to prepare the accounts on time
Given the Charity’s size, budgeting, administration and financial controls were inadequate
Despite these failings, there was no evidence of fraud of misappropriation of any assets
The Commission reported that the Charity’s trustees had taken action to rectify the problems identified. Approximately £26.8million of charitable income for the financial years 2015, 2016 and 2017 was subsequently accounted for and published on the Commission’s website.
It turns out, however, there was a lot more going on behind the scenes.
Contradictory Adverse Media?
One month later, on 24 June 2019, the Daily Mail newspaper published an article reporting that the Charity’s manager (“Mr C”), had been convicted of money laundering and supplying false information to the Commission. It turns out that Mr C was part of a much larger global fake pharmaceutical scam reaching back to 2012.
Sex, Smokes and Slimming Down
Seven years earlier, the London Regional Asset Recovery Team (“RART”), part of the Met’s Specialist Crime Command, launched an investigation in March 2013 after receiving complaints about the sale and purchase of counterfeit drugs from a number of online pharmacies.
They discovered a scam involving the production of fake prescription drugs such as Viagra and drugs intended to help people quit smoking and lose weight. The drugs were sold via fake online stores. Consumers who purchased the drugs were mainly from France, Austria, Germany and Spain.
The investigation led the RART to discover that in early 2012, Mr C had arranged for fourteen bank accounts to be opened, some in the names of the various companies that made up the Charity. Those accounts were then used to receive payments from merchant accounts set up to receive card payments for the drugs bought online.
Between March 2012 and September 2014, the Charity processed over £10.3million through the accounts opened by Mr C. £8,601,299 was transferred to foreign exchange accounts and £1,676,011 was transferred to money service businesses. From there, the proceeds were transferred to bank accounts in Cyprus, Hong Kong, Panama, China and the United States.
Thousands of pounds were also transferred to Mr C’s personal account. A very small proportion of the overall amount deposited into the Charity accounts was legitimate charitable donations. The Daily Mail also reported that Mr C had used some of the proceeds to try and purchase a knighthood in recognition of his work with the Charity. Seriously.
Mr C fled the UK before his trial started in 2019. In his absence, he was sentenced to 9 years prison.
Blogs and Opinions Fly
It turns out there were other media sources commenting about the misuse of the Charity in early 2019, when the trial began. Blog commentators which focused on a particular religious community with a mission to deter financial crime, wrote extensively about it, using subtitles like “Pay Attention Before You Donate!”. Other online sources, opined on the scam and the evidence given in court.
2020 Charity Commission Update
In March of this year, an online news site reported that the story of Mr C and the Charity had not yet ended. It wrote that the Commission was “still considering its options in relation to the recovery of monies” derived from the drug sales held in accounts that had been frozen.
I chased down the source of the story and checked the Commission’s website. There I found a report dated 20 March 2020, laying out a very different set of facts from those it reported in May 2019.
This report disclosed that the Commission opened an inquiry into the Charity in 2014 following receipt of information from the RART. The Commission’s inquiry was then placed on hold in 2016, pending the outcome of the police investigation that led to the prosecution of Mr C and others.
This new report found that:
The Charity was late in filing accounts way back in 2014
There were large discrepancies between the amounts that passed through the bank accounts and what had been reported in annual returns filed with the Commission
The Charity was used to launder the proceeds of crime
Over seven years, one trustee had received £60,850, with no explanation for it
As for the May 2019 Report, it’s no longer on the Commission website.
Food for Thought: When to Rely and Act on Adverse Media
I’m leaving this article open-ended for one good reason: I am not sure there’s a “right way” to know when to rely on adverse media and what to do in all cases once you’ve discovered it.
Unlike the wall case, I was unable to readily locate the court’s decision in relation to Mr C and his associates. So, it’s unlikely that on its own, the Commission’s May 2019 findings would have prompted me to do any further investigation, were I working at a bank in its compliance monitoring team or conducting periodic KYC reviews of its customers. The information may not have raised any significant financial crime red flags in relation to either the Charity and its entities or Mr C.
It’s open to question whether the online material published in early 2019 about the trial would have been enough to rely on if a firm discovered that the Charity or Mr C was an existing customer. At that point, the information in these sources were allegations which had not yet been ruled on by the court. And blogs – how readily are firms willing to rely on the information provided in them?
The Daily Mail newspaper article would have (hopefully) made a firm’s monitoring system go “ping” and triggered a closer look at the information reported. The challenge might be in reconciling the court ruling with the Commission finding that there had been no evidence of fraud or misappropriation. And the Commission did say in its 2019 findings that the Charity had resolved its accounting inconsistencies.
How do you deal with the March 2020 Commission inquiry report, published some 10 months after its first report? That report makes it clear that the Charity was misused and that at least one of its trustees illegally enriched themselves from it. It doesn’t seem to align with its May 2019 report. How would you explain to a regulator your treatment of these sources if you only decided to exit those relationships after discovering the March 2020 report?
This case poses several questions to consider when dealing with the imperfections of adverse media. Timing, independence, completeness and objectivity are all factors that firms need to consider when deciding what types of information can be relied upon and then how to act on them.
There are just so many angles this case could be analysed from beyond adverse media from a KYC perspective. But in the meantime, I’ll leave to you to consider what those might be.