VIDEO | In 2013, the US’ Office of Foreign Assets Control (OFAC) ran two enforcement actions against Clearstream and Brown Brothers Harriman (BBH) for issues related to sanctions and anti-money laundering (AML). The incidences sparked a transformation within securities services – a preoccupation with compliance that had never been there before. In the session titled “Financial crime compliance (with ISSA)” at the PostTrade 360° Nordic 2024 conference, two experts outlined how compliance has evolved in the sector and what’s to come.

Recalling the enforcement action that his firm was embroiled in more than a decade ago, Mark Gem, chairperson of the risk committee at Clearstream shared how it changed compliance practices. Regulators ruled that “upper tier custodians need to be held accountable for the actions of their downstream participants, irrespective of whether the upper tier custodian – the global custodian, or in Clearstream’s case, the ICSD (international central securities depository) – even could have known what was going on downstream.”

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The ruling meant that all in the same position within the industry now faced the same risk – “we had no guardrails in place; no principles as to what the due diligence requirements would be, and how we would provide the authorities with assurance that the global system that we had built up since the 1970s was not vulnerable to abuse,” said Gem. This motivated the industry – including Clearstream, BBH and the International Securities Services Association (ISSA) – to come together to form the Financial Crime Compliance Working Group under ISSA.

Making a change

Olivier Goffard, chief financial crime compliance officer at Euroclear shared that one of the first main principles the working group came up with was “an obligation for the custodian to clarify what its expectation was in terms of financial crime control and what the custodian expect all intermediaries in the chain to comply with”.

This catalysed the growth of a profession that didn’t exist before in the sector. “We expected them (the custodians) to hire compliance officers that had the necessary skills to understand the securities business,” recalled Goffard.

Due diligence

The working group’s efforts fell in line with OFAC’s cause when, following the enforcement actions, the regulator imposed upon custodians to “perform a certain level of due diligence on the type of assets that are being deposited” in both omnibus and segregated accounts”. Goffard shared, “The custodian can decide what kind of due diligence and which level of due diligence it wants to exercise on those assets and possibly restrict the opening of omnibus accounts to certain  geographies or types of assets that it considers as being less risky.” To help the industry meet these requirements, the working group established a due diligence framework in the form of a questionnaire, now known as the ISSA DDQ.

Speakers:
Mark Gem, Chairperson of the Risk Comittee, Clearstream
Olivier Goffard, Chief Financial Crime Compliance Officer, Euroclear

Hosted by ISSA

• The consolidated PostTrade 360° Nordic conference, in Stockholm on 4–5 September 2024, came to host 1,200+ delegates and featured 70 sessions.
• Our coverage relating to the event is indexed here.
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