At our February briefing in London, we looked at the evolution of and practical approaches to two current hot topics, Deferred Prosecution Agreements (DPAs) and Correspondent Banking.

1. Financial Crime Hot Topics
DPAs and Correspondent Banking
February 2016
David Brain

2. 2
Agenda
• DPAs
o Evolution of UK DPAs
o Pros and cons of self-reporting
o Pros and cons of entering into a DPA
o The UK’s first DPA
o Monitors
• Correspondent Banking
o Historic challenges
o The extent and impact of ‘de-risking’
o The changing regulatory requirements
o Practical tips for firms

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What is a deferred prosecution agreement (DPA)?
• Official Wording:
A DPA is an agreement between a designated prosecutor
and an organisation which could be prosecuted, under the
supervision of a judge. (SFO)
• Practical Terms:
DPAs are designed to encourage companies to self-report
wrongdoing in the hope of more lenient treatment.

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UK Background
Introduced in Schedule 17 of the Crime & Courts Act 2013
DPAs came into force on 24 February 2014
Bribery and Corruption focus
Prosecutor charges a company with a criminal offence – but proceedings
are automatically suspended
Company (never an individual) agrees to a number of conditions
If all conditions are met, the DPA is lifted, and no prosecution

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Why have DPAs made it to the UK?
• Historic issues
 Corporate crime is difficult to investigate
and prosecute
 Law Enforcement agencies desire for
more tools to combat corporate crime
 Costs
• DPAs
 Save time
 Allow victims to be compensated quickly
 Save costs in relation to investigation
and prosecution
 Allow a corporate to take remedial
action

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DPAs - UK vs US
Judicial
involvement
Predictability
Who
Scope
Prosecutor’s tone
Additional
responsibilities
Limited, if any
Corporates and
individuals
DoJ has broad discretion
as to the types of crimes
DoJ provides guidance,
more educatory
Only cash reporting
requirements
More so
Judicial approval
throughout negotiations
Corporates only
Scheduled offences
Seemingly more
aggressive
POCA obligations
Less so
USUK

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The DPA Process
Invitation to
negotiate
Negotiation
period
Terms of the DPA
Financial penalty Monitor
First hearing
(public)
Second hearing
Final hearing
(public)
Breach/variation/
termination of the
DPA

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What a DPA may entail
• Terms must be fair, reasonable and proportionate
• May include the following:
o Payment of a financial penalty
o Payment of compensation to victims
o Disgorgement of profits
o Implementing a compliance program (or making changes)
o Co-operating with any investigation
o Appointment of an independent monitor
o Paying reasonable costs of the prosecutor

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Pros and Cons of Self Reporting
• Uncertainty as to whether a prosecution will follow
o No guarantees of a DPA
o Other public interest factors other than self
reporting
• Risk of prosecution from another jurisdiction
• Reputational damage
• Do not leave yourself open to a knock on the
door
• May enable a company to escape debarment
• Potentially avoid conviction
• Limited reputational damage
• Possibility of reduced penalty with open co-
operation

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Pros and Cons of entering into a DPA
• Potential lack of incentive
o Fines will be broadly the same
o Discount will be broadly the same
• Full disclosure and cooperation may unearth other
irregularities
• Work of a Monitor can be disruptive to the business
• Save time and costs of a lengthy investigation
• Swifter restitution and rehabilitation
• Reduced collateral damage to innocent
employees, stakeholders
• Positive reform agenda

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UK’s first DPA
• Payment of $6m USD to third party (EGMA) in March 2014
• EGMA’s chairman and a director were government officials
• Intention of inducing government officials
• Placement successful generating fees of $8.4m USD
• Terms of the DPA with the SFO:
o Fine totalling c. $36m USD
o Cooperate with ongoing and future investigations
o Review and upgrade AB&C policies in accordance with independent
recommendations
• DPA means that the bank will not be prosecuted under s.7 of the 2010
Bribery Act for failing to prevent bribery

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UK’s first DPA - Overarching Takeaways
• Purpose of the Bribery Act
• Extra-territorial reach of the SFO
• The importance of self-reporting
• The importance of a robust internal investigation
• Adequate procedures not a defence

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Key Compliance Takeaways
• Unclear policies – e.g. Introducer and Consultants policy
• Implementation and assurance is key
Policies and
Procedures
• Involvement of a third party
• Government transaction in a high risk jurisdictionLack of EDD
• No ABC due diligence undertaken on EGMA
• Appreciation of the due diligence differencesABC due diligence
• Failed to identify a PEP at EGMA
• Therefore failed to implement commensurate controlsPEP identification
• EGMA were classified as high risk, but no explanation why
• Corruption red flags not identified, documented,
considered
Identification and
documentation
• ABC policies not “reinforced effectively…through
communications and/or training”Training

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Role of the Monitor
• A Monitor’s primary responsibilities are to:
o Assess and monitor internal controls
o Make recommendations for improvements
o Report specific misconduct to the prosecutor
o To report on the satisfaction of the DPA
• Appointed by the prosecuting authority
• Independent - although firm pays expenses of the Monitor

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Monitor Appointment Process
Firm responsible for shortlisting
three
Indicate a preferred candidate
Firms should carefully consider
their Monitor selection

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Monitor Relations and Output
Working
with the
Monitor
• Obtain an insight into how
the Monitor will work
• Foster a relationship
• Consider the practicalities
• Advisory?
Reporting
• Series of interim reports
• Responding to findings
• When does a Monitorship
end?

17. 17
Conclusion
• DPAs are here to stay
• Moved into an enforcement era regarding ABC
• The importance of an effective compliance programme
• Joined up financial crime controls

18. Correspondent Banking
The Good, The Bad and The Challenging
February 2016
Colin Darby

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Overview
“An arrangement under which one bank (correspondent) holds deposits
owned by other banks (respondents) and provides payment and other
services to those respondent banks.”
Other than payment settlement systems, the only way for funds to cross-borders
electronically.
Eurozone:
- 25mn
transactions
/day
- EUR 1
trn/day

20. 20
Correspondent Relationships
Customers
Respondents
Correspondent Bank X
Bank Y
(customer
of Bank X)
Bank A Bank B
Bank Z
(customer
of Bank X)
End
Customers
Direct
access
products
Nested / Downstream
CB

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Correspondent Banking is a high risk activity
No direct relationship with underlying parties
Limited information on underlying transactions
Non-face to face business
Reliant on respondent’s possibly inadequate controls
Exposure to respondents with higher risk appetites
Exposure to less robust regulatory regimes
‘Hidden’ exposure through downstream or nested activity

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CB Compliance Challenges
Defining CB Relationships
Respondent risk
assessment
Risk-sensitive due
diligence
Regulated Status of
Respondents
Interaction with Respondents
‘KYCC’
Transaction Monitoring
Qualitative Assessment
Wire Transfer Regs
Maintaining Profitability

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Wholesale De-risking
Benefits Impacts

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Wholesale De-risking
Benefits Impacts

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Wholesale De-risking
Benefits Impacts

26. 26
Wholesale De-risking
Benefits Impacts
Reduced risk of
regulatory action
Less exposure to
ML/TF risk
Restrict
developing
economies
Diminish small
banks

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Wholesale De-risking
Benefits Impacts

28. 28
Changing Landscape – 4MLD
Definition of ‘correspondent relationship’ – broad and may capture
relationships between NBFIs.
Removal of ‘equivalent jurisdictions’ in favour of identification of high risk
third countries
Less prescriptive, more risk-based approach to SDD – CB due diligence
likely to become less polarised, more risk sensitive.

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Effective CB Operating Models
Policy and
procedures
• CB specific AML policies and procedures
• CB product/service risk assessments
• Multi-factor respondent risk assessment models
• Risk-based CB due diligence
People
• CB due diligence in front line
• CB AML training for RMs
• Dedicated CM TM and AML Advisory personnel
Technology
• Use of KYC utilities and LEIs
• Data analytics (e.g. SWIFT Traffic Profile)
• Dedicated CB TM rules
• Payment data algorithms
• Development of payment messages

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Key messages
CB remains
vital
Sustainability
through
collaboration
Risk-Based
Approach
Authorities
remain
interested
More
technology

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Questions
?