MLROs – Protect Your Assets
MLROs of newly regulated art businesses are rightly worrying about the personal risks they face if they fail to ensure compliance with anti-money laundering regulations. They often ask what they can do to protect themselves if things go wrong.
I asked Steven Francis, a Partner at Addleshaw Goddard who advises businesses on ongoing or anticipated regulatory interventions to provide his perspective on the subject. His thoughts and insights are illuminating.
RT – Where do MLROs face the greatest personal risks in fulfilling their anti-money
SF – Bear in mind that the MLRO is not a function created by statute and therefore has no precisely defined role or obligations. The MLRO is often the name often given to the ‘nominated officer’, although the two roles can vary. I see the greatest risks relating the nominated officer’s responsibility, as the person designated by his employer to receive any disclosures (internal suspicious activity reports) made under section 330 of POCA 2002. It is an offence for a nominated officer within the regulated sector to receive a disclosure under section 330 that causes him to know, suspect or have reasonable grounds for suspicion that money laundering is taking place, and then fail to make a disclosure to the National Crime Agency.
RT – That is interesting. Many MLROs have sleepless nights about not making the right judgement call in situations where there is a lot of pressure to get a deal done. What would you say to them?
SF – Commercial pressures are common when in a risk or compliance function. Part of the skill of the MLRO is persuading his/her company to do the right thing and comply with law. But bear in mind that ultimately, if appropriate disclosures are not made, it may be the MLRO that is held accountable.
RT – HMRC have repeatedly reassured art market participants that they will be lenient during the first year of regulation. After this honeymoon period, how likely is it that a nominated officer will be personally framed for a money laundering offence and would it not be so much simpler for HMRC to slap a fine on the company?
SF – Yes, many regulatory authorities give firms time to get their house in order. It is obviously easier for an authority to fine a company. But the current hot regulatory theme is personal responsibility. There will likely not be many individual cases. But the authorities will bring a few to set an example to others and to show that the MLRO position is one that carries responsibility and should be taken seriously. There is therefore a risk – probably low, probably very low – that an MLRO could find him/herself the target of an investigation or prosecution. Nonetheless that risk is real.
RT – So what practical advice would you give to MLROs who have nobly stepped into these roles at auction houses, galleries, art advisory businesses etc?
SF – MLROs need the authority to discharge their role. To be given responsibility without authority is a situation of particular danger. Many MLROs are not members of their firm’s board. That is fine provided they have sufficient power to make the decisions they need to and they have the full support of the board.
They should also ask the company to indemnify them against legal costs they incur in properly defending themselves against allegations that are made against them in the course of their work. And they should ensure that their company has D&O insurance which can operate for their benefit.
RT – A couple of questions on indemnities – from what I have seen, employers don’t offer these up on a platter. Are indemnities against fines and penalties enforceable? And bearing in mind that less senior members of staff will often find themselves encouraged into MLRO roles, how should they go about convincing employers to provide an indemnity?
SF – There is often confusion here. The company’s article will probably permit the granting of indemnities (the company may indemnify) rather than obligatory (the company shall indemnify). So directors may think they and others are indemnified, but this is not the case. In addition, the articles are deemed to be a binding commitment between a company and its members, and directors and the MLRO will likely not be members (i.e. shareholders). When this is explained, directors will typically see the need for indemnities – to protect themselves as well as the MLRO!
RT – Is D&O insurance an alternative to an indemnity from a company? And is this type of cover available to MLROs who are not statutory directors?
SF – Often the two go hand in hand and provide overlapping and complementary protection. D&O will also indemnify the company if it has to pay out under an indemnity. But it will also indemnify the director or senior manager should the company (for example) be insolvent and be unable to pay.
RT – What does D&O cover?
SF – D&O will indemnify against wrongful acts, for the MLRO the important point will be covering the costs of defending him/ her against what could be a very expensive investigation and legal proceedings. D&O will not cover criminal fines and penalties.
RT – How do you go about getting D&O insurance – it sounds daunting to shop for and possibly expensive. What should one look out for?
SF – MLROs would not buy D&O themselves. They would seek to make sure that their company has the cover and that they can benefit from it. Some covers protect not just directors and officers but also managers such as MLROs. The quality of cover varies considerably. For example, some policies will offer legal costs protection to the individual only when he is charged with an offence. That will typically be too late, legal advice and support is needed where the individual is first suspected of wrongdoing. The wider the cover the more expensive it is. Premiums will also depend on the nature of the firm, its history and the quality of its systems and controls. It seems to be the case that D&O is becoming more expensive. There are many reasons for this (COVID, lack of capacity in the insurance market) but a key reason is insurers’ general belief that legal action against individual managers is more likely than it used to be.
RT – To conclude, do you think D&O insurance is pragmatic for a small gallery that is owner managed and employs a few sales assistants?
SF – D&O is not compulsory. But many non-executive directors would not contemplate being a director of a company that did not have D&O. A company indemnity is important but of little use if the company is insolvent. I would think that many companies already have D&O, and it will just be a case of checking that it covers non-director MLROs. An MLRO of a company that doesn’t have D&O might just enquire why it is that the other directors do not think it is worth purchasing. A properly phrased enquiry will probably lead to an urgent call to the company’s broker. After all, other directors are likely to be in the firing line too!
Contact me for further advice on +44 7896 205533.