Cleaning up the act
5 February 2001
The passage through Parliament of the Financial Services and Markets Act 2000 has attracted much attention since Gordon Brown announced in 1997 the Government's intention to crack down on financial crime. With some 1,500 amendments to the bill, the new framework for regulating the UK's financial industry has been subject to much scrutiny. The result is a firmly established Financial Services Authority (FSA), acting as the country's single major financial services regulator.
One of the four stated aims of the FSA is the reduction of financial crime, including plans to tackle money laundering (Sections 2-6 Financial Services and Markets Act 2000). This new and explicit role will be supported by a full range of powers, including regulatory powers and powers relating to supervision and enforcement. However, since the early 1990s, the UK has had a formidable range of laws and regulations to address the issue of money laundering. So why the change? The answer could be the continuing large-scale laundering of dirty money through the UK's financial institutions. It may, however, also be a determination to maintain the reputation of the city of London as the assimilation of the European financial markets continues. The integrity of the market is crucial.
THE CURRENT SYSTEM
The FSA will exercise its new role within the existing regime of anti-money laundering laws and regulations. This regime consists of the Criminal Justice Act 1988, the Drug Trafficking Act 1994 and the Prevention of Terrorism (Temporary Provisions) Act 1989. These acts criminalise actual assistance in money laundering and failure to report to the criminal authorities any knowledge or suspicion of laundering relating to drug trafficking and obtained in the course of a business. In addition, the Money Laundering Regulations 1993 require financial institutions to put systems in place to detect and prevent money laundering. These systems give an individual protection from the "failure to report" offence, provided that the individual reports to an "appropriate person" within the business. This person is the Money Laundering Reporting Officer (MLRO), and it is for the MLRO to consider whether to report to the criminal authorities.
The effect of the law and regulations is that the financial institutions and others are required to disclose details of suspicious transactions to the National Criminal Intelligence Service (NCIS) for investigation. The success of the anti-money laundering system is dependent on a number of factors: the quantity and quality of disclosures; the efficiency of the NCIS; the use made of disclosures; and the clarity of the legislation. This is where the difficulties lie in the current regime. The Government envisages tackling these with the imposition of one financial regulator - the FSA.
THE DISCLOSURE REGIME
The drug trafficking and anti-terrorist legislation compels all individuals acting in the course of trade, profession, business or employment (whether or not covered by the 1993 regulations) to inform the authorities whenever they are involved in a transaction which they know or suspect to be laundering the proceeds of drug trafficking or terrorism. Individuals may also disclose details of transactions suspected to relate to other criminal activity, but this is not a requirement. These disclosures are made to the NCIS, which effectively acts as an intelligence clearing house for law enforcement. Within the financial institutions, the 1993 regulations require that suspicious transactions are first reported to the MLRO, who will decide what to pass on to the NCIS.
The disclosure level, as a proportion of the money supply in the UK, is modest. This could be explained in a number of ways. Some in the financial sector attribute it to their success in training their staff to identify suspicious transactions. It is also felt that the MLRO successfully filters unsubstantiated disclosures. However, since no records are kept of the quality of disclosures or of the extent to which they have assisted
law enforcement, it is difficult to assess the quality-versus-quantity argument.
On the other hand, the modest level of disclosures could be a result of the friction between the regulated institutions and the NCIS. The Financial Action Task Force noted during its assessment of the UK in 1996: "Representatives of the financial sector, who have been required by the various anti-money laundering initiatives to invest in resources in this area, have a legitimate expectation to see their efforts matched by greater law enforcement resources and priorities for money laundering."
Financial institutions have indicated that after making a disclosure to the NCIS, they do not receive sufficient feedback, and that when it comes, it is often too late to influence decisions regarding the continuance of the client relationship. The NCIS takes seven to eight weeks to process disclosures and, according to the NCIS Economic Crime Unit, feedback is given in only half of the cases. The lack of feedback has led to a decrease in confidence in the system and is likely to have an effect on the level of disclosures.
The key to the success of the disclosure system is a position of trust between law enforcement and financial institutions. The new role of the FSA is to facilitate this by taking on its new responsibility for dealing with money laundering regulation. As part of its statutory aim it will issue new money laundering rules and monitor its compliance. These rules are to be published in the near future following a consultation period. In doing so, the FSA will represent a new level of cooperation between financial institutions and law enforcement. It is believed that this will have a positive effect on the quality and quantity of disclosures.
The FSA's Financial Crime Liaison Unit (FiCLU) will oversee its relationship with the NCIS and will play a major role in building the financial sector's confidence in the disclosure regime. In order to be effective, there must be a strong relationship between the NCIS and the FiCLU, with a free flow of information. The free exchange of information between the FSA and the NCIS will require a high level of cooperation and organisation by both parties. The FSA, for example, has proposed new measures requiring MLROs to prepare annual reports on the anti-money laundering procedures and levels of reporting. These reports will then be made available to the NCIS. The NCIS, for its part, will have to use its new database system to actively monitor disclosure levels and the use made of the information disclosed.
Non-disclosure is an offence carrying a five-year prison sentence. Even though there is a relatively low level of disclosure in this country, to date there has been only one conviction for failing to disclose.
Under the new legislation, the FSA has been given investigative powers which can be called into action by the NCIS in cases of persistent, or a suspected willful, lack of disclosure by financial institutions. Previously, law enforcement was restricted in its investigations by the civil rules on production orders and search orders. Under the new legislation, the FSA will be able to initiate investigations with a view to action for breach of the regulations.
The FSA's role in pursuing a better and closer relationship between financial institutions and law enforcement, and its powers to investigate
non-compliance with the regulations, will lead to greater detection of those involved in money laundering.
SIMPLIFICATION OF LEGISLATION
The next step is to encourage law enforcement to actively investigate money laundering offences. Traditionally, policing resources are directed towards mainstream criminal offences. Money laundering offences are not only considered ancillary to the main offence but are also perceived as "messy" offences to prosecute. The present legislation is complex and confusing, leading to uncertainty, which dissuades practitioners from using the powers that the acts provide. A great deal of the difficulties stem from the legislative differences between proceeds from drugs and those from non-drugs-related criminal activities. This issue was recently highlighted in the EL Kurd case. In this case, although there was clear evidence of money laundering, it was argued that there was no evidence from which a jury could properly conclude beyond reasonable doubt that the money involved was
the proceeds of criminal conduct rather than
drug trafficking. The Court of Appeal noted
the issue and the associated difficulties of the dichotomy between drug trafficking offences and criminal conduct.
It is not always easy to pinpoint the proceeds of crime to one source rather than another. Yet the legislation effectively requires the prosecution to put the case on a certain basis, since there are different issues to prove depending on the source of the money. For example, in relation to proceeds of non-drugs criminal conduct, the prosecution must prove that the defendant knew or suspected that the other person had indeed benefited from the crime. On the other hand, the offence of concealing or transferring another's proceeds of drug trafficking requires proof only that the person knew or had reasonable grounds to suspect that the property was a proceed of drug trafficking. Here it is not necessary to show actual knowledge or suspicion. As a result of these differences, the prosecution often has to allege different offences as alternative counts.
Consolidation of the money laundering offences so that a single offence covering the proceeds of all crime replaces the existing offences will simplify the prosecution of money laundering offences. This in turn will lead to an increased prosecution and conviction rate, which is the Government's stated aim.
On another level, the European Union is implementing a new directive aimed at amending
an earlier directive, which underlies the present legislation (Directive 91/308). The new directive will amend the definition of "criminal activity", so that all forms of organised crime and illegal activity affecting the financial interests of the community, and not just drug trafficking, are covered by the prohibition of money laundering.
A further issue that the directive is intended to address is the increase in the range of legislation by making further activities and professions subject to the obligations. These will include notaries and other independent legal professions, accountants and tax advisers, real estate agents and dealers in high-value goods. The proposal is currently before the European Parliament for a second reading. For the regulations to be extended in this manner in the UK, a further act of Parliament will be required. This will no doubt also affect the role of the FSA and may provide it with even greater powers.
The proposed new role of the FSA, to fill a void and to stimulate and facilitate better cooperation between financial institutions and criminal authorities, is the first step that the Government is taking to tackle the problem of money laundering.
The next step will be to simplify the current legislation of money laundering offences to create a single offence of money laundering, in accordance with the new European directive. It is argued that this would lead to an increased rate of prosecutions and would send the right message to all those who are involved in the illegal activities, and also to those who handle the proceeds.
Compliance may be at a satisfactory level in some sectors, but with money laundering still a continuing major problem, the current system is simply not good enough. The attack on financial crime is now taking the money laundering regime a step further. Just how far will begin to show over the next year. n
Gareth Rees is a barrister at Hollis Whiteman Chambers, Queen Elizabeth Building
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