Money Laundering – No laughing matter

UK money-laundering legislation is ineffective in stopping the persistent criminal, according to a police officer engaged at the sharp end of the fight against financial crime. Billions of pounds of illegal money pass through the country from Turkey, Russia, Columbia, Bolivia and elsewhere, threatening the reputation of London as a leading financial market. And some of the toughest legislation in the world is failing to prevent dishonest accountants and other professionals from assisting in a process that can net them around 20% of the value of the money handled.

‘The trouble with the current legislation is that of proving that the person engaged in money laundering knew or suspected the origins of the cash,’ says acting Detective Inspector Gordon Hutchins, head of the south east regional crime squad money-laundering investigation team. ‘At the moment, there is no requirement on professional advisers to actively seek out cases of money laundering and, although the facts might be staring them in the face, the courts cannot assume that the accused was suspicious and therefore guilty of an offence.’

So seriously does the government view this problem of wilful blindness that the Treasury is examining the possibility of introducing new legislation.

It will tackle professional advisers who fail to ask the necessary questions and who stand to earn #200,000 and upwards for their work on the scams that start the laundering of illegal cash into clean money.

Tricks include setting up bogus, shell companies in off-shore havens, passing criminal profits through the derivatives and futures markets and purchasing single premium insurance policies. ‘There are improvements that could be made to the current legal framework for tackling money launderers,’ Helen Liddell, economic secretary to the Treasury said in a speech to a conference in London in November last year. ‘I am thinking here of those advisers and professionals who assist the money launderers by not asking too many questions. The aim is to ensure that there are no loopholes in the law for those who close their eyes to obviously suspicious circumstances. It may be possible to tackle this by looking at applying the concept of “should have been suspicious”.’

The substantial increase in the fees paid to money launderers – up from around 6% in the mid-1980s to about 20% now – says a great deal about the growing importance of the activity to organisations awash with money that they cannot otherwise make use of. With most countries in the developed world now having at least some legislation to combat money laundering, the job of the professional adviser has assumed a new significance that is beginning to worry governments. ‘The financial market is an extremely complicated place and there are specialists who will deal with various aspects,’ says Rowan Bosworth-Davies, former fraud squad detective. ‘Clearly, if the profits of criminal enterprise are to be laundered without the authorities getting to hear about it, it is going to require a professional who is familiar with the workings of the financial services industry to do the work. It is a highly skilled business and these people can and do command very high fees.’

Current UK legislation requires all suspicious financial transactions to be reported to the National Criminal Intelligence Service (NCIS) economic crime unit, where the information is checked against a database of intelligence before being allocated to the appropriate organisation. Normally, this will be the financial investigation unit of the local police force. But, where the information relates to particularly serious cases of money laundering or where drugs are involved, then the matter may be sent to one of the regional (shortly to become national) crime squad financial investigation units, or the central drugs finance investigation branch of Customs & Excise.

Reported cases of money laundering are rising year on year. In 1991, there were more than 4,000 disclosures, eight times the number disclosed during either of the previous two years. By 1995, the figure stood at 13,710, increasing to 16,125 in 1996. Last year’s total is expected to have shown a further increase, placing an even greater strain on the already over-stretched software being used for the economic crime unit database. ‘The system was never designed to deal with this number of enquiries.’ says Detective Inspector Andy Blezzard, head of the unit. ‘Nevertheless, every disclosure is looked at and given to an investigating officer, although in some cases the information may simply add to the jigsaw or confirm what he already knows.’

Keeping a vigil for illegal activities

Many of the principle suspects of interest to NCIS and the regional crime squads have no criminal convictions and their names will only have come to notice over a period of time. ‘The regional (crime squad) is a proactive police unit,’ says Gordon Hutchins, a front-line investigating officer with more than 29 years’ service. ‘We do not investigate crimes that have already been committed but look at those whom we suspect are actively engaged in the planning and execution of major crimes like money laundering.

‘Our information comes from a number of different sources and very often the same name will keep cropping up. Sooner or later that person will become the subject of an investigation even though there may be no trace of him on the criminal names index of the police national computer,’ he says.

The Criminal Justice Act 1993 and the money-laundering regulations made under the Act make it an offence to knowingly launder, or assist another to launder, the proceeds of crime and they impose heavy penalties on those found guilty. But since the majority of offences are trans-national and there is normally little to connect the money being laundered with the offence in a foreign country, there is usually a substantial difficulty in proving mens rea (guilty knowledge).

The result is that in three years from 1993 to 1995 there were just 39 prosecutions started under the Drug Trafficking Act for money-laundering offences. Of those 39 cases, 26 did not even reach the trial stage and of those that did, only 11 were convicted.

Under the Criminal Justice Act the position is even worse, with only three cases brought to trial since the Act became effective in April 1994.

At the international level, the position is often a great deal worse.

The financial action taskforce, the main international body looking at the problems of money laundering, currently has 26 member states and has ceased to admit any more because of the difficulties it is having in persuading some existing members, such as Turkey, to adopt its recommendations.

In the US, the definition of money laundering is so worded as to catch any unauthorised movement of money. All transfers of cash of $10,000 or more must be reported, leading to a logistical nightmare as the authorities struggle to keep up with the flow of information.

In Turkey, Russia and Thailand the governments have, according to the US Department of State International narcotics control strategy report, resolutely refused to pass any legislation designed to defeat money laundering, while in Bolivia 53% of the country’s export revenue is said to come from drug trafficking.

Despite the difficulties inherent in bringing a successful prosecution in the UK, both the police and the Bank of England are convinced the position would have been far worse without the stringent reporting conditions imposed on all financial institutions under the 1993 Act and Regulations.

Help in complying with the law is available in the form of training material (the Red, Green and Yellow books) and guidance notes, both produced by the Joint Money Laundering Steering Group (JMLSG), administered by the British Bankers Association. Among the topics covered in the guidance notes, revised in June 1997, is the ‘know your customer’ requirement.

It was introduced as a result of the 1988 Basle Committee on Banking Regulations, and recommends that professional advisers know the identity and business of their clients.

A senior officer in the special investigations unit of the Bank of England described it as ‘arguably the key element of anti-money-laundering systems and controls’. It is now a requirement of the 1993 money-laundering regulations – and a failure to comply may provide evidence of misconduct.

The rule imposes a severe requirement on the financial services sector and forces every company to develop a system of prevention and detection of potentially illicit activity. This, in itself, entails the creation of a compliance officer of senior rank to implement training sessions, an anonymous reporting system for internal violations of the guidance notes and surprise internal audits or visits, to ensure compliance.

The injunction falls far short of requiring accountants to actively seek out money-laundering activity, but clearly any professional adviser who forms a suspicion arising out of their work would be well advised to report the matter to the NCIS.

‘It depends on the nature of the business he or she is in,’ says Andrew Clark, a senior manager at Price Waterhouse’s forensic services. ‘Normal auditing is unlikely to bring money laundering to light, but if it became obvious that spurious companies and invoices were being used, the accountant would want to ask more questions than usual. And he would have an obligation to report the matter if a suspicion was formed. It all comes back to knowing your client and his business.’ And in case accountants are still wondering where all this leaves them, both the Treasury and the JMLSG are clear.

They believe the evasion of tax, VAT and National Insurance contributions, together with false claims for state benefits or state subsidies, all amount to offences for the purposes of the money-laundering regulations.

Indeed, all the indications are that the government fully intends to use the money-laundering legislation to compel organisations to divulge transactions that have nothing to do with money laundering but are thought to be tax-avoidance and tax-evasion measures. ‘The new laws are being groomed to be used as much as a primary means of targeting tax evasion and capital flight mechanisms as a way of obtaining evidence against professional criminals,’ says barrister Bosworth-Davies.

For good or ill, accountants are in the front line of a battle being fought by the government. Nominally, it is a fight against criminals and those who assist them in the laundering of their ill-gotten gains. In reality, it is the attempt to prevent, by any lawful means, the flow of money away from the public coffers. With money laundering estimated to cost the taxpayer 2% of the country’s GDP it we can expect vigorous use of the new law.


1. The NCIS has developed a standard format for disclosure. Receipt is acknowledged and written consent is normally given to continue operating the client’s account. At the conclusion of an investigation, the original informant is normally given feedback by the NCIS.

2. The Criminal Justice Act 1993 is now the principal Act in the UK dealing with money-laundering offences. There are, however, other Acts, including the Criminal Justice Act 1988, the Prevention of Terrorism Act 1989, the Drug Trafficking Act 1994 and the Proceeds of Crime Act 1995 (together with the Scottish and Northern Ireland equivalents) that also deal with money laundering and the seizure of assets. The main money-laundering offences are: assisting a criminal to retain the proceeds of a serious crime; perverting the course of justice by informing a suspect that they are or are about to be put under investigation; and where drug trafficking or terrorism is involved, failing to report knowledge or suspicion that the proceeds of these offences are being laundered

3. The money-laundering Regulations 1993 (made under the Criminal Justice Act 1993) make additional demands on banks, building societies, insurance companies, bureaux de change and suchlike, requiring them to put in place administrative procedures to ensure suspicious transactions are recognised and reported. Fines can be levied on institutions for non-compliance and their officers sent to prison. The regulations also require that all financial institutions must: verify identity of customer; keep records;train staff;report suspicions to NCIS; appoint a money-laundering reporting officer whose function it is to decide which suspicions that have been reported to them by staff should be forwarded to the NCIS. Failure to comply with the regulations renders institutions liable to a fine and individual officers to two years’ imprisonment. Patrick Hook is a freelance journalist

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