Musings on Money Laundering…

When the new Labour Government took office in May 1997, the regulation of financial services within the United Kingdom was complex and less efficient than it should have been. Within three years of taking office, however, the wide reaching Financial Services and Markets Act 2000 had been introduced. As well as simplifying and streamlining the regulatory framework, this Act introduced the Financial Services Authority, the body charged with overseeing this regulation. A major aspect of the simplified system has been an increasing focus on the combating of money laundering. All professional persons are responsible for detecting, and alerting the appropriate authorities to such activity, but there is, perhaps, a larger degree of responsibility on solicitors than other professionals to be alert to the dangers.

Before discussing the legislative arrangements in the United Kingdom in particular relation to money laundering, it is necessary to outline the wider changes in financial regulation that have occurred since 1997. At that time, there existed a rather complex web of bodies, each answerable to another, with ultimate responsibility resting with HM Treasury. The second tier of responsibility was divided between the Bank of England (before it gained independence, obviously), the Insurance Division, the Securities and Investments Division, and the Building Societies Commission. These, in turn, regulated further tiers of bodies, and the whole system was underpinned by five ombudsmen, a personal insurance arbitration service, and two different complaints services. Within this tangled structure, it is easy to see how money laundering could have been a problem, with so called ‘dirty money’ being moved around with no clear responsibility lying anywhere. The 2000 legislation, however, simplified this structure so that now, although nominal responsibility still rests with the Treasury, it is almost wholly delegated to the powerful Financial Services Authority with almost exclusive control and responsibility for financial services regulation. There are, now, just two branches under the FSA; the Financial Services and Markets Compensation Scheme, and the Financial Services Ombudsman. This streamlining has made regulation easier and more efficient purely by simplifying what was previously a haphazard and uncertain system.

What, then, is money laundering? Organised crime generates cash. As crime has become increasingly globalised (such as internet crime and people trafficking) and large scale, so revenue generated from it has increased. Where this revenue is in the form of cash, which in the case of organised crime it largely is, the cash has to be disguised and blended into the banking system. Without this happening, it would be easy for the authorities to track down the money and, therefore, the criminals. The ultimate aim of the money launderer is to get the ‘dirty money’ into the banking system in a legitimate form, so that there can be no question that he or she came by the money in a legal way. Once the cash has moved into the banking system, it is passed into many other areas, in an attempt to cover its tracks. These different areas might include other accounts, companies which have been set up to “front” the activity which has generated the cash, foreign currencies and so on. Then, in turn, cash from these different sources is passed into legitimate companies and bank accounts, from which the criminals can extract the cash as apparently legitimate profit. The ‘dirty money’ has been laundered, and is now, in all appearance, clean.

The three stages to money laundering, then, are ‘placement’, whereby the dirty money is put into the banking system, followed by what is called ‘layering’, in which the cash passes into many different areas in order to confuse its origins, and finally, ‘integration’, where the cash passes into legitimate companies and accounts. Money laundering in the UK is a criminal offence, and as such, any person involved in any known or suspected money laundering activity risks a criminal conviction carrying a jail term of up to 14 years. It is significant that even innocent involvement on the part of professionals such as bankers and lawyers can provoke a criminal charge.

There are various money laundering offences within the jurisdiction of the United Kingdom to be found in statutes such as the Criminal Justice Act 1988 (as amended), and the Terrorism Act 2000 (as amended). The main change made by these two significant pieces of legislation is that they create two new obligations to make Suspicious Transaction Reports. The legislation, then, increases the onus on professionals dealing with financial transactions of any kind to be vigilant in detecting suspicious transactions, and to act effectively upon them when such transactions do arise. When this occurs, the Suspicious Transaction Reports (abbreviated to STR) can be made either to the law enforcement authorities or, where applicable, to the nominated Money Laundering Reporting Officer. In most professional outfits dealing with financial transactions, and particularly law firms, will have a MLRO, to whom reports should be made. This officer will have ultimate responsibility within the particular practice (be it a banking, law, or accountancy practice) to regulate the transactions of the firm. It is also this officer, however, with whom responsibility ultimately lies if a suspicious transaction passes without notice, and later turns out to have been a laundering scheme.

The first of these obligations arising in the above statutes is for an individual to make a STR if he or she suspects that either he or his organisation is about to become involved in money laundering. An example of this within the world of solicitors would be if a solicitor, upon being instructed by a (usually new) client, suspected he was being asked to put funds into his client’s account in order to conceal the funds’ criminal origin. In such a situation, he would be obliged to complete a STR. As well as this, he would be obliged to get the consent of the relevant authorities before completing the transaction. Failure to do this (even if it is simply a forgetful omission) will render the solicitor guilty of a money laundering offence.

A further offence is introduced in the Drug Trafficking Act 1994 and the Terrorism Act 2000 is the offence of ‘failure to report’. This occurs where the person knows or suspects that another person is engaged in laundering the proceeds of drug trafficking or terrorism, and fails to make a report to the law enforcement agencies. In the case of the Terrorism Act 2000, this offence is widened to include those who had reasonable grounds for knowing or suspecting. These statutory offences have increased the range of money laundering offences within the UK legislation, and have similarly increased the requisite degree of vigilance on the part of financial professionals. By increasing the offence to cover those who knew of another’s involvement, or even had grounds for such a belief, it is no longer adequate for the financial professional to be careful in the work he alone conducts; he or she must also keep an eye on co-workers.

These various pieces of legislation have been consolidated by the Proceeds of Crime Act 2002. The law relating to money laundering is, then, to be found in one piece of legislation as opposed to three or four. As well as consolidating the offences discussed above, this Act extends one of the offences considerably.

Culled from HM Revenue & Customs

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