Panama papers: again, another reminder

The Panama Papers bring out several issues related to vulnerabilities of controls from countries and companies. We have heard about them…tax havens… offshore companies, banking secrecy, money laundering, political exposed persons… but what are they? How are they related to each other?

To start explaining, it is important to add another role as important as it is Internal Audit within the companies: the Compliance Officer. Where does it come from? What are their responsibilities?

After the most important financial scandals that took place in 2002 such as Enron and WorldCom the authority decided to tighten the nuts and the regulation changed. New rules were placed for public companies such as the prohibition of not being an auditor and consultant for the same company, disclosures if a company is dealing with a fraud, rotation of audit partners (5 years top), creation of the Audit Committee and how to protect whistleblowers among other things. And a new role emerges from this: the Compliance area.

Compliance as its name says it has the duty to comply with the law (externally) and with the policies and procedures (internally). Its difference with Internal Audit is to prevent rather than detect. As we all know either an external or internal Auditor determines a scope based on the nature of its revision in order to analyze what is being doing vs. what it should be. (For more information refer to the article, Value: Internal Audit) The bottom line: an auditor analyzes something that already has happened (after). Meanwhile compliance should be involved before taking a decision. (I.e. a contract, hire key staff, new provider, etc.)

Compliance should be in charge of manage the money laundering risk, which is defined as to give legality to money that comes from illicit activities. Those illicit activities are several among: traffic of drugs, human organs and humans. Prostitution, forgery, pornography, bribes, etc. The term “illicit” depends upon the legal framework of each country. The criminal will look for “paradises to launder money”…those countries or companies which can help him to launder lots of money at a low cost in a very quick time.

A tax haven is defined as a territory where taxes are levied at a low rate or has a system of banking secrecy. This means that banks are not allowed to give to the authorities the information of their clients… the real owner… is a “top secret” and it has to be kept as that, unless there is a criminal complaint. Offshore companies (legal entity), refer to be incorporated or register on tax havens.

Therefore, for its characteristics tax havens are used by some people for purposes of confidentiality…others for launder money and others to pay less tax or hide money from the IRS. The latest two mean a crime: tax evasion.

But tax evasion differs from money laundering. Although both are crimes they have specific characteristics. Therefore, depending on the circumstances, someone can be accused of both or just one.

Then there is another key concept: political exposed person…“PEP”. It is defined as someone who is or has been entrusted with a prominent function. Historically PEPs have shown us that tend to be corrupt. Taking bribes is illicit money; dirty money. It has to be laundered. Someone who is corrupt does not want to be known as such, so the money has to be seen as “clean”… as legal.

One of the key elements to deter and prevent money laundering is to know your customer (“KYC”) and apply customer due diligence. (“CDD”) Countries, authorities and companies need to know who the real owner is, as well as who controls. Criminals use among many methods:  shell companies, front man or identity theft to disguise its identity; therefore verify who really is the owner, it is an extremely important control.

Although there is still an investigation carried out in Panama, it reminds us (again) the importance of internal control that companies should have and countries should promote. How many factors have in common with the Enron case?

-Worldwide there are flaws in the laws that generate legal technicalities that help criminals or there are still issues to be regulated. In Enron case energy wasn't regulated. Today it is the offshore industry.

-In both cases there were rumors of corruption.

-Lack of transparency: Enron didn’t present a Balance Sheet meanwhile in Panama due to bank secrecy information is not provided.

-Enron used “mark to market” for accounting valuation and afterwards a “hypothetical future value” among the creation of several companies to disguise the fraud and real owner. (It included a trust). Today in Panama it is reported a number of companies created by complex structures, also.

-Statements from both executives of companies were: “we didn't do anything wrong”. The rationalization is the same.

Regardless of the mentioned above and the importance of controls and managing risks there is something more transcendent: values. Why do people even knowing that something is wrong, they do it?

And the history…again is repeated…with so much similarities…

By Mónica Ramírez Chimal, México

Partner of her own consultancy Firm, Asserto RSC:  www.TheAssertoRSC.com

Author of the books, “Don´t let them wash, Nor dry!” and “Make life yours!” published in Spanish and English. She has written several articles about risks, data protection, virtual currencies, money laundering. Monica is international lecturer and instructor and has been Internal Audit and Compliance Director for an international company.

OUTSOURCING POST-TRADE

Outsourcing to cut costs is a practice plenty companies put in place for a diverse range of services. Now Financial Institutions are also considering and actually implementing this practice in Post-Trade processes.

After all, who wants to monitor the labor-intensive work that comes after the trade execution, moreover if it can be contracted out to specialists? It’s generally understood that this type of outsourcing can reduce operating costs, address regulatory compliance requirements, and essentially, free asset managers to concentrate on their real business - earning money for their investors.

As you can see there are several reasons for managers on deciding to outsource post-trade processes, let´s get deeper into it:

Costs reduction
Outsourcing gives the companies the possibility to take advantage of industry technology as automated trade matching, messaging and cash transactions without the cost of investing on them directly. This allows managers to cease the expenses to providers who can focus their technology efforts efficiently for the benefit of all their clients. Hedge funds explicitly, find it easier to set aside costs directly back to the funds they manage if they outsource the process to a service provider. Last but not least, cost effective scalability in a market where the need for building up returns may require the flexibility of trading larger numbers and varieties of OTC derivatives, for that outsourcing would be a good option.

Service Quality
Companies can take advantage of service providers established relationships with sell-side back office and the connectivity already in place when outsourcing.  
On the other hand for some managers, even if OTC derivative trading isn't a primary activity is a relevant one. For these managers choosing to outsource can allow key personnel to focus on the most important aspects of their business. This can be true for hedge fund managers as well as for corporate treasures, etc. Guarantee a better decision making in real-time and a better management of the collateral for the securities. With outsourcing managers will handle more information and with comprehensive information the buy-side is able to provide higher quality service.

Increasing Control
Companies get pressured by institutional investors and regulators to provide transparency and independent verification of asset existence and valuation required outsourcing will get rid of this pressure and the service providers will take care of it.
The desire for independent risk measurement and limits monitoring from companies will be fulfilled as well as the required transparency to fulfill fiduciary responsibilities from boards of directors, Chief Risk Officers and other governing bodies.

There are already several companies giving outsourcing services in the market, for instance; Northern trust, First source, SS&C GlobeOp or Accenture. But regardless of just how much of the trading operations desk the fund manager decides to outsource or how much monitoring it wants to undertake, fund management trade operations and external service providers all agree on one thing. As efficient and cost-saving as outsourced trading operations can be, it’s not for everyone. As with any kind of outsourcing, fund managers will have to examine the opportunity carefully before buying in.

TARGETING SECURITY! (T2S)

TARGET2-Securities (T2S) is one of the largest infrastructure projects launched so far by the Eurosystem. It aims to provide a unique platform that facilitates centralized settlements, for transactions in Euros or other currencies. It tries to take advantage of synergies with other facilities of the Eurosystem, particularly with the payment system TARGET2.

T2S is addressed to Central Securities Depositories (CSDs), to which is given the possibility to use a common technical solution, for the implementation of the settlement of securities transactions. CSDs will retain their businesses and contractual relationships with its participants and will continue to provide custodial services and administration of securities (i.e corporate rights management) as well as other value added services.

By grouping securities accounts and cash on the same platform, T2S will offer an integrated service without borders and a highly advanced settlement to the functions.

A recent article by Philippe Ruault, responsible for Product clearing, settlement and custody, and Orla McTiernan, responsible for business development in liquidity solutions at BNP Paribas Securities Services explains the top six benefits of implementing T2S.

   1. Optimization of liquidity and guarantees (collateral)

As explained by experts of the organization, TS2 "Will centralize the settlement of all security transactions for a client in a cash account to the central bank of their choice," eliminating the need to maintain liquidity buffers and Guarantees in different European markets, resulting in optimization and cost savings.

   2. Effect of amplified compensation if customers share custodian

"By using a single custodian, participants will have the option to have trades netted-off with the shared liquidity pool that sits in the custodian’s omnibus account. The larger the custodian, and the bigger the asset pool comprised in the omnibus account, the greater the liquidity netting benefits", the authors notes. 

   3. Auto-collateralisation

The Auto-collateralisation refers to the process of settlement of a transaction, by the automatic provision of intraday credit by the central bank, to its counterpart secured with eligible securities.

T2S will be extended to all markets and will permit participants a feature, that until now was only available in some countries; also allowing the automatic replacement of a value used as collateral, for intraday credit by an eligible guarantee of the participant's account. If necessary, first used for the settlement of other operations. "The advantage is that this sophisticated automatic process, will minimize the need to maintain cash balances and improve the efficiency of the settlement process," refer Ruault and McTiernan.

   4. Optimization of intraday liquidity

No doubt the implementation of the T2S platform for clearing and settlement of international securities will be harmonized and in time will have a very positive impact on intraday liquidity needs of market participants. In addition, experts say that "If you add the benefits of utilising an agent bank to access T2S, – bringing an additional “cross customer” netting effect – intra-day liquidity requirements will be reduced to an absolute minimum."

  5. More options for bond issuance

The international bond market is also evolving, and in this sense, new rules such as CSDR (Central Securities Depositories Regulation) will establish a pro-competitive framework, in which T2S stands as the ideal platform for the international distribution of emissions in primary markets.

   6. Growing importance of international debt instruments

So far, the development of T2S has focused mainly on the settlement of domestic equities and fixed income. However, experts suggest that international debt instruments (such as Eurobonds) gain increasing weight on the platform, which will require new operational and regulatory changes that are already underway, such as those relating to clearing and collateralization of OTC derivatives.

Source: Articles from Securities Services Newsletter & Funds People

The implementation of the T2S platform started in 2007, when the Governing Council of the European Central Bank (ECB), took into account the feasibility study conducted by the Eurosystem which concluded that T2S was a viable project. Since then the project has been evolving and is ready to be launched this June. Nevertheless, the T2S doesn’t end there, after its implementation a series of processes will take place known as Migration waves.

·         Migration wave 1 – 22 June 2015

·         Migration wave 2 – 28 March 2016

·         Migration wave 3 – 12 September 2016

·         Migration wave 4 – 6 February 2017

·         Contingency wave – May 2017 - Any CSD that could not go live in its foreseen migration wave will automatically be placed in the contingency wave. This plan has been defined to ensure that a CSD does not jeopardize the strict implementation plan as defined by the ECB.

Source: Article from Securities Services, T2S Frequently Asked Questions