Essay: Money laundering regimes – UK compared to international

A) Financial Action Task Force (FATF) Recommendation 3 requires that countries should apply the crime of money laundering to all serious offences to include the widest range of predicate offences. The notes outlines that predicate offences may be described by reference to all offences, to a threshold linked either to a category of serious offences, to the penalty of imprisonment applicable, to a list of predicate offences or a combination.
FATF as a minimum recommends there are 21 categories of offences that each country should include. The UK’s view point is wider than this as the definition of criminal conduct is generic in that it is defined to include a range of unspecified activities by reference to their treatment under UK law. Certain other jurisdictions e.g. US have lists of specified unlawful activity.
The UK definition of criminal conduct under Proceeds of Crime Act 2002 (POCA) is broad and includes any conduct that constitutes an offence in the UK (single criminality albeit we have also seen that this changed when the provisions of the SOCPA 2005 came into force insofar as a defence for failing to report money laundering in certain circumstances was introduced). It also includes any offence that occurred outside the UK that had it been committed within the UK would have constituted an offence or been punishable by more than one year’s imprisonment, and was unlawful under the criminal laws of the country where it was committed at the time the offence occurred. The UK POCA originally expanded the test from indictable offences to all offences. Every criminal offence committed in the UK and in other jurisdictions can therefore act as a predicate crime and engage AML provisions.
The UK’s regime differs to other countries where they have implemented a dual criminality test where the predicate conduct has to be unlawful in both the country where the crime takes place and by reference to the jurisdiction in which the money laundering has been committed.
POCA 2002 outlines 3 principal money laundering offences in UK, Concealing, Arrangement, and Acquisition. Failing to report money laundering later introduced by SOCPA 2005.
b) Foreign tax evasion under POCA model outlines that provided tax evasion is a criminal offence in the foreign jurisdiction irrespective of indicatable (dual criminality) or if the offence would have been punishable in the UK if it had happened there > 12 months, then dishonestly evading tax owed to a foreign revenue official is predicate conduct which in turn gives rise to proceeds of criminal conduct and any person who receives, manages, invests, transfers the proceeds of that conduct commits the offence of money laundering therefore a bank could be liable for transferring proceeds of tax evasion unless a disclosure has been made as a defence.
Where the old CJA model is adopted by an off shore financial institution provided tax evasion is an indicatable offence in that jurisdiction then dishonestly evading becomes a predicate criminal conduct under AML legislation.
Providing off shore financial services is fraught with risks this is why some of the big financial services firms such as Royal Bank of Canada are moving out of the industry.
The bank or financial institution have to complete CDD in order to investigate that the funds of their clients do not derive from the proceeds of tax evasion. HMRC has published guidance on ‘reasonable prevention procedures’ which encourages firms to carry out a risk assessment, implement proportionate procedures, perform DD of staff, have top level commitment, provide communication and ongoing monitoring
The Criminal Finances Act 2007 outlines that there must be dishonesty by both the evader and the facilitator (acts/omissions). If the associated person is only proved to have accidently, ignorantly or negligently facilitated tax evasion then the failure to prevent the offence is not committed by the company. Therefore if a bank has ‘reasonable prevention procedures’ in place and inadvertently transfers proceeds of tax evasion it could be argued that they are not labile for money laundering – unlimited fine under legislation however if found guilty.
c) FATF recently concluded some work into Financing of Recruitment for Terrorist Purposes as with terrorism and in turn the financing of terrorism on the increase; central to this is the ability of these organisations to recruit in order to survive. Funding this recruitment is central to the process and therefore their work helps us understand how we can disrupt this terrorism financing whilst also increases ability to detect recruitment at an early stage and report. FATF’s work outlined that various organisations use different recruitment methods with carrying degrees of costs.
Detecting and reporting terrorist financing is the most effective way to stop terrorist financing.
The report found that the most common methods of recruitment/ funding needs were as follows:
– Personal needs of the recruiter and maintenance of infrastructure
– Production and dissemination of recruitment materials
– Paying for goods and services e.g. travel / accommodation costs of recruiters
– Financial incentives for recruits
Various jurisdictions provided cases studies and they also found that recruitment appeals on the internet are often linked closely with the offer of financial assistance; recruitment in prisons is increasing and as some organisations require the needs of people who do not perhaps share the same ideology e.g. Doctors, engineers, their salaries and costs can be much inflated. FATF also identified that the return of terrorist from conflict zones could therefore increase amount of recruiters.
This work is important as it enables focus at the beginning of the recruitment process and therefore provides us with an opportunity to disrupt terrorism financing and recruitment and will enhance the role of counter terror financing measures and could also enable the adoption of financial sanctions at domestic and international level. They recommend improved interagency and international co operation to share information on suspected recruiters. New US legislation aimed at combating terrorist financing has been introduced in Congress. The Kleptocracy Asset Recovery Rewards Act would establish a rewards programme for whistleblowers, encouraging individuals to inform the US government about assets in the US financial system that are connected to foreign corruption.
d) In order for a firm to guard themselves against potential sanction breaches which is as much of a risk as AML and CFT, they need to put in place risk based systems and controls to mitigate these risks.
A risk assessment should be carried our covering risks posed by clients, transactions, services and jurisdictions to include associated parties (directors and beneficial owners). Firms need to have an understanding of their sanctions regime and in some cases if the firm deals internationally they may also have to be aware of non domestic sanctions so that these can be included within their policies to ensure that there are no breaches.
The firm should document policies and procedures which include the relevant controls and have effective procedures to screen against HMT list. They also need to set their level of risk appetite. A good practice control framework should include screening by a system generated for firm’s chose risk appetite calibrated to include fuzzy matching with red flags clearly identified and the appropriate referrals made. Individual’s roles should also be clearly documented as the level of responsibility may vary from one individual to another and appropriate training must be given.
The framework should also have procedures for investigating potential matches, for freezing accounts, for notifying authorities and should include a clear audit trail at all times. Periodic screening should also be used to check against changes to relevant sanction lists and the policy revised at least annually with quality assurance and testing.
A robust sanctions framework should include screening of employees, vendors, all third parties, all payment activity and all prospective customers.
Further guidance for best practices was released by Hong King Monetary Authority in 2013 with the above included therein.
e) UK firms and their employees have an obligation to report to a nominated officer when they have knowledge, suspicion or reasonable grounds to know or suspect money laundering/terrorist financing regardless of the amounts involved – once employees have reported their suspicions they have fully met their statutory obligations. The nominated officer will then determine whether this needs to be reported to the UK’s financial intelligence unit within the National Crime Agency.
Failure to report is an offence and the POCA outlines that a suspicious activity report (SAR) must be made where a person knows, suspects or has reasonable grounds to know or suspect that a person is engaged in money laundering / attempted money laundering – this is an objective test. This duty to report also includes overseas offences if they would constitute an offence in the UK.
In the UK failure to report is a criminal offence. The maximum fine for failure to disclose is 5 years, imprisonment or both. Outside the regulated sector the objective test is not applied.
The FATF Recommendation 20 on the reporting of suspicious transactions states:
“If a financial institution suspects, or has reasonable grounds to suspect that funds are the proceeds of criminal activity, or are related to terrorist financing, it should be required, by law, to report promptly its suspicions to the financial intelligence unit (FIU)”.
In the UK, the objective test has been applied to the offence of failing to report under the PoCA and the Terrorism Act. It is already within the Third European Directive with the concept being covered by the US as ‘wilful blindness’.
It was intended to introduce a negligence test as it places a greater burden on the financial sector than previously under the subjective test of suspicion. The concept of ‘reasonable grounds’ to suspect however has yet to be tested in the English courts.
f) Following the terrorist attacks on 11 Sept 2001, FATF moved to include prevention of terrorism financing and released 8 special recommendations upon which countries frameworks are based. Post terror attacks in Paris, Nice and Brussels in 2016 the EU agenda on counter terrorist financing increased and in direct response the European Commission published proposals to amend the 4th EU Directive in order to strengthen the countering of financing of terrorism.
The UK in 2010 published a new national security strategy which identified terrorism as one of the four risks faced by the country – the strategy is called CONTEST (also update in 2011) and aims to give top priority to countering finance terrorism. The 2013 Organised Crime Strategy is based on CONTEST and covers 4 areas, Pursue, Prevent, Protect and Prepare. The Office for Security and Counter Terrorism and HMRC are jointly responsible for implementing UK’s counter terrorism strategy.
CFT strategy in the UK is underpinned by the Terrorism Act 2002, the Anti Terrorism Crime and Security Act 2002, the Prevention of Terrorism Act 2005, the Terrorism Act 2006, the Counter Terrorism Act 2008 and various orders giving effect to the UN Measures.
National Risk Assessments are intended to link the FATF’s recommendations and will serve as a basis for updating the global risk assessment.
g) Those involved in weapons proliferation often purchase duel use goods which are controlled under export regimes and are normally paid for through the financial services sector. E.g. technology, documents, software, electrical components of weapons, raw materials. These components or pumps can be used to create bombs, missile and weapons; documents can be used to engineer weapons from detailed drawings.
As the EU is a major exporter of duel use items there are tight controls regarding weapons proliferation – EC NO 428/2009 provides the rules which outlines that duel use goods are subject to extra controls and cannot leave the EU with authorisation. The items that require this authorisation are listed in appendix 1 to regulation. There is also a catch all clause where there is reason to believe the items are intended for use with biological, chemical, nuclear, weapons. The restrictions also cover brokerage and transport of duel use goods.
Sanctions can also apply e.g. duel use goods prohibited from North Korea, Iran and Syria under sanction. The European Commission in April 14 outlined that more exporting is now carried out electronically and therefore there is a need for technology in regulation of duel use goods. These lists however are difficult for financial institutions to implement as they may be long and unwieldy and the institution may have little knowledge or information about the product. The FCA’s thematic review on Bank’s controls of Financial Crime Risks in Trade Finance found the approach taken by banks on duel use goods had inadequate controls therefore we are likely to see some changes in this area.
Proliferation of terrorism can be harder for a firm to detect than money laundering as funds may come from both legitimate and illegitimate sources. Firms must include weapons financing proliferation in their current risk assessment. There is no defined list of terrorism jurisdictions therefore firms must make their own judgements and assessment however countries of residence of sanctioned individuals and businesses subject to sanctions can be used to help identify the existence of terror groups.
Firms can also access customer risk to help them identify risk of weapons proliferation e.g. whether the customer is usually involved in the sale of duel use goods or where customers deliver high volume of duel use goods to high risk countries in complex ways. Duration, purpose and transparency can also be considered by the firm.
Financials measures used by firms can also help reduce the risk to weapons proliferation by preventing financial services for development or delivery, by preventing finance for shipments related to weapons proliferation and by being able to seize funds under specific circumstances therefore they have a very important role to play.
h) FATF recommendation 1 outlines that,
“Countries should identify, assess and understand money laundering and terrorist financing risks…and should take action include designing an authority or mechanism to coordinate actions to assess risks and apply recourses aimed at ensuring risks are mitigated effectively. Based on that assessment countries should apply a risk based approach (RBA) to ensure that measure to prevent or mitigate money laundering and terrorist financing are commensurate with the risks identified.”
An effective risk based approach can help a firm maximise effectiveness, meet reg requirements, improve efficiencies and recourses, reduce threats and improve customer experience. It enables the firm to carry out identification and assessment of risks, mitigate these, allows ongoing monitoring and documentation of policies and procedures however each customer is different and a form must consider a number of factors such as customer and product types, complexity of business, distribution channels and operating environment. The UK Thematic Review TR14/16 found that banks often had limited understanding of the these risks and did not have appropriate AML risk based controls in place.
Wolfsberg Risk Assessment model – Oct 15 also outlines an effective risk based model whereby it looks at inherent risks (clients, products/services, countries, channels and others), control effectiveness (governance, policies and procedures, DD, management information, record keeping, AML unit, SAR filing, monitoring and controls, training and testing) and residual risk, the actions to be taken and overall risk appetite.
In applying risk based approaches some businesses have automated scoring which helps identify high risk (EDD) and lower risk (STT) customers. Other firms can have a more prescript rune set e.g. customers who have product x are automatically high risk. The important thing is that the approach used should be proportionate to the overall risk. A risk based approach can be applied by customer due diligence, monitoring of transactions, having reporting systems for reporting suspicious activity, monitoring compliance and training of staff.
i) US Office of Foreign Control (OFAC) is a department of US Treasury and administers/enforces economic and trade sanctions. Their trade sanctions can be selective or comprehensive and use blocking of assets / trade to meet foreign policy goals. It has quite wide ranging effects as it applies to all US citizens regardless of where they are situated, all persons and entities in the US and all US incorporated companies and their branches wherever they are located. The use of dollar currency auto evokes the rules therefore far reaching and has criminal jurisdictional reach.
Once a match has been identified, funds have to be placed in an interest bearing account belonging to OFAC and only OFAC an authorise any debits. The blocking has to be advised to OFAC within 10 days. If no block able interest in the payment the financial institution must still reject the payment e.g. if means facilitating trade with Sudan through a non Sudan bank.
There have been a number of high profiles cases in the US courts where plaintiffs have sought redress from banks for indirect funding of terrorists organisations. OFAC imposes aggressive financial penalties for breaches e.g. Lloyds TSB, an non US bank breached US sanctions – had to pay $175m TO us Government and $175m to State of New York for violation if sanctions re Iran, Libya and Sudan. BARCLAYS Bank in 2010 also were fined $149m as it violated US Sanctions in dealing with Cuba, Iran, Libya, Sudan and Burma. BNP Paribas in 2014 pleaded guilty to large violations of US Sanctions and were fined $8.0bn.
The types of breaches can include facilitating or wilfully moving funds through the financial systems on behalf of entities under sanction, concealing prohibited transactions, non cooperation, providing dollar clearing services to individuals and entities in sanction countries.
j) Identification of ultimate beneficial ownership is extremely important from and AML/CDD perspective as transparency is key in the fight against money laundering, corruption and other criminal activities. It enables an understanding of the ultimate recipient of a financial transaction and is critical to support discovery of tax evasion.FATF recommendations in Feb 12 included an update to improve the transparency around legal and beneficial ownership of legal entities. It requires countries to ensure that adequate and accurate information on beneficial owners can be easily sought. Further guidance is also found in the Oct 14 FATF guidance report on transparency and beneficial ownership.
Often some companies will create complex multi layered companies/ trusts to obscure beneficial ownership and may also use bearer shares, shell companies, off shore accounts and foreign bank accounts in an attempt to conceal corruption. This corruption can undermine society, democracy and the rule of law.
The 3rd EU Directive required that any beneficial ownership must be identified i.e. a natural person > 25% of shares. The introduction of the 4th EU Directive means that all European Union members are not obliged to have a central register where ultimate beneficial owners of registered entities are made held and made available to financial institutions.