Financial Crime Risks for International HNWIs: A Practical Guide
High-net-worth individuals (HNWIs) are increasingly viewed as targets by those looking to make gains through carefully thought-out criminal enterprises.
But they are attractive to criminals due to factors other than simply their wealth. Obviously, those looking to make financial gains through illegal activity will be drawn to those that are known to be wealthy. HNWIs, therefore, will always be the subject of attention from financial criminals.
But that attention can be generated or even heightened by the public profile of HNWIs. While the exact wealth of an HNWI may not be known to the outside world, a high profile generated through public activities or appearances in the media emphasises to everyone – including criminals - that a person has substantial assets.
That can lead to them being viewed by criminals as a quick route to obtaining wealth – much quicker than carrying out a series of attacks on people not known to be as wealthy. Unfortunately, this can make them vulnerable to a number of threats.
The threats can, generally speaking, be divided into three types:
1. Cybercrime
This is one of the most notable risks to HNWIs and it comes in various forms. Cybercriminals use practices such as ransomware, phishing and social engineering (meaning manipulation or deception) to someone’s personal information and / or their financial assets.
Such activities have increased with the rise of digital banking and the use of online transaction systems – systems that the criminals look to infiltrate and abuse to make their illegal gains.
2. Physical Threats
There has been a rise in recent years in the number of kidnappings, extortion attempts, robberies and burglaries involving HNWIs. In such cases, the individuals (or even their relatives, friends or close associates) are targeted by those who track their activities using information that has been reported or is openly available on social media.
Examples include social media posts about a person going on holiday abroad meaning their home becomes a burglary target, or someone’s publicised appearance at a location leading to them being robbed or even kidnapped.
3. Financial Fraud
As HNWIs are known to possess significant assets, they are often singled out by those looking to make illegal gains through activities including Ponzi schemes, investment frauds and illegal share trading. Added to this, a HNWI’s use of numerous security measures, advisors, bank accounts and areas of investment make them more vulnerable to fraud than those with more modest, straightforward financial affairs.
But those risks can be managed and minimised. Taking the correct approach to identifying and addressing the dangers can go a long way to protecting a HNWI’s wealth.
Elsewhere in this HNWI guide, we go into detail about how particular risks can be mitigated. But, in general terms, it requires an approach that involves looking to see where the vulnerabilities exist that can pose the risk and then seeking to remove them. This may, depending on the nature of the risk, require the help of those with the relevant expertise.
For example, HNWIs may need the assistance of those who can devise and introduce enhanced cybersecurity measures, provide advice on ensuring individuals’ physical safety or conduct necessary due diligence on current financial activities and potential ventures.
The risks may evolve over time. So it is important that action is taken to respond to this.
How Family Offices Attract Regulatory Attention
Family offices have always been the subject of attention from regulators. But this has grown in recent years.
This increasing attention is partly due to the growing prominence of family offices. But it is also because of the possibility that such offices may be involved with intricate financial structures and complicated activities. Issues such as tax evasion and the drive for legal, responsible wealth management have seen regulators in many countries raising the levels of oversight and requiring compliance on matters ranging from formal registration and reporting of activities through to laws relating to money laundering and data protection.
Family offices manage large amounts of wealth, which makes them the subject of close regulatory attention. To take the UK as an example, such offices are subject to the Financial Conduct Authority and the Financial Services and Markets Act 2000. But the UK is far from being the only country with regulations in place that directly affect family offices. As a result, family offices have to expect to comply with a wide range of regulations, often in more than one country if their interests cross borders.
This multinational approach is becoming more common as family offices become more global, with both the family members and its interests increasingly likely to be based in a number of jurisdictions. Added to this, the sheer range of family office activities also makes the need for regulatory compliance all the more challenging. Trusts and foundations, private investment structures, family companies and even charitable and philanthropic activities all have their own regulatory and legal requirements.
Family offices, therefore, are facing a situation where they face an increasingly complex regulatory environment – one that may vary from country to country and be subject to change at any time in any of those countries. This can present challenges in terms of ensuring compliance with all the regulations that relate to the operations of a family office.
It is a challenge that requires professional advice on key areas such as risk management and regulatory compliance, so that a family office can be sure it is taking the right course of action for its interests while not bringing any regulatory (or even legal) problems upon itself in any of the areas where it is active.
There is an increasing need for family offices to be both aware of the evolving regulatory landscape and ensure they are complying with all aspects of it.
Common Triggers for Cross-Border Investigations
We have talked elsewhere about family offices often having operations and interests in more than one country. If, therefore, an allegation was made about a family office’s activities in more than one country, it could be subject to investigation by a law enforcement agency and / or a regulatory body in any of the countries where the wrongdoing is alleged to have happened.
The nature of such cross-border investigations will vary from case to case. Factors such as the nature of the allegation (including who made it, where it was made and to whom), where the wrongdoing is supposed to have happened and which (and how many) law enforcement or regulatory bodies are involved will all shape the type of investigation and the course it takes.
But while the exact circumstances of each cross-border investigation may differ wildly, the cause of it will usually be one of a number of triggers:
1. Failure to Comply with Laws or Regulations
If any person or organisation fails to comply with the laws or regulations that apply to them or their activities, they run the risk of becoming the subject of an investigation. If such a failure becomes known to the relevant authorities, investigations will be conducted in one or more of the countries where the compliance failure is believed to have happened. The law enforcement or regulatory agencies in those countries may work together on a cross-border investigation in order to fully understand the nature and the scale of the wrongdoing.
2. Tip-offs and Whistleblowing
Any failure to comply with laws or regulations may become known to a regulator (or even a law enforcement agency) during its day-to-day activities. But many investigations are often the result of tip-offs to such bodies. These tip-offs could come from anyone who has knowledge of the activities of a person, company or organisation and is aware that things are not being done in compliance with the law or regulations.
These could be people who have business dealings with those they make allegations against (such as trading partners) or those who perform services for them (such as auditors). Whistleblowers who work for or with an individual, company or organisation are often the ones who alert the authorities that wrongdoing is being carried out.
3. International Cooperation
An investigation in one country may begin as the result of one that has already been started in another nation. This is becoming more common, as both business and crime become increasingly cross-border in nature. For example, if the authorities in the United States uncover evidence of a money laundering operation that involves people or organisations in the UK and France, they will contact the relevant agencies in those countries.
This is likely to lead to a cross-border investigation, with the French and UK agencies conducting their own enquiries and working with their counterparts in the US. Working in this way enables investigators to gain as full an understanding as possible of the wrongdoing, which will then determine what prosecutions are brought.
Why International Wealth Attracts Scrutiny
International wealth does not need to be high profile to attract scrutiny. It is important, therefore, that those who possess significant amounts of wealth are aware of both the potential for being scrutinised and the best way to prepare and / or respond to such scrutiny.
The tax affairs of wealthy individuals may often be complex, especially if their wealth is being held in more than one country and / or in a wide variety of financial institutions and structures. This will often mean that this wealth can be subject to examination by agencies and regulators in a number of countries; sometimes for a variety of reasons.
The activities of such bodies may vary from country to country – as the financial regimes they are enforcing or regulating may differ – but they will view the financial affairs of HNWIs and UHNWIs as being worthy of scrutiny.
The issue of wealth management has risen up the legal and political agenda in recent years. This is due partly to disclosures such as the Panama Papers, which revealed the financial activities of many with large amounts of wealth and prompted calls for more transparency in financial systems and closer examination of offshore financial structures. But it is also partly because governments are increasingly determined to identify potential new sources of tax revenue.
As a result, a number of governments have introduced measures compelling those using complex financial structures to be more open about the nature and location - and, therefore, the potential taxability – of their wealth.
In addition, the activities of banks and other financial institutions have been under closer scrutiny since the financial crisis of 2008. Such bodies play a large role in managing the assets of many wealthy individuals and bodies.
The increased expectations on them regarding matters such as the vetting of customers, money laundering checks, ongoing monitoring and the reporting of any potentially suspicious transactions means that their wealthy clients are subject to closer examination, and may have to give more detailed explanations for the sources of their wealth than was previously the case.
To give just one example, in 2023 the US Federal Reserve carried out a review of Morgan Stanley’s wealth business serving foreign clients. A year earlier, the bank closed or suspended thousands of international client accounts due to what was described as a backlog in due diligence. It was an indicator of how wealth management is being looked at increasingly closely.
Understanding Global Enforcement Priorities
The enforcement of the law and regulation regarding global wealth has to be seen as more than a simple case of “laying down the law’’. It is done for reasons that go beyond a need to tell people what to do or what they can or cannot do with their wealth. If anything, it can be viewed as an attempt to ensure that the financial sector and all related aspects of wealth management are being run in a way that is in the best interests of those who depend on them.
Enforcement action – like the passing of the legislation that makes such activity possible and lawful – is carried out to protect those who use the financial systems while deterring and punishing those who see them as a way of making illegal gains.
The main reasons for enforcement, therefore, are:
- Combating Money Laundering: By placing obligations on financial institutions to monitor activity and identify and prevent transactions that are being conducted in order to disguise the proceeds of crime, the authorities aim to keep “dirty money’’ out of the system.
- Protecting Consumers: Regulations and laws have been devised to reduce the possibility of criminals targeting people with investment fraud schemes and other forms of financial misconduct. This is especially the case in areas such as retail investments and pensions, where criminals will use illegal practices to take money from innocent individuals.
- Preserving the Integrity of the Markets: The regulators’ primary purpose is to make sure that the markets they are responsible for are operating in an open and fair manner, free from market manipulation, mis-selling or other activities that are used to make illegal gains.
Developments
Within these three main areas, there have been recent developments that address particular issues.
For example, responsibilities are being placed on wealth managers to ensure they are doing all they can to help vulnerable clients who may need more specialised financial advice and protection than most. The rapid development of cryptocurrency has also made it necessary for regulators in many countries to devise and introduce legal frameworks for how such assets can be sold and used.
Holding individuals within regulated firms responsible for their actions, ESG (environmental, social and governance) and sustainability are also factors that regulators have looked to incorporate into their oversight of the financial world.
Enforcement is about more than punishing wrongdoers. It is about making sure the financial world works as well as it can.
