Curb money laundering

“Money laundering is regarded as the world’s third-largest industry after international oil trade and foreign exchange… The UK has adopted different strategies in the fight against money laundering in the last two decades” (Mei Leong AV (2007), ‘Anti Money Laundering Measures in the United Kingdom: A Review of Recent Legislation and FSA’s Risk Based Approach’, Company Lawyer, 28(2), pp35-42) Critically assess the UK’s attempts to curb money laundering.

Money Laundering (ML) is easier to describe than define1 but could be described as the process by which the proceeds of crime or criminal conduct are disguised or concealed so that they appear to from a legitimate source. 2 It is said that criminals in America at one time channelled the cash proceeds of crime through launderettes to enable the cash to be presented as legitimate business takings, hence the term ‘Money Laundering’. Essentially, the acquisition, use, possession, disguise, concealment, conversion, transfer or removal of the benefit of any criminal conduct can be ML, often referred to as ‘dirty money’.

Even an attempt to do any of these, or incitement of another person to do them, can constitute a ML offence. In the past, the term ML was applied only to financial transactions related to organised crime. Today its definition is often expanded by government regulators such as the United States Office of the Controller of the Currency to encompass any financial transaction, which generates an asset or a value as the result of an illegal act, which may involve actions such as tax evasion or false accounting.

3 As a result, the illegal activity of ML is now recognised as potentially practiced by individuals, small and large businesses, corrupt officials, members of organised crime, such as drug dealers or the Mafia, and even corrupt states, through a complex business network of shell companies and trusts based in Offshore Financial Centre offshore tax havens.

The increasing complexity of financial crime, the increasing recognised value of so-called financial intelligence information gathering intelligence (FININT) in combating transnational crime and terrorism, and the speculated impact of Capital economics capital extracted from the legitimate economics has led to an increased prominence of ML in political, economic, and legal debate. 4 Although it is a relatively new offence in the United Kingdom, it is rapidly developing.

The IMF estimates put it at between 2% and 5% of global GDP, or between $600 billion and $1. 3 trillion – the equivalent to the economy of Spain. 5 It is traditional to analyse the process of ML into three stages: Placement – the initial place in which the money enters the financial system; Layering – usually through the process of many transactions to hide the origin of the money; and finally the mixing (integration) stage, in which the money is then mixed with legal funds and made to appear to be from a legitimate source and thus ready to spend.

Without the network of banks and other financial institutions to facilitate the three stages of ML and to lend an air of respectability to the proceeds when they eventually re-appear, ML would be largely impossible. 6 Therefore the financial and related sectors have always been positioned at the forefront of the drive to combat ML. Traditionally, legislation has viewed this crime as a by-product of an initial crime, and up until the 1980’s the UK relied on the Theft Act 19687 and the Misuse of Drugs Act 19718.

Both these approaches had problems: the Theft Act required dishonesty among the accused ML launderer and was limited to crimes of theft, and the Drugs Act was also limited to tangible assets and its application could not spread to choose in action. The latter legislative flaw led to the shock decision in R v Cuthbertson [1981]9 in which no forfeiture order could be made to seize the defendant’s ill-gotten gains that were in a bank in Switzerland.

It was at the turn of this decade that ML legislation started to appear and the crime and its punishment began to stand-alone. However, it was not a UK strategy that dealt with the crime of ML initially. The Vienna Convention 1988 proved to be the most important step in the internalisation of ML law and the introduction of the concept worldwide. 10 This was shortly followed by the creation of the FATF11 by the G7 summit and their forty recommendations12 to tackle ML, which included a recommendation for all member states to follow Vienna’s stance and criminalise ML.

13 These recommendations were taken with ‘particular account’ in the EU’s first Directive on ML14 but also provided the basis for ML to be regarded as a stand-alone crime. It stated that ML ‘occurs not only in relation to the proceeds of drug-related offences but also in relation to the proceeds of other criminal activities. ’15 This lead to the first major change in strategy of the 1990’s to UK legislation. It was introduced into16 the UK’s Criminal Justice Act 198817 (CJA), the offence of ‘acquisition, possession or use of proceeds of crime,18’ and also the ML Regulations 1993.

Sham,19 views the 1990’s as a period of ‘Supranationalisation’ in which the EU leads the way in terms of ML prevention strategies. These strategies were really the beginning of ML laws as we know it, with one of the main primary objectives of the directive being to make ML a crime. This directive was the only specific ML law of the decade and focused on customer identification20 or ‘know your customer’ (KYC). The fact this was the only specific ML law of the decade backs up this idea of supranationalisation and highlights that the UK’s law here was in an early stage.

In the 1990’s the UK had the ML Act 1993 to deal with the relevant financial institutions to keep ML out of the city and also the CJA 1998 and the Drug Trafficking Act 199421 (DTA) to keep ML from the ‘real’ criminals on the streets. However, the CJA and DTA laws of this decade had application problems. The CJA was designed for non-drug proceeds and the DTA for drug proceeds, meaning that when charging someone with a ML offence it had to be determined exactly where the proceeds came from. Clearly, this would have been difficult.

Similarly the proceeds may have been a mix of the two, requiring the prosecution to construct a more complex case. This confusion as to the true application of ML laws has been highlighted recently by a decision of the late 1990’s being quashed and re-trials ordered as the Judge misdirected the Jury22 on the appropriate law. It was again a European influence in the form of the FATF that lead ML laws in the current direction. The FATF in 1996 made amendments to its recommendations based on a global survey on ML trends23 and one of the main things to stand out was the use of non-bank financial institutions, in particularly bureau de change.

The bureau de change is a massive financial industry, as is the oil industry, and it is no coincidence that there are cases that mix ML with both. 24 The inter-twinning of these industries means that they can make each other bigger and exacerbate ML. Often the seller of oil is in a different country and under a different currency than the buyer, meaning that if a criminal uses oil as a front for ML then a currency exchange is also likely to be involved.

Although, the aforementioned case was quashed recently, at the time it was the first case to convict someone for ‘outsourcing’25 – the ML part of their crime, which was also committed in a bureau de change. This case illustrates the appreciation by the judges that ML is not just a by-product of a specific crime and also that moving funds abroad through exchanges was not properly legislated against. During the 1990’s the ECJ scrutinised laws that required prior authorisation for any export of Spanish coins, banknotes or bearer cheques in order to prevent ML.

The ECJ found in Mellad and Maestre [1995]26 that prior authorisation would conflict with EU free trade laws, and that prior declaration was enough. 27 It was not just the UK’s present legislation that was struggling to deal with foreign exchanges. Furthermore, the UK Governments Performance and Innovation Unit in their report of 200028 highlighted that there was ‘much concern’29 that the UK was the only country not to regulate the foreign exchanges, although the first Directive seems to cover them.

The second EU directive of 2001 sought to dispel any doubt and expressly states that ML law should cover the bureau de change services in EU countries. It is important when viewing the 1990’s to know that this second directive in 2001 did not repeal the 1993 directive, it just amended it. However the biggest change to regulatory architecture in the UK came at the start of the decade in the form of the Financial Services and Markets Act 2000.

30 It gave the Financial Services Authority (FSA) wide ranging powers to complete its objective of ‘reducing financial crime’31 and among other things, rule-making powers in relation to ML. 32 The FSA now had the power to make rules, investigate compliance of these rules, and also fine firms for non compliance. This was a move away from the soft regulation of the 1990’s and the guidelines issued by the Joint Money Laundering Steering Group (JMLSG) to a more prescriptive regime. 33 This represented a positive step in regulating firms in the UK that should bear ML responsibilities.