Challenges for Combating Money Laundering

The fight against money laundering (ML) and the complications with practical Implementation/enforcement from an International Perspective

ABSTRACT

This dissertation aims to investigate the fundamental issues and complexities in controlling money laundering (ML) globally by analyzing international anti-money laundering laws (AML) and getting to the root of the problem by highlighting the loopholes and exploring the status of the crime internationally.

Significant international cases are examined to compare and recognize the existent corrupt practices not only within financial institutions but also of the ruling class. The weak regulations coupled with problems of inconsistencies and lack of uniformity are analysed. Enforcement which is a vital mechanism in serving as an implementing tool is probed to identify the existent difficulties. The repercussions/implications of ML will be underlined to recognize the intensity of the crime and why there is a need to tackle the crime with a stronger force both domestically and most importantly internationally.

This dissertation raises questions in relation to the efficacy and strength of the existent AML enforcements. Considering the fundamentals of international laws, it recommends methods of achieving uniformity. A comparative method is adopted to illustrate the scope of the crime, deficiencies in the regulatory regimes of corporate establishments and the responsive action of the states.

The comparative analysis further identifies the respective issues of the individual states which instigate the crime. In international law it can be beneficial to deem ML as a specific crime. Ratification of the Vienna Convention has the ability to enable uniformity of AML laws. Uniformity amid different nations can have the tendency to deter perpetrators from laundering illicit funds.

Contents

Chapter 1 - Introduction

Chapter 2 - Enforcement/implementation of International Law and the obstacles

Chapter 3 - The Role of Banks

Chapter 4 - A Comparative Analysis – Cases and Jurisdictions

Chapter 5 - International Anti-money laundering laws – Testing the waters

Final Chapter - Conclusion

Bibliography

Chapter 1: Introduction

The fight against money laundering (ML) strengthened intensively since the 1980s. The international collaboration and cooperation in eradicating ML, was almost absent until 1986 and was not treated in its own right a criminal offence.[1] It was after the formation of Financial Action Task Force (FATF) by the Group of 7 (G7)[2] in 1989 that the regulation of anti-money laundering (AML) became widely recognized on an international level, and rightly so because of its intensity and the nature of the crime.

So far, there is only one state which has shown non-cooperation to implement the Recommendations of the FATF which is North Korea.[3] However, discussions were said to have initiated by North Korea in October 2012 with the FATF in relation to the subject. AML regulation thus is the most broadly implemented regulatory regime throughout the world. Given the nature of ML and its implications, measures to counter money laundering are at the center of international effort.[4] The US along with other nations have embraced several AML controls to measure the scope of the crime and to stop laundering of criminal proceeds, along with attempting to catch the one who commits such a crime.[5]

The question however is the extent and the effectiveness of such efforts. It is not what such respective states claim to ensure but rather whether there is sufficient practical implementation by them to tackle ML. The challenge posed is due to the fact there are no orderly estimations of the scale of ML.[6] Illegal origins such as smuggling, drug trafficking, prostitution and activities of organized crime can generate large profits; creating incentive to legitimize the gains through laundering.[7] Individuals or groups involved in criminal action then look for ways to control such ill gains without attracting attention to the main action. ML is a process where the assets attained by criminal means are processed to abstruse the connection between the illegal activity and the funds.[8] It creates a cover of legal legitimacy to furtively conceal the original nature of the illegal money.[9]

This organized crime is typically transnational, involving several legal standards and different jurisdictions.[10] The nature of the crime is transnational due to the fact that it originates in one jurisdiction and the illegal earnings are then filtered through to another jurisdiction to hide the trace of its original source.[11] In order to successfully and effectively eliminate and lessen ML, the law must address every stage of the process, namely: “identification, pursuit, seizure, and confiscation or forfeiture”.[12]

The offence of concealment as specified by the Proceeds of Crime Act 2002 (POCA), broadens the ML offence in an effective manner. The conversion, disguising and removing or transferring the property of a criminal nature from the UK is described as concealment.[13] What makes ML more serious is the failure to report the launderer of the money or the activity in cases where it is suspected. There is therefore, by virtue of this provision, a duty imposed to report any suspicion in relation to ML and thus creates an accountability for both the financial and legal division.[14]

Even though it may seem that ML does not apparently have any recognizable victims which are affected directly, but, the repercussions of the crime are not any less than the crimes of the street.[15] ML in its nature is disastrous, not only does it negatively affect the economy because of unequal wealth distribution but also renders substantial adversarial effects on the citizens’ welfare.[16] It has a detrimental impact on the well-being of the people and also damages the reputation of a state internationally, and is therefore categorized as corrupt and disreputable.[17] The effects on such an economy are thus quite harmful, where foreign investors hold back from investing in states of such character.[18] Investors typically target states where there is financial transparency and economic stability, whereas countries who are subject to corruption and vices such as ML, lose the opportunity to grow and prosper.[19] Such states lose on the much-needed foreign investment, which is a necessary requisite for a country’s economy to flourish.[20]

It is important to understand the process of how money is laundered in order to recognize its implications.[21] It is a process which generally comprises of 3 rudimentary stages namely; placement, layering and integration.[22]

Process

Placement is the initial and a key step in unravelling the illegal money derived from criminal activities, from the criminals.[23] Funds are deposited in financial institutions or either expended through acquisition of assets. The financial system and banks are thus used to place the illegal proceeds which paves the way for the second stage of the laundering process.[24]

Layering is the method used by launderers to further abstruse the trail of the criminality in the effort to detach the money from the original source.[25] This can be undertaken through several methods such as passing money through shell companies, numerous accounts or trusts, especially in areas which offers anonymity.[26] In order to undertake detachment, schemes of complex and synthetic nature are adopted to disassociate the funds; smurfing or physically scattering the money in different financial institutions worldwide.[27]

The concluding stage of the process is integration, where the laundered money is given a legitimate status and assimilated into the financial and economic system.[28] The criminal is thus reconciled with the funds which he can further invest, draw and use for personal gains or finance further criminal plans such as terrorism or other serious crimes.[29]

ML is one of the most attractive options for criminals to deal with their illegal proceeds and acquisitions.[30] This is due to the fact that there are slimmer chances of detection in ML because of the inconsistencies in law, compared to when money is invested in the black economy.[31]

The primary focus of this dissertation entails the uniformity of AML laws and how uniformity can be achieved by recommending relevant solutions. The chapters aim to conceive the measures used by states to tackle the fight against ML, the core problems which exist pertaining to ML controls and the need for uniformity. It will discuss the complexities of enforcement/implementation of international laws in relation to ML and also determine as to whether these complexities can or cannot be reduced or eradicated in practice.

The structure of the chapters will be in the following order:

The Introductory Chapter has discussed ML and its process, to set the background for further analysis.

Chapter 2 will discuss enforcement of International ML laws and the obstacles faced when attempting to implement them.

Analysis in Chapter 3 will evolve around the role of the banks combined with the function of the Financial Conduct Authority, the Wolfsberg group, and FATF to highlight their efforts to alleviate money laundering; alongside emphasizing Transparency International’s recommendations.

Further discussion in Chapter 4 will delve into a comparative analysis of significant cases in key jurisdictions, namely; United Kingdom, United States of America and Africa; signifying the threats posed by ML and the complexities that exist in implementing AML laws. The loopholes are identified and examined by investigating the international efforts of the states by adopting a comparative approach.

Chapter 5 will map out the complications of embracing International AML laws, its counter arguments and why there is an urgent need to attack ML.

The final chapter gives a conclusive evaluation and recommendations of how ML can be tackled internationally with uniformity.

Chapter 2: Enforcement/implementation of International Law and the obstacles

In order to understand why it may be challenging to ensure the enforcement of AML laws internationally, it is important to examine the issues which exist in relation to the enforcement of international law. There are several hindrances when it comes to implementation and enforcement.[32] Making a certain set of perfect laws does not guarantee the goal it aims to achieve, as International law is not binding on states, and more so, there is no guarantee of implementation.[33] Most importantly the task of bringing uniformity in laws internationally is also not an easy one.[34] It is therefore argued that domestic laws may serve as a better option in tackling ML.[35] On the contrary, it is important to note that ML is a transnational crime and international law can have a better impact in controlling its practice in different jurisdictions rather than relying on the national laws.[36] The fortification of international law is therefore, critical to tackle and deal with a crime such as ML which is cross-border.[37]  

2.1 Standardization, consistency and uniformity

One of the most recognized hinderance in enforcing and implementing international law is the lack of uniformity between states. United Nations (UN) has for instance,193 member-states; the fact that the Holy See and Palestine are not members does not truly in its literal sense reflect an international scope.

Different states apply and interpret international laws differently, this indicates that the international legal documents are not per say as tidy as they ought to be. It is important to note that there are often disagreements and reservations made on different aspects of law. This is a major hinderance in achieving uniformity. The efforts towards uniformity therefore are not as fruitful as they are expected or aspired to be. There are substantial discrepancies in relation to the extent of how much the laws are supposed to be binding. It is inevitable that soft laws may only generate what is called soft harmonisation. An example of this is the third recommendation of the FATF which is the criminalization of the criminal proceeds which are laundered. However, the adversarial effects of absence of uniformity are more than the mere disappointment of harmonization in international laws.

It is argued, and is fairly true that money launderers have successfully exploited these loopholes and the inconsistencies among the legal systems of different states to take advantage of the existent deficiencies. It therefore wouldn’t be wrong to argue that there is a need for widespread uniformity and harmonisation in the fight to deter and reduce the crime of ML.

Arguably, the construction of uniformed law is something which only the European Court of Justice can achieve. Against this argument it is submitted that there is an absence of an efficient international law instrument which is directly effective on a macro level. However, at the same time, laws which are applicable directly are criticised for having the potential to hinder a state’s liberty to change and improve their law.

In order to embolden harmonisation and uniformity of the international laws, the UN Office on Drugs and Crime (UNODC) for this purpose strives to aid countries in ratifying multilateral treaties. It helps countries in targeting ML and terrorism by developing its policies and municipal legislation. International law is typically based on treaties and these treaties are not easy to be enforced to ensure a successful operation. Even though there is a need for strong multi-lateral treaties, they are criticised by many scholars for not being effectively successful in bringing unification of the law.

For this purpose, it is ideal or rather recommended that Vienna Convention be ratified, as it has the potential to reinforce homogeneity in regulatory regimes domestically. Moreover, there is a crucial need for focused detection at an international level to control cybercrime which is another serious problem facilitating the crime of ML.

Cyber laundering is a mechanism used to launder illegal money through the use of internet throughout the world. There are numerous techniques used by criminals to change dirty money into clean money internationally by methods such as online banking, online auctioning and other digital oriented techniques. ML as discussed is a global issue and because of its transnational nature, there are sets of several measures which are concurrently in force to tackle the problem. This means that there is an overlap of numerous rules and distinctive animating principles. As a result, when international AML laws are ratified, it leads to an uneven and irregular mechanism across the states.

There is a lack of global uniformity among different countries which are simultaneously adhering to different rules and procedures. In order to tackle this issue, there is a need to enhance comparative law and its study, which may help to improve the uniformity of transnational rules and its content.

The International Money Laundering Information Network can further enrich the advancement in this regard. Another underlying problem is that though standards are established by the international laws, it is eventually every state’s discretion of how such standards are implemented by individual states.

The susceptibility of the states to ML across borders is thus influenced by the application and implementation of these standards set in place. It is therefore, argued that the national laws can have a legal impact transnationally which will be further discussed. Where the soft laws are formed by the FATF, the “Eurasian group on combating money laundering and the financing of terrorism”, which is one of the FATF-Style Regional Bodies (FSRBs), for instance strives to make sure that there is synchronization and that international standards are met in the regions represented by them.[38]

There are altogether 9 bodies in conjunction with the FATF, forming a network globally.[39] The FATF-Style Regional Bodies can thus, with their planned targets, assist in bringing uniformity in international AML laws. However, to what extent such targets are met is debatable.

Additionally, in order to ensure steady relationships between the FATF-Style Regional Bodies, the Eurasian group on combating money laundering and financing of terrorism (EAG) strives to play an extensive role in strengthening their connection and association. These attempts can urge and support the consistency and standardization of the international AML laws; making sure that the future targets by the FSRBs are put into effect in an instantaneous manner to fight the battle against ML.

2.2 International law - The element of coercion and absence of sanctions

The nature of international laws is such that they are not in the legal capacity mandatory to be ratified or as such do not impart a compulsion upon the states to adopt. It is entirely the discretion of each state to choose to ratify and to accept or implement the recommendations put forward in a particular instrument. These methods therefore are such which imply a risk-based approach rather than an imposition of comprehensive penalties to block ML.

According to John Austin: “Law is a command backed by sanctions”.[40] Arguably, under such consideration, international law does not per say entirely fall under the classification of positive law, as it only imposes moral sanctions for the obligations set out in the international instruments. There is thus, a deficiency of coercive influence in the enforcement of the laws. However, against this argument, the International Criminal Police Organisation (INTERPOL) does enforce a coercive element by emboldening cooperation, information exchange and training of the police to enhance their AML laws.

However, one can question the effectiveness of such measures to fight ML on an international scale, this will be analysed further below. Coercive measures are considered fairly essential and carry an evident significance in the enforcement of legal duties. However, it is argued, that even though in international law there is a deficiency of an adequate inherent coercive force; it is balanced by efforts of widespread global collaboration which is achieved by the use of several means integrated into the system.

To further support this argument, it is stated that national legislation such as the UK’s Proceeds of Crime Act 2002, can successfully achieve cooperation internationally, which is set to tackle confiscation and asset recovery. Arguably, international cooperation can further be achieved by engaging with other states through informal collaboration and requests for assistance.

To this extent, the Harare Scheme is submitted to be a helpful basis/footing for Commonwealth countries for interchanging intelligence in fighting ML. Another suggestion in this regard is the recommendation to build up teams of joint investigation advised by the European Union Legislation to its member states. Debatably, this would make the process of tackling ML more effective as it promotes a sense of joint cooperation and collaboration.

The same is also promoted by the Egmont Group requiring its members to make Financial Intelligence Units (FIUs), and interchange important information concerning ML. There are several secured modes of communication set in place for the states to interconnect, and for the furtherance of the same, training is also provided by the FIUs. It is quite essential to have cooperation and exchange of information between states to tackle something like ML on an international level. Acknowledging the significance of such elements, the FIUs and the FSRBs encourage and provide enhancement in collaboration and the exchange of information among states to monitor ML more efficiently and effectively.

Irrespective of the fact that the measures in place are innately non-binding, the states, nevertheless are under a sense of a certain pressure to comply with the given rules. However, this does not prevent the states from professing their individual state supremacy. Like for instance, the US constitution under Article 6, regardless of the international laws underpins the federal law’s supremacy. Whereas, on the other hand the constitution of France under Article 55 instates preeminence or more so rather gives preference to the international laws.[41]

The agreements and treaties ratified thus have a superior authority over the national laws under the French constitution.[42] One can argue that this particular stance adopted by the Constitution of France is likely to enhance consistency and standardization of the international laws, but it is improbable to be on the cards for other countries to adopt the same approach; and give up on their national supremacy.

The French law presents a good example and it can be argued that if other states adhere to the same approach, it is likely to eradicate most of the problems and procure better results in fighting international crimes. This can eliminate the underlying inconsistencies and the problems that surface due to the lack of uniformity. Thus, strengthening the fight against ML and the process to tackle the problem in a standardized manner.

Nonetheless, considering the circumstances, attaining uniformity in practice does not seem to be an easy one, bearing in mind that there is no obligation on states to ratify international laws. The flip side to giving authority to international laws, where rules are made obligatory on states, is argued and said to hinder the advancement of the domestic laws. The middle ground therefore can be to enforce measures nationally which is relatively appropriate at the time to tackle ML because of the financial institutions’ regulations.

Arguably, it is favorable for countries to analyze the advancement of the national legal enforcement of the states globally and use that insight in making their domestic AML laws better and of preferable standards.  

2.3 International law and money laundering

ML is categorized as an international crime by various international laws. It is explicated by the ‘UN Convention against Transnational Organized Crime 2004’, that international ML is to be criminalized by states through means of effective legislation.

Similarly, where the gains of a serious crime are being laundered, it is specified as an offence by the Palermo Convention, especially when the action is planned and cross-bordered. It is encouraged that countries offer legal backing to each other in dealing with international systematized crime, and assist in the process of tackling the wrong. ML in international law is a crime which stands alone. However, it is typically charged as an offence of an ancillary nature. In this context, the main or ground offence is the production of illegal funds, and ML is the component of such a crime, led from the predicate offence.[43]

Given that the nature of such a crime is derived from a serious offence i.e. illegal proceeds, it makes ML quite serious of an offence, categorized as an ancillary offence. It is necessary for a predicate offence (acquisition of illegal proceeds), to have taken place which would then result in the subsequent route of laundering the money. ML however, is both reliant and un-reliant on the predicate offence.

For instance, in order to launder money, a predicate offence is required to exist. However, un-reliant because criminals may be indicted for the crime of ML, despite not being charged for the predicate offence.

The dependence therefore varies and ML thus can classify as a specific offence. Interestingly so, judges in German courts are permitted not to impeach criminals for ML, in cases where they are charged for the predicate offence. Given the intensity of the crime, it is very critical that countries protect their financial institutions and its integrity by adopting the existent international anti-ML instruments.

As Tom Sherman (President of the FATF 1992) puts it:

“Combating money laundering is not just a matter of fighting crime but of preserving the integrity of financial institutions and ultimately the financial system as a whole.”[44]

It is directed by the ‘UN Convention against Corruption 2004’ that countries preclude ML by requiring them to set up FIUs and specifying sufficient supervisory and regulatory regimes for their financial institutions.

The International Convention for the Suppression of the Financing of Terrorism 1999 also under Article 2 (1) sets out the measures to confirm that illegal laundered proceeds are not used to fund terrorism. Therefore, it wouldn’t be wrong to argue that it is vital to criminalize ML to stop rather more serious crimes that are a threat to the people and the nation, by blocking the source of funding streamed through laundering.

It is worth acknowledging, that ‘the European Convention on Mutual Assistance in Criminal Matters 1959’ helps to enable shared support, where amongst other means of useful facilitations, requests can be made for certain cases which are needed to acquire necessary evidence. It is also noteworthy that EU law has shown commitment in eradicating ML by bringing into effect for instance, the ‘Convention on Laundering, Search, Seizure and Confiscation of Proceeds of Crime 1990’.

This convention criminalizes and forbids the usage of illegal proceeds, including its concealment and conversion. There is also a requirement that the offence has to be undertaken deliberately and purposely, which is also stated in the Palermo Convention; ensuring that innocent parties do not in the process become subject to unfair punishment. However, complications still exist and despite the fact that there are numerous instruments, there is still a lack of practice and issues prevail with regards to enforcement and implementation.

Under the ‘Model Provisions on Money Laundering, Terrorist Financing, Preventive measures and Proceeds of Crime 2009’, it is the preference of each State to criminalize the laundering of the serious crime proceeds. It is up to individual states to decide as to what the predicate offences to ML ought to cover. However, it is understandable that each state adopts what they choose is right for them and that there is an element of discretion they can practice but at the same time, it can cause inconsistencies and irregularities.

Where such rules are said to be adopted by states, the question remains as to whether how much and to what extent is the essence of such guidelines brought into practice. The ground reality and actions are always different than what is portrayed to be executed. This will be discussed in the latter part of the discussion.

It is important to note that cases in relation to ML are not presently heard by the ‘International Criminal Court’ (ICC). It is therefore, recommended that there should be a court established specifically for AML matters from around the globe.

Suggestively, in order to authorize the ICC to hear matters in relation to ML, the International Law Commission could amend the Rome Statute 1998 to incorporate ML as a crime. This would allow the ICC to acquire jurisdiction in dealing with the ML matters. Arguably, this would be rather economical and efficient in terms of cost; more so practical as several offences presented before the ICC might not have come about, if the launderers were penalized in the first place.

An international platform where ML matters could be dealt with, would additionally encourage the unification of international AML laws in different states. International ML laws may not straightforwardly be binding in the legal sense, they however may or can be deemed as obligatory, because of the fact that their compliance would perpetuate a healthy association and connection between countries.

It is recommended that states should comply with the ‘pacta sunt servanda’ principle, as it is the key to a good standing point to fight crime. The phrase generally means that treaties must be abided by.[45] The expression signifies a message of good faith and a notion which is quite significant in international law.[46] Furthermore, if countries enduringly consent to the treaties and conventions in place, this can bring about a sense of value and garnish effective standardized rules to fight not only ML but also other crimes as one unified community. International law is a valuable tool where states can fill the gaps in their national laws, and save themselves from falling prey to serious vices such as ML.

As Wang Zahowen (Bank of China Spokesperson) pointed out:

“The clampdown on money laundering and corruption is common responsibility of all the countries and regions in the world.”[47]

Irrespective of the fact that ML in international law is an offence which is somewhat varying in definition; there is no doubt that it is an international wrong. However, it may not invariably be interpreted as a specific crime.

It is sometimes argued that only when law originates from a sovereign, it is only then considered law. However, in international law classing ML a crime discards this particular interpretation.

The present international law regime effectively categorizes ML as an undoubted crime. It is therefore, recommended that nations unanimously consent to the several set international ML laws in place, to become fully equipped to fight and control the ML crime.

Chapter 3: The Role of Banks

The goal of money launderers as discussed is to legalize the illegitimate proceeds and cover the trace of how the money has been sourced. A very common and yet effectual method to make the dirty money clean is to use a bank to launder the illegal proceeds, which effectively serves as a clear foundation in disconnecting the launderer from the original source.

Banks can become a subject of compromise where deposits of illicit funds are made in a systematic manner. This is also known as structuring, where the illegal funds can go unnoticed; and thus, systematically and calculatedly scooch from raising and triggering red flags.

Institutions such as banks are the central foundation for money launderers, and are at the core of engaging ML criminals in effectively sanitizing and cleansing their illegal proceeds. As Robert Mazur, a former federal agent who served as an undercover money launderer, states:

“The only way to stop the flow of this dirty money is to get tough on the bankers who help mask and transfer it around the world.  Banks themselves don’t launder money, after all: people do.”[48]

ML as discussed is a crime which is characteristically or generally transnational in nature. Due to this particular reason ML cannot be entirely handled at a national level, more so because of the implementation and enforcement frailties that exist in certain countries. Consequently, in order to supervise and manage the regulation of the banks at an international level, the Basel Committee on Banking Supervision was established.

It wouldn’t be wrong to argue that financial institutions who are the central foundation for facilitating money launders, are very tricky and rather hard to detect. Where there are consistent and persistent practices of corrupt nature, it can lead to a culture of serious corruption. In such circumstances, the concept of attaining success in an industry changes and can mean pursuance of any illegal activity which may benefit the business.

Permitting the flow of illegal resources and money into a business to attain higher gains can thus inevitably disturb competition. Therefore, when an institution launders money untraced, it encourages the competitors to adopt the same route and gain the same financial remunerations. This hence can spread like an epidemic and turn into a vicious circle, leaving an intensely adverse effect on the entire economy.

As aforementioned in relation to tackling ML on a national level; arguably, as banks are the central medium in the facilitation of laundering funds, effective detection ought to be and can be carried out on a national level. Even though an international effort is necessary to entirely eradicate the crime of ML; efforts at a local level are also similarly crucial. Launderers commonly seek for banks who would be prepared to accept their funds and then consequently set up companies as a cover to conceal their identity. Arguably, it is therefore, highly imperative to observe and expose ML by a focused and careful monitorization domestically, given that launderers generally hide behind others to conceal the true control and ownership of their businesses.

Financial institutions thus should and can inspect activities by adhering strictly to the guidelines in place, and strive to record, monitor and report doubtful or devious activities. It is vital for a country’s economic development to have a steady and well-established finance industry, which realizes the importance of upholding international reputation and strives towards maintaining it. Confidence and trust are the key factors which attract investors. Therefore, it is recommended that countries engage in healthy competition internationally by verifying that banks function with integrity and upright standards to attract foreign investors.

There is a need for strong and effective mechanisms to be embraced by all banks to control ML in the first encounter. Banks must strictly adhere to the principles of accountability, transparency and integrity, to steer clear of corruption and raise concerns in events of suspicious activity. Where there is a failure to comply with the aforementioned principles of governance, it means that there is risk of significant reputational loss for the bank. In such circumstances, the bank can also become subject to legal sanctions for not having sufficient or satisfactory measures to control ML and adhere to the set guidelines.

3.1 Financial Conduct Authority

As far as the integrity of the finance industry in the UK is concerned, the Financial Conduct Authority (FCA) which is a non-UK governmental body helps the finance industry by promoting competition, protecting the integrity of financial markets and protecting consumers.[49] The regulatory body receives its fees from the financial services institutions and has an accountability to the Treasury.

It is imperative that Financial institutions keep themselves up to date and comply with the standards laid out in the handbook of FCA, especially the set-out Principles for Businesses.[50]

In order to fight ML, it is essential that financial institutions adhere to Principle 3 of the FCA handbook which mentions that firms ought to undertake reasonable care in controlling and organizing its affairs in a responsible and effective manner, with sufficient management systems in place to tackle risk.[51]

Given that ML is typically categorized as a white-collar crime and is conspired/correlated in a wise and organized manner; it is for this reason stressed upon to have an effective ‘risk management system’ in place, to effectually alleviate the probable risks. Additionally, it is highly recommended to ensure that financial institutions function with “due diligence, care and skill”, which are crucial requisites for dealing with ML.[52]

Arguably, this can also be called an alternative recipe/formula for risk-based approach concerning compliance. Essentially, it should be made sure that there is utmost transparency, so that the financial institutions are shielded from risks of organized corruption and exploitation.

3.2 Money Laundering Regulations 2017

Moving on, ‘Money Laundering Regulations 2007’ now the ‘Money Laundering Regulations 2017’ is also worth discussing here, especially Regulation 27 (former Regulation 20) in relation to the due diligence of the customers. This regulation is of quite an essence and vital to fight ML at national level. The new ‘Money laundering Regulations 2017’ which came into force on 26^th June 2017 under the implementation of the EU’s Money laundering 4^th Directive replaced the old Regulations with some changes.[53]

There has been changes in relation to the level of due diligence, where the geographical risk factors and customers both are considered in deciding whether a simplified due diligence is suitable, instead of the former automatic simplified due diligence. This is a good step towards strengthening the measures in tracking money launderers. Further changes are improvement in the transparency of the owners who benefit from trusts and companies.

Again, a suitable development to track down the true owners who hide behind puppet owners and enjoy the benefits. Moreover, there is an advancement and improvement in the enforcement of the sanctions. Only time will tell as to how efficient and effective the new changes might prove in tackling ML. However, arguably, it is a step in the right direction.

3.3 The Wolfsberg Group

At the time when there were rising concerns in relation to the financial crime, it led to the formation of the Wolfsberg Group[54], which was created in the year 2000, with the intention to offer direction to those associated with the banking division.

The Wolfsberg group is a non-governmental association which carries out almost similar functions to that of the FATF which is however, an inter-governmental body. A consortium of 13 international banks, the Wolfsberg Group strives to provide guidance pertaining to dealing with ML and other crimes concerning finance. The group initially came together in the presence of the members from Transparency International to make a draft on the recommendations and standards for AML, concerning private banking.[55] Their directions in relation to ML recapitulates the significance of customer due diligence and the need for maintaining the same under unremitting appraisal. Moreover, it directs to be additionally careful when tackling with jurisdictions which have poor AML controls, and also conduct suitable monitorizations when it comes to the Politically Exposed Persons (PEPs). Most importantly, one can argue that the publications by the Wolfsberg Group and its principles provide to bring uniformity and standardization in rules concerning regulation and extenuation of risk approaches.

On 6 January in 2011 the Wolfsberg Group also sent a comment letter to the President of FATF in relation to its Anti-money laundering and Counter terrorist financing standards.[56] Among other comments, they cautioned FATF about their take on the PEPs. In a sense they advised FATF to not issue directions or recommendations which are rather prescriptive, for instance, referring to the suggestion, that the PEPs set forth a high risk.

They argued that such approach doesn’t seem necessary and is essentially counterproductive. The two co-chairmen among other things also commented on FATF’s emphasis on “mind and management” in relation to Beneficial ownership, arguing that the notion of “mind and management” denotes different meanings in different circumstances which may lead to confusion.

While supporting and acknowledging FATF’s efforts, they made comments on other aspects where the Wolfsberg Group did not share the same view. However, on the contrary, Robert Mazur pointing towards the Wolfsberg Group, asserts that this is not ideally desirable and is rather superficial, by arguing that “the wolves are guarding the sheep”. [57]

He pointed out, and arguably rightly so, that 5 of the banks from the given self-made association have confessed to management of illegitimate funds or either have been or were subject to investigation in relation to such crimes. He maintains that Barclays and Credit Suisse accepted to the channeling dollars in millions to declared adversary states. Similarly, HSBC also underwent investigation for promoting the reception of US currency in dollars of billions belonging to account owners from Mexico.

Additionally, Americans in thousands were assisted via network of fake companies and pretentious loans in eluding income taxes by means of undisclosed accounts. It was affirmed by the bank compliance sector and law enforcement representatives that bulk of US currency was conveyed for criminals from Mexico to America by the HSBC officers. Furthermore, Goldman Sachs which is also one of the association members was too under monitorization in relation to extensive unlawful handling.

Considering the aforementioned discussion, one can argue that in such circumstances matters are left in the hands of the banks to introduce and propose changes to the rules which seem fitting and suitable to them at the time.[58] This therefore, results as an inside matter for banks as opposed to a matter of policy for regulators. Nevertheless, arguably, this can be considered as a progressive sign for the banks involved, if not anything, to have more visibility in relation to how matters are conducted.

Chapter 4: A Comparative Analysis – Cases and Jurisdictions

The Juarez Cartel, a drug dealing gang,[59] is an example to understand and grasp the extensity level of which the ML activities can extend to. Enormous amounts of money made from drug trafficking in Mexico, estimating above 14 million Dollars were incrusted in the financial institutions of Uruguay and Argentina.[60]

The funds were subsequently used to buy shares, and expended on extravagant items in an endeavor to hide and legalize the money. Banks globally have been subject to a lot of scrutiny and consequently punishments for the scheming of money launderers.[61] The launderers plan and target nations with weak/inadequate laws which favor their endeavors.[62] Most of these nations are not hard to spot as they are famous and known for their prevalent corruption and bribery.

4.1 United Kingdom

UK is one of the central locations for money laundering where perpetrators seek to launder/invest their illegal funds; given it is one of the biggest financial markets.[63] Each year, extortionate amounts of money flows through the UK’s financial channels, with numerous transactions involving illicit funds.[64] Once the money passes through the UK and its affiliated regions, it is approved by the economy.

Being a global hub for many talents and political influence, the UK is an appealing location for corrupt individuals.[65] UK has incomparable links with offshore jurisdictions and thus, the confidentiality allows the funds to be easily concealed.[66] It offers security and stability as a safe haven, where the prospects for investments are vast.[67] Thereby, offering launderers secure estate rights and a stable environment.[68]

The fore coming relevant ML cases discussed in this dissertation illustrate and highlight the involvement of the UK in the ML endeavors. One can question the UK’s effort to fight ML. Despite the fact that there is an apparent cloth of effort displayed, the effort is not as forceful as it needs to be. Arguably, the UK is at critical position in the fight against money laundering and corruption.[69] As David Cameron labelled it:

“the cancer at the heart of so many of the world’s problems.”[70]

Generally, money laundering procedures are reliant upon professional enablers; accountants, agents of company-formation and lawyers, some who cooperatively facilitate the process.[71] It is argued that ML poses a risk which outreaches the regulated divisions.[72] ML outside such regulated divisions weakens the domestic guards against corruption.[73] Quantifying the degree of illegal funds flowing into the UK is arguably a tremendously difficult task.[74] The flow of cross-border illegal wealth is concealed and virtually undetectable.[75] Although numerous methods are utilized in attempt to determine the scale of laundered funds into the UK, the estimations remain diverse.[76] However, according to the NCA, the money laundered into the UK per year is equivalent to billions.[77]

4.1.1 Deficiencies in the UK’s AML system

It is submitted that there are apparent weaknesses in the AML system of the UK which makes it susceptible to the flow of illegal funds entering its economy.[78] Central to the problem is the UK’s twenty-seven supervisory figures, that are mostly private bodies which oversee the AML compliance in the property and banking divisions. Arguably, this system is erratic and presents inconsistencies, all which result in an impractical environment for those seeking to follow the rules.[79]

Furthermore, conflicts of interest amongst the supervisors is a major problem as it can deter them from effectively doing their job.[80] Although intermediaries such as accountants and lawyers are at the forefront of detection for both private sector institutions and banks, their reporting is not always as effective.[81] Therefore, the professional intermediaries’ process of detection and reporting of money laundering needs to be severely improved.[82]

4.1.2 Shell Companies and Entrance

As perpetrators can easily conceal their identity, it makes it a difficult task for law implementing agencies to identify the source of their illegal funds.[83] Corrupt individuals often utilize a complex corporate structure to launder their funds into the UK.[84]

There is a correlation amongst cases involving corruption and the usage of private corporate vehicles, for example property being one of the main vehicles used to launder money into the UK.[85]

Over seventy percent of two hundred cases according to a 2011 World Bank report highlighted the usage of secret shell companies to launder money into the UK and hide the identity of politicians involved in corruption.[86]

The UK’s Metropolitan Police’s Proceeds of Corruption Unit (POCU) investigated more than seventy eight percent of property related corruption cases which convoluted the registration of anonymous companies in Crown Dependencies and Overseas Territories.[87]

Research revealed that an excess of thirty-six thousand London properties were registered in offshore jurisdictions, with ten percent of properties owned by secret companies.[88] Therefore, it is imperative for the UK to focus on the transparency of the beneficial owners of such companies in order to tackle the problems surrounding the laundering of illicit funds.

The Tier 1 visa system for investors can also be used to secure UK residency and utilize the same to flow illegal funds into the UK.[89] Migrants can invest two million pounds into the economy and thus apply for a permanent UK residency after a passage of five years. Due to discrepancies in the system, it opens it to exploitation by corrupt individuals as there is no devoted system to conduct background checks.[90] The reliance is wholly placed upon asset management firms and banks to identify grounds for suspicious activities. Where an individual’s account is accepted by the bank, it is assumed by the home office that the requisite AML checks have been undertaken.[91] This loophole opens a path for corruption without conducting necessary checks. There is arguably no clarity as to how much money is invested into the UK and where it is invested. Thus, it is paramount that necessary checks are conducted alongside total transparency.

It is imperative that a specific single-supervisor is introduced by the UK government to combine and unite the AML efforts of the supervisors to avoid inconsistencies; making sure that all the standards of the FATF are met.[92] The supervisors must also be equipped with the right tools to instigate deterrence such as liability and penal sanctions, where there is failure on the part of professional enablers.[93] It is essential that sanctions are established and imposed upon professional enablers, revoking licenses of those involved in ML schemes.[94] There is also a need for adequate legislation which would bound offshore companies to disclose the identity of beneficial owners.[95] Availability of public registers regarding the details of companies’ beneficial owners would pave the way to undertake thorough investigations.[96]

Effective legislation is required with the authority of dispensing “Unexplained Wealth Orders” for the recovery of ill-gotten assets which would serve as an effective mechanism to freeze stolen assets, as this would by-pass the reliance on cross-border jurisdictions’ predicate offences or support of the countries which are uncooperative. Furthermore, it is imperative that Tier 1 visa system is made subject to utmost transparency by the Home Office, ensuring disclosures, in relation to the identity of the investors, the amount of funds invested, the business where investment is made and the intentions/interests of such investors.

Strict transparency is needed when it comes to the public officials and PEPs, irrespective of the fact if they are holding office at the time or not. Most importantly, assessment needs to be undertaken of the Tier 1 visas granted prior to 2015 rules changes, and published to catch the culprits which would trigger deterrence for the future criminals.

It raises a big question on the reliability of detection and enforcement mechanisms when criminals go unpenalized for their criminal activities. An illustration is the case of Daxford Ltd, which exemplifies the deficiency and difficulty in impleading powerful and dominant people.

Michael Daxford would perpetrate tax evasion and then hide the money by making fake trade accounts. These bogus trade accounts were made under the names of Arab sheikhs who in reality did not even exist. It was a stratagem and an arrangement of such nature that it would seem, that large sums of money were deposited by the non-existent sheiks.

Daxford would then close down the respective accounts after he had surreptitiously generated profits. The arrangement was disguised by a legitimate cover, in order to make sure that everything appeared authentic and legal, accounts were opened for UK citizens, whereby it would show that a lawful business is being carried out.

By managing another clever scheme, he would then succeed to send the money to a bank account in Switzerland. Astonishingly, even though two crimes viz. evasion of tax and ML were committed by Daxford, still he did not face any criminal prosecution. A detective who was posted to Fraud Squad to work on the case, mentions in his blog:

“[….] it was clear that the Establishment did not want to drag these eminent and socially-elevated people through the Courts. So, the whole thing was dropped and covered up.”[97]

Where a background check is necessary to be carried out, it is also important that financial institutions try their best to avoid the action of enforcement by extenuating the probable risks that may lead to ML.

In 2012, a fine of 525,000 pounds was imposed on Habib Bank AG Zurich due to its deficiencies and shortcomings in relation to the implementation of AML controls. Among other failures, one was that the training for employees was not up to par or rather lacked. This shows as to how vital the role of employees is in detecting and monitoring ML activities. Additionally, an important and a major failure on their behalf was their deficiency in making sure that each client’s account is categorized with the level of risk which is suitable and relevant; and in line with the degree of risk which is expected of the higher risk states in relation to ML.

This is a very important measure, as states who have weak AML implementations and managements pose a risk and thus, it is upon financial institutions who deal with such states’ clients to make sure that they are assessed in the most appropriate manner to alleviate any probable threats. Furthermore, it is therefore paramount that the internal regulations of the financial institutions are strong and in line with the AML laws of the State.

For further exemplification, the case of Coutts and Company also serves as a good example in relation to risk management and its importance. A fine of 8,750,000 pounds was imposed on Coutts and Company in 2012 for their failure to adequately protect against the risks of ML activities. What’s more important is that they also botched in their duty to properly recognize and classify the PEPs. This therefore, brought upon a great ML risk to the institution.

As far as high-risk clients are concerned, flaws were discovered in about 71% files reviewed by the FCA in relation to due diligence. Such conduct enhances complications and complexities; when financial institutions are not compliant and sufficiently diligent. It is thus, vital that financial institutions thoroughly comply with the standards set and are fully alert, for these institutions can be an open entrance for cunning international clients with their illicit proceeds.

The hefty fines clearly indicate how grave and serious such flaws can be, and how serious of an impact they can have on the economy. There is a bigger responsibility on such eminent financial institutions to be more steadfast and to serve as an example for other institutions. They potentially have an indirect duty towards the state in preserving the reputation of the country and its financial market.

Where there is a compromise on the standards of AML regulations, it can have disastrous effects on the reputation and economic stability of a state. There has been negligence also on part of other financial institutions in implementing the AML rules, and sufficiently adhering to the set guidelines and standards. For a failure to establish satisfactory AML controls, the EFG Private Bank was charged a fine of 4.2 million pounds. Among other clients, they had clients who were previously convicted of ML; this was a risk which was not properly assessed. The fact that they served numerous clients who were PEPs, they did not recognize and direct their attention to gauging the risks concerning ML.

Surprisingly, accounts which were risk oriented and posed a threat were about 400 in number. This as reported went on for 3 years. Where clients of such description are entertained by financial institutions without proper assessment and controls, it is understandable why there would be a risk of ML and other potential crime.

It is therefore vital that there is assiduousness, and adoption of careful assessment procedures and controls. As Tracey McDermott who was the director of Enforcement and Financial crime (FCA) said:

“Banks are in the front line in the fight against money laundering. If they accept business from high-risk customers they must have effective systems, controls and practices in place”.[98]

Despite the fact, that there have been so many fines imposed on different financial institutions, the controls in relation to ML are still not satisfactory. Arguably, this might mean that fines may not be an effective or a suitable course of action in enforcing the rules and regulations.

It is only about four years ago, that Standard Bank was charged a fine of more than 7.6 million pounds because they infringed rules that serve to safeguard and protect against ML.[99]The fines imposed indicate and reflect the failures of the banks in complying and recognizing the significance of prevention and detection of ML activities. It is often found that banks are not sufficiently active and equipped according to the set standards in identifying PEPs. It is imperative that they should be highly alert when it comes to clients of such description. In the case of Standard Bank, it failed to comply with the measures of ‘customer due diligence’ as laid out in the Money Laundering Regulations 2007, and the same is neglected also by other banks who have or have not necessarily been fined, as one is not guilty until proven to be so.