What is a Scenario?
“Executive becomes first fined for risk failures - The Financial Services Authority has for the first time fined a senior executive for money laundering control failures in a sign of the City regulator’s changing stance on combating financial crime.
Ram Melwani, managing director of Investment Services UK, an emerging market broker, was fined £30,000 and the company £175,000” so commenced an article reported in the Financial Times on 10 November 2005.
This is a typical public failure that will appear in an external loss database and could be relevant to your firm. Firstly you may be concerned – do our management understand the personal risks that they are taking by the business they are conducting? blame”? You might say think that there would need to be wilful disobedience to cause the type of personal fine set out above, but this is not the case. The article further states that there was no evidence of money laundering, nor was there any evidence that Mr Melwani or his company had sought to mislead the bank and the firm had cooperated with the regulators. So none of this stopped a penalty being raised both on the individual and the firm.
So you now have a public loss to consider. Could it happen to you? When you are building your operational risk framework it is important to consider all of the risks to which your firm is subject and money laundering deterrence risk falls within operational risk. So yes, it could happen to you.
What specifically did they do wrong in this case? “[the company] had helped offshore clients to open accounts with a bank so they could enter bond trades but it failed to provide enough information for the bank to identify the clients and assess the risk to which it was exposed”
So they key issues here are about identification of offshore accounts. It may be that your firm has a loss of this type within their database, but the likelihood is that you will not. So now you need to answer a lot of issues:
- Do we have any accounts where we are not obtaining all of the information that we require?
- Do we have any accounts where we provide information to other parties that may require more information than we have?
- Do we really understand our clients business?
- Does our management fully understand the importance of the controls that apply in this area?
Your next stage is to consider the size of the loss (both personal and corporate) leading to an assessment of the likelihood that this type of loss could occur.
Of course in the example the loss is related to bond trading, but that is not actually relevant to the nature of the individual loss. What we are doing here is creating scenarios to consider the nature of the risks run by your firm and also how to populate the areas of your loss database where you are devoid of information.
This if just one of a series of public scenarios that we consider on our Operational Risk courses and also on our specialist Scenario Modelling courses.
If you require any further information on Scenario Modelling, contact Risk Reward Limited on 01277 218843 or email us.
All that you can do when you are taking on this type of business is see that you fully understand the nature of the business being conducted and the compliance and regulatory framework within which the company operates. Any failure on your part to understand these requirements could potentially leave you open to a charge that you were not fulfilling the role that was expected of you. You are the professional that is being bought into solve an issue – make sure you do not become part of the problem.
Dennis Cox
Risk Reward Limited
