Money Laundering Regulations

(a) Explain the current legislative and regulatory arrangements existing in the United Kingdom in relation to the combating of money laundering.

(b) To what extent are the changes inserted by the Money Laundering Regulations 2003 likely to make a difference?

Part A

When the new Labour Government took office in May 1997, the regulation of financial services within the United Kingdom was complex and less efficient than it should have been. Within three years of taking office, however, the wide reaching Financial Services and Markets Act 2000 had been introduced. As well as simplifying and streamlining the regulatory framework, this Act introduced the Financial Services Authority, the body charged with overseeing this regulation. A major aspect of the simplified system has been an increasing focus on the combating of money laundering. All professional persons are responsible for detecting, and alerting the appropriate authorities to such activity, but there is, perhaps, a larger degree of responsibility on solicitors than other professionals to be alert to the dangers.

Before discussing the legislative arrangements in the United Kingdom in particular relation to money laundering, it is necessary to outline the wider changes in financial regulation that have occurred since 1997. At that time, there existed a rather complex web of bodies, each answerable to another, with ultimate responsibility resting with HM Treasury. The second tier of responsibility was divided between the Bank of England (before it gained independence, obviously), the Insurance Division, the Securities and Investments Division, and the Building Societies Commission. These, in turn, regulated further tiers of bodies, and the whole system was underpinned by five ombudsmen, a personal insurance arbitration service, and two different complaints services. Within this tangled structure, it is easy to see how money laundering could have been a problem, with so called ‘dirty money’ being moved around with no clear responsibility lying anywhere. The 2000 legislation, however, simplified this structure so that now, although nominal responsibility still rests with the Treasury, it is almost wholly delegated to the powerful Financial Services Authority with almost exclusive control and responsibility for financial services regulation. There are, now, just two branches under the FSA; the Financial Services and Markets Compensation Scheme, and the Financial Services Ombudsman. This streamlining has made regulation easier and more efficient purely by simplifying what was previously a haphazard and uncertain system.

What, then, is money laundering? Organised crime generates cash. As crime has become increasingly globalised (such as internet crime and people trafficking) and large scale, so revenue generated from it has increased. Where this revenue is in the form of cash, which in the case of organised crime it largely is, the cash has to be disguised and blended into the banking system. Without this happening, it would be easy for the authorities to track down the money and, therefore, the criminals. The ultimate aim of the money launderer is to get the ‘dirty money’ into the banking system in a legitimate form, so that there can be no question that he or she came by the money in a legal way. Once the cash has moved into the banking system, it is passed into many other areas, in an attempt to cover its tracks. These different areas might include other accounts, companies which have been set up to “front” the activity which has generated the cash, foreign currencies and so on. Then, in turn, cash from these different sources is passed into legitimate companies and bank accounts, from which the criminals can extract the cash as apparently legitimate profit. The ‘dirty money’ has been laundered, and is now, in all appearance, clean.

The three stages to money laundering, then, are ‘placement’, whereby the dirty money is put into the banking system, followed by what is called ‘layering’, in which the cash passes into many different areas in order to confuse its origins, and finally, ‘integration’, where the cash passes into legitimate companies and accounts. Money laundering in the UK is a criminal offence, and as such, any person involved in any known or suspected money laundering activity risks a criminal conviction carrying a jail term of up to 14 years. It is significant that even innocent involvement on the part of professionals such as bankers and lawyers can provoke a criminal charge.

There are various money laundering offences within the jurisdiction of the United Kingdom to be found in statutes such as the Criminal Justice Act 1988 (as amended), and the Terrorism Act 2000 (as amended). The main change made by these two significant pieces of legislation is that they create two new obligations to make Suspicious Transaction Reports. The legislation, then, increases the onus on professionals dealing with financial transactions of any kind to be vigilant in detecting suspicious transactions, and to act effectively upon them when such transactions do arise. When this occurs, the Suspicious Transaction Reports (abbreviated to STR) can be made either to the law enforcement authorities or, where applicable, to the nominated Money Laundering Reporting Officer. In most professional outfits dealing with financial transactions, and particularly law firms, will have a MLRO, to whom reports should be made. This officer will have ultimate responsibility within the particular practice (be it a banking, law, or accountancy practice) to regulate the transactions of the firm. It is also this officer, however, with whom responsibility ultimately lies if a suspicious transaction passes without notice, and later turns out to have been a laundering scheme.

The first of these obligations arising in the above statutes is for an individual to make a STR if he or she suspects that either he or his organisation is about to become involved in money laundering. An example of this within the world of solicitors would be if a solicitor, upon being instructed by a (usually new) client, suspected he was being asked to put funds into his client’s account in order to conceal the funds’ criminal origin. In such a situation, he would be obliged to complete a STR. As well as this, he would be obliged to get the consent of the relevant authorities before completing the transaction. Failure to do this (even if it is simply a forgetful omission) will render the solicitor guilty of a money laundering offence.

A further offence is introduced in the Drug Trafficking Act 1994 and the Terrorism Act 2000 is the offence of ‘failure to report’. This occurs where the person knows or suspects that another person is engaged in laundering the proceeds of drug trafficking or terrorism, and fails to make a report to the law enforcement agencies. In the case of the Terrorism Act 2000, this offence is widened to include those who had reasonable grounds for knowing or suspecting. These statutory offences have increased the range of money laundering offences within the UK legislation, and have similarly increased the requisite degree of vigilance on the part of financial professionals. By increasing the offence to cover those who knew of another’s involvement, or even had grounds for such a belief, it is no longer adequate for the financial professional to be careful in the work he alone conducts; he or she must also keep an eye on co-workers.

These various pieces of legislation have been consolidated by the Proceeds of Crime Act 2002. The law relating to money laundering is, then, to be found in one piece of legislation as opposed to three or four. As well as consolidating the offences discussed above, this Act extends one of the offences considerably. This offence if the Drug Trafficking Act offence of failure to report another’s involvement in laundering. Firstly, it widens the offence to bring it into line with the offence in the Terrorism Act 2000, namely that the person is under an obligation to make a STR if he or she has reasonable grounds for suspecting another’s involvement. Secondly, the requirement to make a STR now extends to financial transactions involving money originating from any crime, as opposed to only drug trafficking proceeds. The failure to report offence is, however, limited in one respect. It is limited to people who come across money laundering in the course of conducting business in the ‘Regulated Sector’. The ‘Regulated Sector’, as defined in Schedule 6 of the Act, is basically every institution which is obliged to comply with the Money Laundering Regulations. It is significant that despite the fact the Proceeds of Crime Act 2002 replaces the money laundering offences found in the Criminal Justice Act and the Drug Trafficking Act, the Terrorism Act 2000 continues to regulate the laundering of money related to terrorist activities.

The Proceeds of Crime Act 2002, then, criminalises anything to do with money laundering. The offences fall within Part 7 of the Act, particularly sections 327 -342. It is here that the new offence of failure to report laundering based on reasonable grounds for suspicion is to be found. Section 340 defines the relevant terms. ‘Criminal property’ is defined as anything which constitutes or represents a benefit from a crime (any crime as opposed to the specific ones mentioned in the earlier legislation). It goes on to define ‘criminal conduct’ as anything that constitutes a criminal offence in the United Kingdom, regardless of where the ‘offence’ was committed. These are clearly very wide definitions. This is necessary in order to counter the internationalisation of organised crime.

An example of this is the problem of so-called “Spanish bull fighting”. This is where a person has made profits from an activity which is legal within the jurisdiction that the profit was made, but then comes to the UK, where the same activity is illegal. The broad definitions of POCA catch the proceeds from such an activity for the purposes of money laundering regulation. With regard to the ‘criminal property’, the Act, again because of its broad definitions, covers many types of person and activity, for example, tax advisors and mortgage fraud.

Section 327 of POCA deals with the offence of ‘fencing’. This, broadly, includes any dealings with the criminal property throughout its trail. Section 328 deals with arrangements which facilitate money laundering.

Another significant effect of these pieces of legislation is that they criminalise “tipping off” (section 333 of POCA). This is in order to prevent people warning those about whom they have made a STR. Broadly, the offence prohibits a person who suspects or knows that a STR has been made to the law enforcement authorities, to make any disclosure which might prejudice any forthcoming investigation. The starkest example of this would be informing a person that he is the subject of a STR in order to give that person time to cover his tracks and, possibly, destroy the evidence. Linked to this is the offence of prejudicing an investigation into money laundering, which is covered by section 342.

Solicitors’ practices are very attractive to potential money launderers. This is because they have certain qualities which make the laundering process, if successful, virtually untraceable. Solicitors are often targeted, then, because they regularly deal with clients’ money. High value transactions occur through the solicitors’ books every day, and as the proceeds of organised crime are often very high indeed, transactions of a similar value help to conceal the laundering from standing out. Secondly, the practice of solicitors is heavily regulated, both from within the profession (the Law Society) and also from without. While this may appear to be an argument against using solicitors as part of the laundering process, from the point of view of the launderers, if the process is successful, there will be absolutely no suspicion remaining about the origin of the funds. Coupled with this is the supposed integrity of solicitors. Again, the practical effect of this from the point of view of the launderers, is that once the funds are extracted from the solicitors’ account, there will be no question as to the money’s legitimacy. Finally solicitors are easily accessible to members of the public, so potential launderers have no problem in contacting them. In response to this increasing need for vigilance, solicitors (as well as other financial professionals) are increasingly being trained (and are increasingly required to be trained by legislation) to be alert. Causes for concern in this context include unusual settlement requests from a client. That is to say in a situation where a case might be progressing well, and the client requests a settlement abruptly and immediately, suspicions may be aroused. Similarly, any unusual instruction from a client, particularly is they are a new client, and use of a client account, would generate suspicion.

There are certain defences available for those accused of money laundering offences, but as the legislation has become more comprehensive, these loopholes have gradually been closed. The most significant defence, particularly for junior members of staff, is a lack of appropriate and proper training in relation to money laundering. While this may provide an adequate defence, the effect of this has simply been to encourage organisations to make certain that they do administer the proper training to all their staff. This, then, ahs been a positive overall effect of a possible loophole. In order to cover their backs, organisations are keen to see that all their staff are satisfactorily trained.

The main defence to a money laundering offence, however, is one which also encourages vigilance and action on the part of the professionals within financial service industries. This is the defence of reporting an offence, or a suspected offence; or even an intention to disclose, so long as this is accompanied by a reasonable excuse as to why the disclosure was not actually made. This does not include wilfully shutting one’s eyes to the true situation, and there will be a rigorous standard of proof required if this defence is pleaded. The significance of both of these defences is that they both have a positive effect on the overall combating of money laundering. Although an adjunct to the legislative provisions, these defences provide great encouragement for those involved in financial services to take all steps possible to ensure no offences are being committed.

The body charged with policing the financial world in relation to money laundering is the National Intelligence Gathering Service. With the mission statement: “To provide leadership and excellence in criminal intelligence to combat serious and organised crime”, one of its key functions is to combat money laundering. It is through this body (either from their website or otherwise) that one can make a Suspicious Transaction Report. As an indication of the extent of money laundering activity, but also perhaps as a reassuring sign of the NCIS’ work, in 2003, the NCIS received over 100,000 disclosures (according to their website). This constituted an increase of 60% on the number in 2002, and almost double that of 2001. Again, rather than showing necessarily that money laundering is on the rise (although it may be), these figures reflect the success of the current legislative and regulatory arrangements within the UK in combating money laundering. As at March 2004, an estimated £25 million had been ‘protected’ (that is, restrained, seized, or returned to victims) as a result of ‘consent decisions’. the NCIS works in partnership with sister agencies such as the Serious Fraud Office, the Egmont Group of Financial Intelligence Units, and the Financial Services Authority. The umbrella organisation is the Joint Money Laundering Steering Group.

With regard to the Financial Services Authority, section 6 of the Financial Services and Markets Act 2000 requires that body to aim at reducing the extent to which regulated persons and unauthorised businesses can be used for a purpose connected with financial crime. This is one of the FSA’s four core aims, or statutory objectives (the other three being to protect consumers, market confidence, and public awareness). In January 2001, having recently been established by the Financial Services and Markets Act 2000, the FSA published their Policy Statement. Later that year, in July 2001, the FSA published a document entitled The Money Laundering Theme: Tackling Our New Responsibilities. These set out the objectives of the FSA in relation to money laundering specifically, as well as financial crime more generally. These included making crime more costly for criminals, achieving an industry perception of money well spent, raising consumer awareness of financial crime issues, contributing to a wider UK plc fight against crime, and to have a “balanced, joined up” approach to anti-money laundering and fraud.

Finally, it is possible that money laundering offences could come within the remit of the Serious Fraud Office. This is an independent government department which investigates and prosecutes serious and complex fraud in order to maintain confidence in the probity of business and financial services within the UK. This department focuses only on serious and complex fraud, and therefore does not respond to every referred case of suspected fraud. In order for a money laundering offence to come within its remit, several factors must be met. Firstly, the value of the alleged fraud must exceed £1 million. Amounts smaller than this will not be considered sufficiently serious for the SFO to investigate. Secondly, there must be a significant international dimension to the fraud. In many modern money laundering instances, this will be the case. This is a natural effect of the fact that so much of the organised crime which generates the ‘dirty money’ needing to be laundered is international in character. Thirdly, the case must be likely to be of widespread public concern. Often money laundering cases will not meet this criteria, as they will only involve a closed, relatively small group of people. Occasionally, however, this will not be the case. Fourthly, the case must require specialised knowledge of financial markets. Given that many money laundering cases occur through highly complex financial trails, it is likely that this requirement will be met.

Under section 2 of the Criminal Justice Act 1987, the SFO have special powers to require a person to answer questions, provide information or produce documents for the purposes of an investigation. Written notice is given when the SFO exercise these powers. In urgent cases they can require immediate compliance with a notice. These powers can be used when the SFO reasonable suspects that a person or company holds information relevant to a suspected fraud.

There are, then, various statutory and regulatory frameworks and agencies which are concerned with the prevention of money laundering. As serious organised crime increases, so too do the proceeds of such crime. In response to this, the UK has had to become more vigilant and alert, as have those professionals working within the industries likely to be targeted by the launderers. Various pieces of legislation, consolidated by POCA 2002, have increased responsibilities and provisions for reporting on such offences. These may, however, be changed when the Money Laundering Regulations 2003 come into force.

Part B

When the Money Laundering Regulations 2003 come into force, they will substantially increase the level of regulation which financial service providers are subject to. As a general rule, the higher the level of risk that a particular activity carries, the higher the degree of regulation it will be subject to. The MLR say staff within the relevant businesses must be properly trained to be alert to potential money laundering activities. This applies to all staff, including secretaries and other support staff. ‘relevant businesses’ will involve, for example, those concerned with insolvency work, tax advice, financial and real property transactions (such as acting as a client’s receiver), and company and trust work.

The Regulations are organised into five parts. The first part is entitled ‘General’, and deals briefly with citation, commencement, and interpretation. This part simply states that the Regulations came into force at various points throughout 2004, and early 2005. An important definition found in Part 1 is that of what a ‘relevant business’ is. It is defined as a broad range of activities concerned with financial services, for example, regulated activities such as accepting deposits or managing investments, estate agency work, operating a casino, the provision of accountancy services and so on. Any dealer in high value goods will generally find themselves to be caught by the Regulations. A wide range of businesses have, then, been brought into the regulated sector, including certain jewellers or car dealers. Often it will be the case that these businesses, uncertain of how they will be affected, will have to seek legal advice to understand the implications of the new legislation for their particular business.

Part 2 is entitled “Obligations on those who carry on relevant business”. this part makes provision for systems and training to be instigated to combat money laundering, and procedures for identification checking, record keeping, and internal reporting. Part 3 is entitled “Money Service Operators and High Value Dealers”, and is sub-divided into ‘Registration’, ‘Powers of the commissioners’, ‘Penalties, review and appeals’, and ‘Miscellaneous’. Part 4 is the Miscellaneous section, covering such issues as the relevant supervisory authorities, prohibitions in relation to certain countries, and so on.

One of the major changes which these regulations have is to widen the scope of the ‘regulated’ sector. This means that more professionals and industries or practices fall within the scope of the statutory provisions for combating money laundering.

Similarly, the obligations upon those who count as ‘regulated’ persons, or engaged in regulated activities, are increased. A major area where this is the case is that of checking a client’s identity. This is a significant factor as it provides a powerful means of combating potential money laundering. By checking a client’s background sufficiently, a practitioner will be able to establish that the client is legitimate, and that the instruction is itself legitimate. The likely effect of this will be, potentially, a more cumbersome process of screening by professionals prior to accepting instruction. Many professionals may be unhappy about this as it prolongs the length of time before that professional can accept the instruction, and therefore get paid. There is also the issue of wanting to avoid embarrassing or upsetting the client, especially if he or she is new to the practice, by investigating whether they are genuine. There are, however, provisions for discrete investigation so as to avoid this potential embarrassment, and the overall likely effect is that fewer dubious new clients will be accepted professionals in the financial services sector.

Another significant change which has come about as a result of the Regulations is the altered Suspicious Transaction Report form which is issued by the NCIS. A new form has been introduced which deals specifically with circumstances where the information being reported is likely to be of limited intelligence value (the Limited Intelligence Value report).

Finally, the Regulations introduced a further hurdle for professionals to overcome when dealing with financial transactions which may involve money laundering. Under the new rules, consent may be necessary from the NCIS before a transaction can be carried out. From the day after this consent is sought, the NCIS have a seven working day notice period in which to issue or withhold consent. The likely effect of this provision is, again, that the procedure for completing instructions from clients will be more onerous and drawn out. This is likely to annoy professionals who will be keen to work as swiftly and efficiently for their clients as possible (in order to obtain payment, and hopefully further instructions). It means, however, that there is a further safeguard against suspicious transactions which may involve money laundering occurring.

BIBLIOGRAPHY

Statutes

• Criminal Justice Act 1988
• Drug Trafficking Act 1994
• Financial Services and Markets Act 2000
• Money Laundering Regulations 2003
• Proceeds of Crime Act 2002
• Terrorism Act 2000

Websites

• Her Majesty’s Treasury Department: www.hm-treasury.gov.uk
• National Criminal Intelligence Service: www.ncis.co.uk
• Serious Fraud Office: www.sfo.gov.uk
• The Financial Services Authority: www.fsa.gov.uk
• The Law Society: www.lawsociety.org

Secondary sources

• Conboy, J.C., Law and Banking: Principles (American Bankers’ Association, 1990)
• Cranston, R., Principles of Banking Law (Oxford, 2002)
• Malloy, M.P., Principles of Bank Regulation (London, 2003)
• Mitsilegas, V., Money Laundering Counter Measures in the European Union (Kluwer, 2003)
• Penn, G.A., Law Relating to Domestic Banking (Sweet and Maxwell, 1987)
• Reuter, P., and Truman, E.M., Chasing Dirty Money: The Fight Against Money Laundering (London and New York, 1995)