Essay Bank : Essays about Anti Money laundering

ICA International Diploma in Anti Money Laundering

1. Stages of money laundering and introduction

https://www.lawteacher.net/free-law-essays/commercial-law/the-early-history-of-money-
laundering-commercial-law-essay.php

https://www.imf.org/external/np/leg/amlcft/eng/aml1.htm#moneylaundering

2. Money Laundering Essay

1. Money laundering is a process whereby criminals conceal the money coming from
their criminal activity in order to reintegrate it as legitimate earnings. Steven M.
D’Antuono, highlights in his Statement before the Senate the traditional “three-stage”
money laundering as follows: “Money laundering generally involves three steps:
placing illicit proceeds into the financial system; layering, or the separation of the
criminal proceeds from their origin; and integration, or the use of apparently
legitimate transactions to disguise the illicit proceeds”.[1] However, this traditional
process remains general and presents some limitation due to the globalisation of the
financial sphere and especially the type of sector involved. Nowadays, with the
democratisation of payments online, the money can be laundered directly by
placement due to the many alternatives and intermediaries of payments that exist
online. It simply needs to be justified to the financial institutions So, the money
launderers can easily skip one of these stages by using other means. Petrus C. van
Duyne depicts in his book Money Laundering Policy, Fears and facts, a fourth stage at
this process: “justification: the crime-money must be justified (this is the actual
laundering in the narrow sense)”.[2] This is what leads the money launderers to use
other methods which are directly supplied by the financial system. A technique such
as an over invoice: A company ships under value material and rise voluntary the price
over the value to a colluding partner by issuing a falsified invoice. The company
receiving the goods will pay the invoice from criminal revenue and mixed with legit
cash. The exchange appears legitimate due to the official documents supporting their
trading activity. This example as many others shows that the stake for money
launderers is to take advantage of the lack of control in the financial system in order
to remain undetectable whatever the process used. Therefore, the stake to determine
which process will profit the most to criminal activities is to look inside the
irregularities of the international trade and financial system.

2. The Financial Action Task Force (FATF) is an intergovernmental organism whose

purpose is to develop a framework for the defence of governments against Money
Laundering (ML) and financing terrorism (FT) risks. It was created in 1989 during an
international summit Group of Seven in Paris. It was established due to concerns
 from government whose laws were not sufficiently adapted for the authorities to
fight the increase of money laundering process. The FATF also expands its influence
thanks to the FATF-Style Regional Bodies (FSRB’s) for implementing its standards
requirements. The first objective of the FATF is to create reforms and
recommendations after analysing the evolutions of the money laundering process. It
created 40 recommendations of Anti Money Laundering (AML) and 9
recommendations for Countering the Financing of Terrorism (CFT) which
recommendations are regularly updated.[3] Its second objective is to supervises an
ongoing monitoring on its 38 members through a system of Mutual Evaluation
Reports (MER). [4] This evaluation is based on two area. It assesses the enforcement
of the FATF requirements within the legal system of its members which is called the
“technical compliance”. [5]  The second domain evaluated is the efficiency of the
legal framework against the present risk of ML and TF risk and to what extent the
results are achieved which is called the “effectiveness assessment”. [6] Both fields
must provide a complete analysis of the way a nation place the FATF
recommendations within their legal system. The country assessed must provide their
AML/CFT regime to the FATF which select a group of experts to evaluate the country.
They look at the implementation of the 40 recommendations through a rating
according to their level of compliance. This is made in one year before a visit to the
country. During the visit, the experts write a report on the extent that the FATF
standards and recommendations have been established and identify the weaknesses
to determine the areas of improvement. The report is discussed during a plenary
session for its acceptation and if a monitoring is necessary before its publication.

The procedure of the fourth round illustrates that two kind of follow-up can be made over the
five years following the MER, a regular follow-up or an enhanced follow-up according to
their compliance rate. [7] Once the MER is accepted, a list of success and vulnerabilities will
be issued. In the further years, the country has to address the action taken to resolve its
vulnerabilities through several updates. This method also includes an evaluation of the
progress made by the government to react on the issue detected during the MER. The process
takes five years to keep a constant evaluation through three reports on the progress made until
the 5th year follow-up assessment. The primordial function of the MER is to create an
international cooperation and involvement between jurisdictions to incorporate the FATF
requirement and to identify their area of improvement. The effects allow governments to
identify high risk jurisdiction and to lead the country to adopt or improve their policy thanks
to the political weight of the FATF members. Furthermore, as the FATF president reports
many aspects for the fight against ML and TF such as the multilateral legal assistance, the
seizure of assets and forfeiture of properties, extradition require a partnership between
governments in order to provide a successful support to the international financial
investigations. [8]

2.  
3. The jurisdiction chosen is France to describe the main laws and the regime applicable
to the fight against Money Laundering. France taking part of the European Union had
to transpose within its internal regime the five European directive against Money
laundering and counter financing Terrorism directly linked to the FATF
recommendations. The French regime defines the offences and the applicable
sanctions of Money Laundering and Financing Terrorism in the article 324-1[9] and
 421-1[10] in his Penal Code. This is the main support for the government to define
the offenses and the applicable sanctions. The ministry for the economy and finance
is the responsible for settling preventing measures against these offenses which are
edited by the Monetary and Financial Code (CMF) and gathered in the article L.561-
1.[11] This article regulates all professions whose role is to control, realise or advise
money movement for individuals to complete a Suspicious Transaction Report (SAR)
if they are aware that the origins of the funds come from criminal activity.

Their reports must be conveyed to TRACFIN, the French Financial Intelligence Unit. Its goal
is to collect, analyse and complete suspicious activity reports made by professional subject to
the law and to pass these reports to the court in case of judicial prosecution. All professions
quoted in this article have the duty to report all suspicious activity and can be sanctioned if
they did not execute the protocol willingly. TRACFIN can transmit the STR to the following
judicial authorities: prosecutors, magistrate but also to different police depending on the case
or authorities. According to the article 561-35, the Authority of Financial Market (AMF) is
also a competent authority for controlling financials investment and asset management.
[12] In a resume in the French regime the article 561-1 and the following paragraphs is the
main component that is regularly updated to transpose the European directives and apply the
FATF requirements. Beyond fighting the money laundering and terrorism financing, these
laws and actors help to maintain and reinforce a healthy economy by eradicate risk of
inflation that can come from integration of criminal money into the economy. The fourth
European directives[13] was implemented to create more transparency over the Non-profit
Organisation and company. Now, they are obligated to declare the beneficial owner who
possess twenty five percent or more of a company asset or an association. This directive was
transposed in the French regime by the decree n°2017-1094 of the 12 June 2017 in relation to
the beneficial ownership of entities which complete the article of law L561-2-2of the
Monetary and the Financial Code. [14]  More recently, after the terrorist attacks in Europe,
the fifth European directive have been adopted on the 30 of May 2018. [15] It extends its
regulations over entities which provides  virtual currencies service, lower the thresholds for
identifying prepaid card owners and make accessible to the public a register of beneficial
owner and many  other requirements that France as all European Union members will have to
transpose in their internal legislation before the 1st of January 2020. We can highlight the fact
that through the past events and constant technologic innovations in Finance, the French
regime is in constant adaptation of its laws and development of its process to keep up to date
its ML/FT regime at the highest level.

4. According to the FATF recommendation 20, all persons in the regulated financial
sector are subject to the duty to make a suspicious transaction report (STR). They
must know their client and their business. Furthermore, they must be aware of the
risks associated with money laundering and terrorist financing through specific
training to increase their awareness in this field.

Therefore, a person subject to this recommendation must file an STR after reviewing
elements on an account that raised suspicion in his mind such as an abnormal transaction
volume, the refusal of a client to provide supporting documents. Thanks to his knowledge of
the client and his activity and all the risks related to ML/TF, a person can complete an STR
rationally on reasonable grounds of suspicion. A person guessing just based on inaccurate
assumptions might be speculating on a doubt. Hence, the objective test of knowledge or
suspicion must determine the transition from a subjective to an objective suspicion due to
rational foundations and elements that raised red flag indicators.

However, a person that fails to make an STR while he knows about it and hides his suspicion;
he commits a professional misconduct punishable by law. It means that he voluntarily
remained in the ignorance of crucial elements to avoid reporting this transaction and can be
accused of wilful blindness. This principle, used by law, means that a person has voluntarily
remained in ignorance about elements to hide a criminal liability. This type of situation can
have serious financial consequences and also on the reputation of a financial institution or
even its closure. The New Zealand Society articles depicts the judgement sentence of the
director of Pin Han Finance LTD in New Zealand.[16] He fails to verify the identity of 372
customers and miss to report 172 suspicious transactions. The default of due diligence and
STR resulted in a fine of $ 5.29 million, 6 months in jail and 200 hours of general work for
the director and therefore its liquidation.

5. The obligation of confidentiality towards a customer is not total but delimited by the
contract which binds the customer and his bank. Richard Spearman QC outlines the
consequences of the decisions taken by the UK Court of Appeals on the Tournier vs
National Provincial & Union Bank of England case in relation to the duty of
confidentiality.[17] Therefore, reporting a transaction does not conflict with the
obligation of confidentiality for several reasons.

In application of the law, for example the requirement to report a suspicious transaction that
results to freeze an account or to have to inform the taxes.

In the case of a duty to inform the public, for example when a bank requests information on
behalf of the government relating to a crime committed or when the bank considers that the
client is involved in activities that do to the interests of the country a disservice.

When he has received foreign funds that should be seized following a sanction from a
government.

 In banking deontology, a bank may also share the account information of its client with
another bank for its interest with the consent of its client. However, if an STR is carried out
without rational grounds and this causes a direct financial loss to the customer. The customer
may sue the institution if the report of the transaction is not founded, especially if the contract
signed with the client does not provide a clause specifying the share of information under
exceptional circumstances.

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Recently, the FATF has also extended the Tax Evasion as a predicate offence of ML, which
leads international pressure on offshore financial centre to have a compulsory process for
reporting suspicion transaction. That has led the sacred secrecy of foreign financial institution
in a turmoil. Face to the FATF members pressure they progressively includes the mandatory
STR within their AML/CFT regimes.
 6. The new payment services (NPS) on the Internet offering no restricted geographic
services and no face-to-face control remains one of the most vulnerable payment
industries for ML and TF Risks given the ease for creating an account, the speed of
transactions without really having to justify the activity.

On the one hand, an individual can create an account just by adding an email address and
password, by entering the name, address and phone number. Since identity checks are only
from a certain amount, the account can be created by usurping information. The source of
financing that we add to this type of can varies from adding a bank account, prepaid or credit
card. At this point, it is easy to use stolen financial data and identity and then make purchases
without impunity or distribute the money received on other accounts to withdraw it later.

On the other hand, this type of account allows an excellent flexibility one can receive and
send money in personal payments or for purchases/sales of goods or services in the whole
world without almost any geographical restriction.

It is also straightforward to pass funds from one criminal activity from one continent to
another by simulating payments between friends or sales on marketplaces such as eBay.

Seamus Hugues describes a prominent example of trial in the case of Mohamed Elshinawy.
[18] He received $ 8700 between March and June 2015 from a UK company, Ibacstel
Electronics, which had established front companies in Turkey and Bangladesh.

These transactions passed through PayPal by simulating the sale of printers on eBay’s online
auction site. The transaction seems suspicious given the origin of the funds and its destination
especially when we observe the location of subsidiaries in Bangladesh and Turkey not far
from the Islamic state. The second red flag is that it would make more sense for profit that the
business specialised in IT sells to a US consumer according to the volume of payment.

This situation may be subject to verification, but international transactions of this type are
still very common with online payment services.

The third red flag is that this amount received has been divided into four payments spaced in
time of fifteen days in order to make think of a stable business relationship over time.

In fact, this individual has received funds by the intermediary of Ibacstel Electronics which
carried out these transactions on behalf of ISIS members to finance a terrorist attack on US
soil. In consequences, he was arrested by the FBI on December 11, 2015, for terrorism
charges. Other person to person payment services were also used such as Western Union and
an attempted transaction via Money Gram.

7. Three main methods are used by terrorists to move money or transfer value in order
to achieve their objective. The first is the use of the financial system which tends to
decrease due to the strengthening of regulations. However, to avoid detections, the
abuse and exploitation of charities is a method to abuse the financial system to
redirect transfer of funds from to their activity. For instance, a charity in charge of
collecting the Zakat which is a tax imposed by the third Pillars of Islam can easily be
directed to a geographic location pretending building a school but instead it is used
to finance terrorist activity in this area. Jerry Gordon argues the connection of Zakat
 with the financing of terrorism, for instance the Holy Land Foundation which layered
$12 million to Hamas from donators; and the impact of counter terrorism action on
the Muslim traditions.[19]  Also, it is important to note that the system of Hawala
which is an informal financial system does not include cash exchange or wire transfer
but a mutual debt recognition between money brokers. Hence, it remains almost
undetected in the international financial system and is often used by terrorists. The
second method is smuggling the physical money movement which remains
prominent in a cash-intensive economy with low jurisdiction such as the Middle East
and South East Asia. The third main method is the international trade that remains
important as there is a vast volume of transactions and the intermingling of
legitimate money with criminal funds allow terrorist to transfer funds for their
activities.

Bibliography:
1. Basel Committee on Banking Supervision, Fifteenth progress report on adoption of
the Basel Regulatory framework (October 2018)

https://www.bis.org/bcbs/publ/d452.pdf

2. Egmont Group, Annual Report (2016-2017)

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%20Annual%20Report%202016-2017.pdf

3. FBI, Common Fraud Schemes

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4. FATF (2012-2018), International Standards on Combating Money Laundering and the

Financing of Terrorism & Proliferation, FATF, Paris,
France, www.fatf-gafi.org/recommendations.html
5. FATF (2018), Procedures for the FATF Fourth Round of AML/CFT Mutual Evaluations,
updated June 2018, FATF, Paris, France, figure 1
p.20: www.fatf-gafi.org/publications/mutualevaluations/documents/4th-round-
procedures.html
6. FATF (2018), FATF President’s paper: Anti-money laundering and counter terrorist
financing for judges and prosecutors, FATF, Paris,
France, www.fatf-gafi.org/publications/methodandtrends/documents/AML-CFT-
judges-prosecutors.html
7. ICA Course Manual

8. Jerry Gordon, “Zakat and Terrorism”, New English Review (July

2009) https://www.newenglishreview.org/Jerry_Gordon/Zakat_and_Terrorism/
9. Legifrance, Penal Code, Article L324-1 available at:
https://www.legifrance.gouv.fr/affichCodeArticle.do?
cidTexte=LEGITEXT000006070719&idArticle=LEGIARTI000006418330&dateTexte=&ca
tegorieLien=cid

10. Legifrance, Penal Code, Article L421-1, from the available at:

https://www.legifrance.gouv.fr/affichCodeArticle.do?
cidTexte=LEGITEXT000006070719&idArticle=LEGIARTI000023712838&dateTexte=201
11204

11. Legifrance, Monetary and Financial Code, Article L561-1, available at:

https://www.legifrance.gouv.fr/affichCodeArticle.do?
idArticle=LEGIARTI000020196700&cidTexte=LEGITEXT000006072026&dateTexte=200
90201

12. Legifrance, Monetary and Financial Code, Article L561-1,2°

https://www.legifrance.gouv.fr/affichCode.do?
idSectionTA=LEGISCTA000020196437&cidTexte=LEGITEXT000006072026&dateTexte=
20190124

13. Legifrance, Monetary and Financial Code, Decree No.2017-1094 of June 12, 2017 on
the order of the article L. 561-2-2              
https://www.legifrance.gouv.fr/affichTexte.do?
cidTexte=JORFTEXT000034920785&categorieLien=id

14. Margaret Heffernan, The danger of wilful blindness, TedxDanubia ( March 2013)

https://www.ted.com/talks/margaret_heffernan_the_dangers_of_willful_blindness#t-5782

15. Official Journal of the European Union, Directive (EU) 2015/849 of the European
Parliament and of the Council of 20 May 2015 on the prevention of the use of the
financial system for the purposes of money laundering or terrorist financing,
amending Regulation (EU) No 648/2012 of the European Parliament and of the
Council, and repealing Directive 2005/60/EC of the European Parliament and of the
Council and Commission Directive 2006/70/EC (Text with EEA relevance)

                         https://eur-lex.europa.eu/eli/dir/2015/849/oj

16. Official Journal of the European Union, Directive (EU) 2018/843 of the European
Parliament and of the Council of 30 May 2018 amending Directive (EU) 2015/849 on
the prevention of the use of the financial system for the purposes of money
laundering or terrorist financing, and amending Directives 2009/138/EC and
2013/36/EU (Text with EEA relevance) 

https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32018L0843

17. Members and observers of the FATF

http://www.fatf-gafi.org/about/membersandobservers/

18. New Zealand Society, “$5.29 million in penalties for AML/CFT compliance failure”, (5
October 2017)

https://www.lawsociety.org.nz/news-and-communications/latest-news/news/$5.29-million-in-
penalties-for-amlcft-compliance-failure

19. Petrus C. van Duyne, Money Laundering Policy: Fears and Facts In Duyne P, van et al
(eds) Criminal Finances and Organising Crime in Europe, 2003, Nijmegen, The
Netherlands: Wolf Legal Publishers. Publication available at:

http://www.petrusvanduyne.nl/wp-content/uploads/2017/08/Witwassen-Fears-and-Facts.pdf

20. Publication du ministère de la Justice – Rédaction : Direction des affaires criminelles

et des grâces – Conception : SG – DICOM – Edition : octobre 2014

https://www.economie.gouv.fr/files/guide_blanchiment.pdf

21. Richard Spearman QC, “Disclosure of confidential information: Tournier and

“disclosure in the interests of the bank” reappraised”, Butterworths Journal of
International Banking and Financial Law (February 2012)

http://www.39essex.com/docs/articles/disclosure_article_for_butterwords.pdf

22. Seamus Hugues, “The only Islamic State-Funded Plot in the U.S.: The curious case of
Mohammed Elshinawy”, Lawfare, Terrorism trial & Investigations (7 March 2018)

https://www.lawfareblog.com/only-islamic-state-funded-plot-us-     curious-case-mohamed-
elshinawy

23. Steven M. D’Antuono, Statement Before the Senate Banking, Housing and Urban
Affairs Committee on November 29, 2018 I

https://www.fbi.gov/news/testimony/combating-money-laundering-and-other-forms-of-illicit-
finance

[1] Steven M. D’Antuono in his Statement Before the Senate Banking, Housing and Urban
Affairs Committee on November 29, 2018 I., Background
&2 https://www.fbi.gov/news/testimony/combating-money-laundering-and-other-forms-of-
illicit-finance

[2] Petrus C. van Duyne, Money Laundering Policy: Fears and Facts In Duyne P, van et al
(eds) Criminal Finances and Organising Crime in Europe, 2003, Nijmegen, The Netherlands:
Wolf Legal http://www.petrusvanduyne.nl/wp-content/uploads/2017/08/Witwassen-Fears-
and-Facts.pdf
[3] FATF (2012-2018), International Standards on Combating Money Laundering and the
Financing of Terrorism & Proliferation, FATF, Paris,
France, www.fatf-gafi.org/recommendations.html

[4] Members and observers of the

FATF: http://www.fatf-gafi.org/about/membersandobservers/

[5] FATF (2013-2018), Methodology for Assessing Compliance with the FATF

Recommendations and the Effectiveness of AML/CFT Systems, updated November 2018
(additional revisions adopted during the October 2018 Plenary), FATF, Paris, France p
12http://www.fatf-gafi.org/media/fatf/documents/methodology/FATF%20Methodology
%2022%20Feb%202013.pdf

[6] Ibid., p.93.

[7] FATF (2018), Procedures for the FATF Fourth Round of AML/CFT Mutual Evaluations,
updated June 2018, FATF, Paris,
France, www.fatf-gafi.org/publications/mutualevaluations/documents/4th-round-
procedures.html p.21.

[8] FATF (2018), FATF President’s paper: Anti-money laundering and counter terrorist
financing for judges and prosecutors, FATF, Paris,
France, www.fatf-gafi.org/publications/methodandtrends/documents/AML-CFT-judges-
prosecutors.html p.60-61.

[9] Article 324-1 from the French Penal

Code https://www.legifrance.gouv.fr/affichCodeArticle.do?
cidTexte=LEGITEXT000006070719&idArticle=LEGIARTI000006418330&dateTexte=&ca
tegorieLien=cid

[10] Article 421-1 from the French Penal

Code https://www.legifrance.gouv.fr/affichCodeArticle.do?
cidTexte=LEGITEXT000006070719&idArticle=LEGIARTI000023712838&dateTexte=201
11204

[11] Article  L561-1 from the Monetary and Financial

Code https://www.legifrance.gouv.fr/affichCodeArticle.do?
idArticle=LEGIARTI000020196700&cidTexte=LEGITEXT000006072026&dateTexte=200
90201

[12]Article L561-1 ,2° from the Monetary and Financial

Code https://www.legifrance.gouv.fr/affichCode.do?
idSectionTA=LEGISCTA000020196437&cidTexte=LEGITEXT000006072026&dateTexte=
20190124

[13] Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015
on the prevention of the use of the financial system for the purposes of money laundering or
terrorist financing, amending Regulation (EU) No 648/2012 of the European Parliament and
of the Council, and repealing Directive 2005/60/EC of the European Parliament and of the
Council and Commission Directive 2006/70/EC (Text with EEA relevance)
https://eur-lex.europa.eu/eli/dir/2015/849/oj

[14] Decree No.2017-1094 of June 12, 2017 on the order of the article L. 561-2-2 of the
Monetary and Financial Code

 https://www.legifrance.gouv.fr/affichTexte.do?
cidTexte=JORFTEXT000034920785&categorieLien=id

[15] Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018
amending Directive (EU) 2015/849 on the prevention of the use of the financial system for
the purposes of money laundering or terrorist financing, and amending Directives
2009/138/EC and 2013/36/EU (Text with EEA relevance) 

https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32018L0843

[16] “$5.29 million in penalties for AML/CFT compliance failure”, New Zealand Society (5
October 2017)

https://www.lawsociety.org.nz/news-and-communications/latest-news/news/$5.29-million-in-
penalties-for-amlcft-compliance-failure

[17] Richard Spearman QC, “Disclosure of confidential information: Tournier and

“disclosure in the interests of the bank” reappraised”, Butterworths Journal of International
Banking and Financial Law (February 2012)

http://www.39essex.com/docs/articles/disclosure_article_for_butterwords.pdf

[18] Seamus Hugues, “The only Islamic State-Funded Plot in the U.S.: The curious case of
Mohammed Elshinawy”, Lawfare, Terrorism trial & Investigations (7 March 2018)

 https://www.lawfareblog.com/only-islamic-state-funded-plot-us-curious-case-mohamed-
elshinawy

[19] Jerry Gordon, “Zakat and Terrorism”, New English Review  (July

2009) https://www.newenglishreview.org/Jerry_Gordon/Zakat_and_Terrorism/

https://www.ukessays.com/essays/criminology/money-laundering-prevention-
strategies.php

AML Regulations

2. Money Laundering Regulations

Info: 4441 words (18 pages) Law Essay
Published: 25th Jun 2019
(a) Explain the current legislative and regulatory arrangements existing in the United
Kingdom in relation to the combating of money laundering.

(b) To what extent are the changes inserted by the Money Laundering Regulations 2003
likely to make a difference?

Part A
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. This offence if the Drug Trafficking Act offence of
failure to report another’s involvement in laundering. Firstly, it widens the offence to bring it
into line with the offence in the Terrorism Act 2000, namely that the person is under an
obligation to make a STR if he or she has reasonable grounds for suspecting another’s
involvement. Secondly, the requirement to make a STR now extends to financial transactions
involving money originating from any crime, as opposed to only drug trafficking proceeds.
The failure to report offence is, however, limited in one respect. It is limited to people who
come across money laundering in the course of conducting business in the ‘Regulated
Sector’. The ‘Regulated Sector’, as defined in Schedule 6 of the Act, is basically every
institution which is obliged to comply with the Money Laundering Regulations. It is
significant that despite the fact the Proceeds of Crime Act 2002 replaces the money
laundering offences found in the Criminal Justice Act and the Drug Trafficking Act, the
Terrorism Act 2000 continues to regulate the laundering of money related to terrorist
activities.

The Proceeds of Crime Act 2002, then, criminalises anything to do with money laundering.
The offences fall within Part 7 of the Act, particularly sections 327 -342. It is here that the
new offence of failure to report laundering based on reasonable grounds for suspicion is to be
found. Section 340 defines the relevant terms. ‘Criminal property’ is defined as anything
which constitutes or represents a benefit from a crime (any crime as opposed to the specific
ones mentioned in the earlier legislation). It goes on to define ‘criminal conduct’ as anything
that constitutes a criminal offence in the United Kingdom, regardless of where the ‘offence’
was committed. These are clearly very wide definitions. This is necessary in order to counter
the internationalisation of organised crime.

An example of this is the problem of so-called “Spanish bull fighting”. This is where a person
has made profits from an activity which is legal within the jurisdiction that the profit was
made, but then comes to the UK, where the same activity is illegal. The broad definitions of
POCA catch the proceeds from such an activity for the purposes of money laundering
regulation. With regard to the ‘criminal property’, the Act, again because of its broad
definitions, covers many types of person and activity, for example, tax advisors and mortgage
fraud.

Section 327 of POCA deals with the offence of ‘fencing’. This, broadly, includes any
dealings with the criminal property throughout its trail. Section 328 deals with arrangements
which facilitate money laundering.

Another significant effect of these pieces of legislation is that they criminalise “tipping off”
(section 333 of POCA). This is in order to prevent people warning those about whom they
have made a STR. Broadly, the offence prohibits a person who suspects or knows that a STR
has been made to the law enforcement authorities, to make any disclosure which might
prejudice any forthcoming investigation. The starkest example of this would be informing a
person that he is the subject of a STR in order to give that person time to cover his tracks and,
possibly, destroy the evidence. Linked to this is the offence of prejudicing an investigation
into money laundering, which is covered by section 342.

Solicitors’ practices are very attractive to potential money launderers. This is because they
have certain qualities which make the laundering process, if successful, virtually untraceable.
Solicitors are often targeted, then, because they regularly deal with clients’ money. High
value transactions occur through the solicitors’ books every day, and as the proceeds of
organised crime are often very high indeed, transactions of a similar value help to conceal the
laundering from standing out. Secondly, the practice of solicitors is heavily regulated, both
from within the profession (the Law Society) and also from without. While this may appear
to be an argument against using solicitors as part of the laundering process, from the point of
view of the launderers, if the process is successful, there will be absolutely no suspicion
remaining about the origin of the funds. Coupled with this is the supposed integrity of
solicitors. Again, the practical effect of this from the point of view of the launderers, is that
once the funds are extracted from the solicitors’ account, there will be no question as to the
money’s legitimacy. Finally solicitors are easily accessible to members of the public, so
potential launderers have no problem in contacting them. In response to this increasing need
for vigilance, solicitors (as well as other financial professionals) are increasingly being
trained (and are increasingly required to be trained by legislation) to be alert. Causes for
concern in this context include unusual settlement requests from a client. That is to say in a
situation where a case might be progressing well, and the client requests a settlement abruptly
and immediately, suspicions may be aroused. Similarly, any unusual instruction from a client,
particularly is they are a new client, and use of a client account, would generate suspicion.

There are certain defences available for those accused of money laundering offences, but as
the legislation has become more comprehensive, these loopholes have gradually been closed.
The most significant defence, particularly for junior members of staff, is a lack of appropriate
and proper training in relation to money laundering. While this may provide an adequate
defence, the effect of this has simply been to encourage organisations to make certain that
they do administer the proper training to all their staff. This, then, ahs been a positive overall
effect of a possible loophole. In order to cover their backs, organisations are keen to see that
all their staff are satisfactorily trained.

The main defence to a money laundering offence, however, is one which also encourages
vigilance and action on the part of the professionals within financial service industries. This
is the defence of reporting an offence, or a suspected offence; or even an intention to disclose,
so long as this is accompanied by a reasonable excuse as to why the disclosure was not
actually made. This does not include wilfully shutting one’s eyes to the true situation, and
there will be a rigorous standard of proof required if this defence is pleaded. The significance
of both of these defences is that they both have a positive effect on the overall combating of
money laundering. Although an adjunct to the legislative provisions, these defences provide
great encouragement for those involved in financial services to take all steps possible to
ensure no offences are being committed.

The body charged with policing the financial world in relation to money laundering is the
National Intelligence Gathering Service. With the mission statement: “To provide leadership
and excellence in criminal intelligence to combat serious and organised crime”, one of its key
functions is to combat money laundering. It is through this body (either from their website or
otherwise) that one can make a Suspicious Transaction Report. As an indication of the extent
of money laundering activity, but also perhaps as a reassuring sign of the NCIS’ work, in
2003, the NCIS received over 100,000 disclosures (according to their website). This
constituted an increase of 60% on the number in 2002, and almost double that of 2001.
Again, rather than showing necessarily that money laundering is on the rise (although it may
be), these figures reflect the success of the current legislative and regulatory arrangements
within the UK in combating money laundering. As at March 2004, an estimated £25 million
had been ‘protected’ (that is, restrained, seized, or returned to victims) as a result of ‘consent
decisions’. the NCIS works in partnership with sister agencies such as the Serious Fraud
Office, the Egmont Group of Financial Intelligence Units, and the Financial Services
Authority. The umbrella organisation is the Joint Money Laundering Steering Group.

With regard to the Financial Services Authority, section 6 of the Financial Services and
Markets Act 2000 requires that body to aim at reducing the extent to which regulated persons
and unauthorised businesses can be used for a purpose connected with financial crime. This is
one of the FSA’s four core aims, or statutory objectives (the other three being to protect
consumers, market confidence, and public awareness). In January 2001, having recently been
established by the Financial Services and Markets Act 2000, the FSA published their Policy
Statement. Later that year, in July 2001, the FSA published a document entitled The Money
Laundering Theme: Tackling Our New Responsibilities. These set out the objectives of the
FSA in relation to money laundering specifically, as well as financial crime more generally.
These included making crime more costly for criminals, achieving an industry perception of
money well spent, raising consumer awareness of financial crime issues, contributing to a
wider UK plc fight against crime, and to have a “balanced, joined up” approach to anti-
money laundering and fraud.

Finally, it is possible that money laundering offences could come within the remit of the
Serious Fraud Office. This is an independent government department which investigates and
prosecutes serious and complex fraud in order to maintain confidence in the probity of
business and financial services within the UK. This department focuses only on serious and
complex fraud, and therefore does not respond to every referred case of suspected fraud. In
order for a money laundering offence to come within its remit, several factors must be met.
Firstly, the value of the alleged fraud must exceed £1 million. Amounts smaller than this will
not be considered sufficiently serious for the SFO to investigate. Secondly, there must be a
significant international dimension to the fraud. In many modern money laundering instances,
this will be the case. This is a natural effect of the fact that so much of the organised crime
which generates the ‘dirty money’ needing to be laundered is international in character.
Thirdly, the case must be likely to be of widespread public concern. Often money laundering
cases will not meet this criteria, as they will only involve a closed, relatively small group of
people. Occasionally, however, this will not be the case. Fourthly, the case must require
specialised knowledge of financial markets. Given that many money laundering cases occur
through highly complex financial trails, it is likely that this requirement will be met.

Under section 2 of the Criminal Justice Act 1987, the SFO have special powers to require a
person to answer questions, provide information or produce documents for the purposes of an
investigation. Written notice is given when the SFO exercise these powers. In urgent cases
they can require immediate compliance with a notice. These powers can be used when the
SFO reasonable suspects that a person or company holds information relevant to a suspected
fraud.

There are, then, various statutory and regulatory frameworks and agencies which are
concerned with the prevention of money laundering. As serious organised crime increases, so
too do the proceeds of such crime. In response to this, the UK has had to become more
vigilant and alert, as have those professionals working within the industries likely to be
targeted by the launderers. Various pieces of legislation, consolidated by POCA 2002, have
increased responsibilities and provisions for reporting on such offences. These may, however,
be changed when the Money Laundering Regulations 2003 come into force.
Part B
When the Money Laundering Regulations 2003 come into force, they will substantially
increase the level of regulation which financial service providers are subject to. As a general
rule, the higher the level of risk that a particular activity carries, the higher the degree of
regulation it will be subject to. The MLR say staff within the relevant businesses must be
properly trained to be alert to potential money laundering activities. This applies to all staff,
including secretaries and other support staff. ‘relevant businesses’ will involve, for example,
those concerned with insolvency work, tax advice, financial and real property transactions
(such as acting as a client’s receiver), and company and trust work.

The Regulations are organised into five parts. The first part is entitled ‘General’, and deals
briefly with citation, commencement, and interpretation. This part simply states that the
Regulations came into force at various points throughout 2004, and early 2005. An important
definition found in Part 1 is that of what a ‘relevant business’ is. It is defined as a broad range
of activities concerned with financial services, for example, regulated activities such as
accepting deposits or managing investments, estate agency work, operating a casino, the
provision of accountancy services and so on. Any dealer in high value goods will generally
find themselves to be caught by the Regulations. A wide range of businesses have, then, been
brought into the regulated sector, including certain jewellers or car dealers. Often it will be
the case that these businesses, uncertain of how they will be affected, will have to seek legal
advice to understand the implications of the new legislation for their particular business.

Part 2 is entitled “Obligations on those who carry on relevant business”. this part makes
provision for systems and training to be instigated to combat money laundering, and
procedures for identification checking, record keeping, and internal reporting. Part 3 is
entitled “Money Service Operators and High Value Dealers”, and is sub-divided into
‘Registration’, ‘Powers of the commissioners’, ‘Penalties, review and appeals’, and
‘Miscellaneous’. Part 4 is the Miscellaneous section, covering such issues as the relevant
supervisory authorities, prohibitions in relation to certain countries, and so on.

One of the major changes which these regulations have is to widen the scope of the
‘regulated’ sector. This means that more professionals and industries or practices fall within
the scope of the statutory provisions for combating money laundering.

Similarly, the obligations upon those who count as ‘regulated’ persons, or engaged in
regulated activities, are increased. A major area where this is the case is that of checking a
client’s identity. This is a significant factor as it provides a powerful means of combating
potential money laundering. By checking a client’s background sufficiently, a practitioner
will be able to establish that the client is legitimate, and that the instruction is itself
legitimate. The likely effect of this will be, potentially, a more cumbersome process of
screening by professionals prior to accepting instruction. Many professionals may be
unhappy about this as it prolongs the length of time before that professional can accept the
instruction, and therefore get paid. There is also the issue of wanting to avoid embarrassing or
upsetting the client, especially if he or she is new to the practice, by investigating whether
they are genuine. There are, however, provisions for discrete investigation so as to avoid this
potential embarrassment, and the overall likely effect is that fewer dubious new clients will
be accepted professionals in the financial services sector.

Another significant change which has come about as a result of the Regulations is the altered
Suspicious Transaction Report form which is issued by the NCIS. A new form has been
introduced which deals specifically with circumstances where the information being reported
is likely to be of limited intelligence value (the Limited Intelligence Value report).

Finally, the Regulations introduced a further hurdle for professionals to overcome when
dealing with financial transactions which may involve money laundering. Under the new
rules, consent may be necessary from the NCIS before a transaction can be carried out. From
the day after this consent is sought, the NCIS have a seven working day notice period in
which to issue or withhold consent. The likely effect of this provision is, again, that the
procedure for completing instructions from clients will be more onerous and drawn out. This
is likely to annoy professionals who will be keen to work as swiftly and efficiently for their
clients as possible (in order to obtain payment, and hopefully further instructions). It means,
however, that there is a further safeguard against suspicious transactions which may involve
money laundering occurring.

BIBLIOGRAPHY
Statutes

 Criminal Justice Act 1988

 Drug Trafficking Act 1994
 Financial Services and Markets Act 2000
 Money Laundering Regulations 2003
 Proceeds of Crime Act 2002
 Terrorism Act 2000

Websites

 Her Majesty’s Treasury Department: www.hm-treasury.gov.uk

 National Criminal Intelligence Service: www.ncis.co.uk
 Serious Fraud Office: www.sfo.gov.uk
 The Financial Services Authority: www.fsa.gov.uk
 The Law Society: www.lawsociety.org

Secondary sources

 Conboy, J.C., Law and Banking: Principles (American Bankers’ Association, 1990)
 Cranston, R., Principles of Banking Law (Oxford, 2002)
 Malloy, M.P., Principles of Bank Regulation (London, 2003)
 Mitsilegas, V., Money Laundering Counter Measures in the European Union (Kluwer,
2003)
 Penn, G.A., Law Relating to Domestic Banking (Sweet and Maxwell, 1987)
 Reuter, P., and Truman, E.M., Chasing Dirty Money: The Fight Against Money
Laundering (London and New York, 1995)
 3. Effectiveness of UK Controls on Money Laundering and Risk based approach

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%20200509079%20School%20of%20law%20%20PhD%202014.pdf

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Introduction
The report presents the extent to which the United Kingdom’s private banking sector is
vulnerable to money laundering threats. It has been observed that the United Kingdom
(UK) is the major leader in European world and finance and therefore, it is the major
attraction for the money launderers in respect with its reputation, size, and sophistication
in financial markets. Even though, the statistics reveal that narcotics are still considered
as the main source of illegal proceeds for money laundering, smuggling of people and
goods, and other offenses like financial fraud have become increasingly important. The
United Kingdom’s strategies and priorities towards AML was committed to identifying
and interdicting the flow of illicit funds across and within its borders, and to the disruption
and dismantling of the money laundering and terrorist finance networks that move such
funds. This was made clear in the government’s Anti -Money Laundering Strategy,
published in October 2004. The government’s policies for AML/CFT were underpinned
by three key objectives: to deter, through the establishment of enforceable safeguards
and supervision; to detect, using the financial intelligence generated by money
laundering controls to identify and target criminals and terrorist financiers; and to disrupt,
maximizing the use of available penalties such as prosecutions or asset seizures. In
spite of the various steps taken by the Authorities there have been substantial attempts
to launder money in the recent past. And hence there is a pertinent need to asses and
analyze the effectiveness of the United Kingdom’s controls in meeting the threats and
identify areas for improvement.

Concept of money laundering

In the recent times, money laundering is considered as one of the major problems and it
is very difficult to have a grip on it. In simple words, it can be realized that in money
laundering the criminal income is converted into assets which cannot be market out to
the primary crime. In addition to this, it can be observed that money laundering has been
further divided into three phases, firstly, the placement of the fund that are resulting from
the crime, in order to cover up their origins, the layering of those funds has to be done
along with the incorporation of the funds into the majority of the economy[1]. There are
many forms of unlawful activities that demands cash. For instance, drug dealing involves
a large amount of cash in minute denominations.  The money launderer is responsible
for removing the cash from where it was obtained and put the cash at a safe place
where the money cannot be traced or detected.
Furthermore, the next stage is to cover the basis of funds, this is done by formulating
difficult layers of financial transactions.  In the transactions, offshore bank accounts are
involved, along with this, companies registered with nominee shareholders are also
taken into account, and there are complex dealing in shares, futures, and commodities.
In the final stage of money laundering, the funds are integrated into normal economy so
that the funds come into sight as justifiable. This combination is mainly accomplished by
the conversion of money into apparently legal business earnings by means of
commercial and financial operations.  Moreover, it can be noticed that terrorist financing
mainly incorporates money laundering. Furthermore, weakening to distinguish among
terrorist financing and money laundering in AMLR is almost certainly counterproductive
for two reasons, firstly, the act of layering, placing and combining does not essentially
apply with terrorist financing. Moreover, this can be a fact that the basis of terrorist
financing is not essentially illegal, therefore, it is not required to camouflage the
placement, and furthermore, it does not have to be integrated into the normal economy
as it is being used for unlawful purposes.  In order to protect the secrecy of the source,
the process of layering is carried out, but this layering does not has much significance
than in money laundering. Secondly, in order to finance even large terrorist actions, the
amounts needed, can be comparatively small.
Case of HSBC, RBS, and Coutts
The banking system mainly refers to the network of business and personal bank
accounts that help in depositing and lending money to the consumers. The high street
banks provide services to the common public, there are five big banks in UK, such as,
HSBC, Lloyds TSB, Leicester, Alliance, and Natwest. The banks look for the best way to
invest money by means of knowledge in different bond markets, stock market, and
exchange rates. The Bank of England is accountable for monetary policy in the UK. The
aim of UK banking system is to facilitate confidence and security in the economy. Over
the last decade, there have been certain investigations by the U.S. Senate Permanent
Subcommittee to strengthen the working of financial sector in UK and US. The purpose
of AML is to explicitly investigate about the money launderers, corrupt officials, terrorists,
tax evaders, and other organized crime that has been happening in the financial
institutions[2].
 AML is focused to identify and understand the illegal proceeds related with organized
crime, financial fraud and drug trafficking. According to the investigation done by the
Subcommittee, it was observed that there were a number of poorly managed and corrupt
foreign banks that used the UK and US bank accounts for their wrongdoing. There were
stronger AML laws as part of the Patriot Act of 2002 enacted by congress, responding to
the investigation done after the money laundering vulnerabilities exposed by the 9/11
terrorist attack, moreover, the laws included stronger provisions to fight the mistreatment
of correspondent services[3].
In addition to this, the regulators of Federal bank followed with stronger regulations and
examination to keep safety against money laundering activities by the means of
correspondent accounts. Therefore, the AML control strengthen over time  by regularly
monitoring account activities and making wire transfers on any suspicious activity. With
AML in effect, the banks also took measures to make sure that they don’t provide
services to such banks. On the other hand, to the notice, the money laundering risks
associated with correspondent banking still persists, this is because the correspondent
accounts help in providing a gateway in the UK financial system, and as a result, the
wrongdoers can easily enter through that way.
Effectiveness of the UK Controls and Money Laundering Issues
In order to examine the current money laundering and terrorist financing, the case of
HSBC has been taken into account where the threats are associated with correspondent
banking. It is well known that HSBC is considered as one of the largest financial
institution in the world with having more than 89 million customers, over $2.5 trillion in
assets, along with 300,000 employees, and according to the statistics, having $22 billion
profits as recorded in 2011.  According to the investigation done on HSBC, it was
revealed that HSBC operates in many jurisdictions with weak AML controls, having high
risk financial activities, with high risk clients that include Middle East, Asia, and Africa[5].
In many of these countries, the correspondent accounts are provided by HSBC affiliates
to foreign financial institutions. It has been observed that HSBC affiliates and
foreign financial institutions that countenance considerable AML challenges often
operate under weaker AML requirements.
In December, 2012, according to BBC, HSBC was fined with $1.9bn to US authorities
making a settlement regarding the poorly managed money laundering controls. This
news was originally reported in July when the US senate heard the subcommittee report
highlighting the problems with the operations of American banks.  In addition to this, the
subcommittee also disclosed that the bank was also being used by the Russian
gangsters and Mexican drug cartels to launder money. Therefore, HSBC apologized and
admitted the wrongdoing and came to a settlement by paying fine. Moreover, according
to the bank officials, they have spent $290m for improving its money laundering systems
with the help of Financial Services Authority in the UK[6]. As a result, with the help of the
improvement system, the HSBC of today is a fundamentally different organization and is
working towards strengthening its anti money laundering activities. On the other hand,
HSBC is not the only bank that has been caught up in this type of disgrace; moreover,
$340m penalty has been paid by Standard Chartered to settle money-laundering
charges, furthermore, it will also pay $300m in fines for violating US sanctions against
Libya, Iran, Burma, and Sudan. There are several other banks that have been caught up
in such scandals such as Coutts, RBS, Lloyds, ING, Credit Suisse, and Barclays. The
other bank Coutts has also been fined with £8.75million for systematic and serious
failures while handling money from foreign despots and suspected criminals[7]. The
bank was highly criticized for an unacceptable risk of handling the proceeds of crime and
as a result, the fine was imposed by Financial Services Authority for the bank’s money
laundering offence. In the above cases, the reporters claim that the private bankers have
not paid attention and did not conduct proper check on the customers by monitoring their
accounts and as a result, they ultimately failed to make out serious criminal allegations
against those customers. Moreover, in the case of RBS, there are allegations of
embezzlement of state funds and secure business along with personal associations with
individuals wanted by law authorities. On the other hand, the report by FSA reveals that
the bankers at Coutts were enthusiastic to succeed new business and secure a bigger
bonus. Hence, Coutts failed to take considerable measures that would help in
establishing and maintaining effective controls and AML systems that were associated
with high risk customers, mainly including the politically exposed persons that are
vulnerable to corruption[8]. 
The FSA’s investigation acknowledged that Coutts did not implement with vigorous
controls when they were starting their relationships with high risk customers. In addition,
they did not even apply suitable monitoring over and over again of those high risk
relationships. It was found by the FSA that the AML team of Coutts was not effective and
failed to provide an suitable altitude of analysis and challenge.

Vulnerability of UK private banks in relation to Money Laundering

Role played by the European Union in fortifying the AML regime
The awareness of the effectiveness of Money Laundering led the EU to take steps in
order to combat money laundering. Hence, in furtherance of the same goal it designed
European Union Anti-Money Laundering and Financing of Terrorism Directives with a
view to shelter the financial system and other susceptible professions from the threat of
being abused for laundering money and funding Terrorism. Now it is vital to highlight
some of the few elements of the Directives it has enacted[9].
The first Directive (91/308/EEC)[10] was focused more on the precautionary processes
like customer/client identification, record-keeping and essential methods of reporting
suspicious transactions with a view to ensure the protection of the EU single market. It
included points such as: Due diligence checks must be carried out by all credit and
financial institutions before entering into any business relationship or before conducting
any transaction over a certain threshold. All collated identification documents, evidence
and existing records collected as part of the due diligence checks must be kept for at
least five years by credit and financial institutions. There must be close international co-
operation and harmonization between credit and financial institutions and their
supervisory authorities and the establishment of a mandatory central system of
reporting. The confidentiality rules regarding customer information should be toned down
in relation to disclosing suspected money laundering offenses to the authorities[10].
Special protection should be afforded to credit and financial institutions, their employees
and their directors who have to breach confidentiality rules in order to make the
disclosure.
The second Directive 2001/97/EC of 4 Dec 2001 modernized and polished the
provisions created by the First Directive with a view to fill the openings in the legislation
highlighted by the 40 recommendations, suggested by the Financial Action Task
Force(FATF). The second directive cleared the confusion about which Member State’s
Authorities should obtain suspicious activities reports where credit or financial institutions
had had branches in various jurisdictions. It also widened the definition of money
laundering while also expanding predicate offences. Moreover, it added the authority to
identify, trace, freeze, seize and confiscate any property and proceeds linked to criminal
activities.
The third Directive 2006/70/EC of 1 August 2006 emphasized on: Enhanced Customer
Due Diligence steps for Politically Exposed Persons as well as their immediate relatives
and close associates; and Simplified customer due diligence measures for low-risk
transactions involving public authorities or public bodies if their identity and activities are
publicly available, transparent and certain and on-going monitoring of such transactions.
The Fourth Directive of 5 February 2013 while taking into account the amendments to
the FATF requirements pays special attention to the vigilance required from lawyers
under EU law. Its second draft textconsists of a new regulation on information on the
payer accompanying transfers of funds to “improve traceability of payments and ensure
that the EU framework remains fully compliant with international standards.”

Role played by the FATF

Now the further section of the paper will provide a brief summary of the
recommendations suggested and reviewed and amended time and again by the FATF
for its members.

-The criminalization of money laundering on similar terms to those suggested in the

1988 UN convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances
and the 2000 UN Convention against Transnational Organized Crime, as well as for
extended sanctions (civil and regulatory) to be applied to legal persons who fail to
adhere to the Directive;

-That countries adopting the recommendations should establish a national center for
obtaining information about suspected money laundering transactions (a Financial
Intelligence Unit or FIU) and guarantee that there are designated law
enforcement authorities that have responsibility and resources necessary to investigate
such transactions;
-The adoption of measures such as tracing in order to confiscate property and proceeds
from money laundering. The recommendations also call for steps that prevent the State
from recovering such property to be voidable[11];
-That client due diligence should be completed by all financial institutions and non-
financial businesses and professions, including lawyers, and records to be kept for five
years. The recommendations also call for ‘special attention’ to be paid to all complex and
unusually large transactions and to those transactions involving new or developing
technologies;

-Requirement for all financial institutions and non-financial businesses and professions
to report suspicious transactions to the Financial Intelligence Unit (FIU) and for
protection to be offered to such informants[12];
-Development of Platforms by Financial institutions, such as internal policies, in order to
combat money laundering and terrorist financing and make sure that all subsidiaries
adhere to the recommendations;

-That all shell banks should be discontinued and all financial institutions should report all
domestic and international currency transactions above a certain amount;
-That there should be enhanced regulation, supervision and guidance offered to financial
institutions and non-financial businesses and professions, in their compliance with the
recommendations; and

-Emphasis on improved effectiveness regarding international co-operation, mutual legal

assistance including possible extradition and information sharing amongst jurisdictions.
Wolfsberg
The Wolfsberg group includes twelve global banks that align their actions with an
intention to develop financial services industry standards and contribute in curtailing the
money laundering and counter-terrorist financing policies. The group was formulated in
the year 2000, at the Chateau Wolfsberg in north-eastern Switzerland and was assigned
a duty to work on drafting anti-money laundering guidelines for private banking. The
Anti-Money Laundering Principles by the group for Private Banks was first time
published in October 2000. Since its formation the group has made an active
contribution in providing guidance to the banks with regard to a number of areas of
banking activity in terms of money laundering prevention[13]. The group has been taking
active steps and initiatives to curtail and reduce the activities of money laundering. It is
quite clear that the banks are the major target for the supply of money from criminal
activities and such groups helped in reducing the possibilities of such actions.
Legal and Regulatory Framework by UK in relation to money laundering
Money laundering is the process of hiding illegitimate sources of money. There are many
regulatory and sophisticated rules in regards to the same. The government authorities of
UK define the amount of money to be laundered domestically and internationally. Money
laundering and terrorists funding legislation in the United Kingdom is governed by four
Acts of primary legislation: –

1. Terrorism Acts, 2000

2. Anti-terrorism, Crime and Security Act, 2001
3. Proceeds of Crime Act, 2002
4. Serious Organized Crime and Police Act, 2005[14]
5. Money laundering regulations, 2007

The regulation in regards to money laundering system is there in order to protect the
financial system of United Kingdom. This kind of regulations are also important from
business point of view, as this helps in keeping an eye on the system in which money is
laundered. A proper guidance can also be provided by groups viz- Joint Money
Laundering Steering Group, the Law Society and the Consultative Committee of
Accountancy Bodies’ (CCAB).   The definition has a wider scope in UK. Penalty of
maximum of 14 years is associated with money laundering offences.
The money laundering regulation, 2007 was previously used to known as money
laundering regulation, 2003. This provides the secondary regulation. This act involves
the provisions that if any of solicitors, accountants, tax advisers and insolvency
practitioner finds their clients or any other, for whom they have been doing business
with, are involved in the case of tax artifice, can now report this to the authorities. Under
any circumstances the authorities are required not to disclose the name of solicitors,
accountants, tax advisers and insolvency practitioner. This is termed as legal
professional privilege.

It is to be noted that it is not mandatory for the banking institutions to report in a routine
about the deposits being made over and above a stipulated amount. However, they can
report the suspicions incase if they face any. The prime legislation of Anti-Money
Laundering of UK is contained in proceeds of crime act, 2002. This also includes
provisions for reporting about the suspicion to the authorities in case of tax evasion by
the businesses including banking, investment, money transmission, certain professions,
etc. In any case the same is not reported to the authorities the same person can be held
to imprisonment of five years. UK money laundering is different from as that of other
countries. The system of UK does not only define the proceeds of serious crime, or any
stipulated monetary limits. The legislation of UK anti money laundering system involves
assets of any description and not only involves money. Any person who is found to be
involved in taking some benefit in the form of money or assets also considered to be
committing an offense under money laundering offense under UK legislation. The same
also applies on to a person who evades any such liability as referred by the lawyers in
lieu of taking an advantage in liable to pay the same amount which is equivalent to the
liability evaded[15].
Overview of the Steps taken By UK to fortify the AML regulations
The UK government is trying to put in best in order to fight against anti money
laundering. Their whole sole motive behind the same is to protect the citizens from the
fraudulent activities so as to prevent from harm which can be caused to them through
crime and by terrorism. It is been observed that some of the legitimate businesses are
involved in causing harm to the citizens by the use of lending money. This borrowed
money by the businesses is seemed to be used in criminal and terrorists activities. Since
such activity requires use of finance. UK is one of the participants who are involved in
the development of standards meant towards the step of protecting public[16]. There is a
body formed for the same purpose known as Financial Action Task Force (FATF). The
standards formed in here come under Money Laundering Regulations 2007, the
Proceeds of Crime Act 2002 and the Terrorism Act 2000 in UK. There are various steps
taken the treasury which is formed by UK are as follows:
 Financial Action Task Force (FATF).- as already been discussed UK is an
active participant towards the development of standards. FATF was
formed in 1989 in order to cover the issues of money laundering and
terrorist activities. This formation has helped in forming compliance in
regards to the same. This is also responsible for finding improvement and
new upcoming threats, stopping development of weapons and tackling
mass destruction. UK is amongst the founding member of FATF[17].
 Implementing EU directives: EU legislation came into being in order to
protect the system from the activities related to money laundering and
financing of terrorism activities. Commission Directive 2006/70/EC of 1
August 2006 laid down measures for Directive 2005/60/EC. This
commission also released a draft in order to prevent money laundering
and terrorist financing.
 Money Laundering Regulation, 2007: After few amendments Money
Laundering Regulation, 2003 is now known as Money Laundering
Regulation, 2007. This act provided the provisions that if any of solicitors,
accountants, tax advisers and insolvency practitioner finds their clients or
any other, for whom they have been doing business with are involved in
the case of tax artifice, can now report this to the authorities. Under any
circumstances the authorities are required not to disclose the name of
solicitors, accountants, tax advisers and insolvency practitioner. This is
termed as legal professional privilege.
 Strategy on terrorist finance: UK’s Money Laundering Regulations 2007
and Financial Action Task Force (FATF) helped in tuning these efforts.
This step was substantially important in order to take actions against the
members who act as donors and helpers which in turn increases the
capacity of the terrorist to perform terrorist activities[18].
Deficiencies in UK Rules and Laws
There are number of deficiencies found in the system of UK Rules and Laws as they are
found to contain certain ambiguities. Also, some of the laws are found to be poorly
implemented. There are found to be many differences in between the interpretation and
application of law. It is also been claimed that training provided to the community for
enforcing law is not sufficient. The industry providing financial service is claiming about
the rise in cost in regards to anti money laundering regulations.  They are being viewed
as proving more problems as compared to its benefits. The legislation does not provide
an objective understanding in regards to remove crime. This has regarded as complete
failure when we talk about avoiding terrorist financing. Some of the deficiencies present
in the system are:
Firstly, many of the digital banks did not fall under a specific regulatory statue. Thereby it
is not expected out of them to adhere to the rules and regulations meant for the same.
Sometimes it may be found that transaction may not involve large sum of money. Now
the question comes here whether to monitor such transactions or not. Secondly, the
legislation has found to be against Data Protection Act. The legislation requires banks to
report about the customers on whom they are suspicious about. This step however
requires leaking of data to the institutions. Hence, data privacy is one of the biggest
issues coming forward[19].
Thirdly, there are lots of issues in regards to measure the extent of scale of money
laundering. Although efforts were made by the FATF (Financial Action Task Force) in
order to correct the problems, however it failed. This problem arose on the basis that in
every country there are different definitions used in context of money laundering.
Fourthly, it is impossible to find the reliable figure in regards to costs and benefit behind
the implementation of Anti Money Laundering Regulations. This problem prevents to
calculate the impact of legislation.

Fifthly, many organizations like banks, does not differentiate between the cost spend on
anti-fraud and AML operations and thus they do not allocate costs to each operation
separately. The regulation does not provide any provision to differentiate. UK once has
also been criticized for lacking in procedure to invest about the companies involved in
foreign bribery. 
Due to the flaws present in the Anti Money Laundering legislation it has been viewed to
be a reason for causing harm on economic development. Such regulations are coming in
the way of capital formation from the other nations. Also this is being considered as the
way of taking/diverting the capital away[20].
It is to be concluded that the main purpose behind any law is to curb the ill effects, the
law system should try as much as possible that it should take the system in the way they
are meant to be so as to take maximum benefit out of fit.

Discussion
From the above facts and cases, it can be analyzed that as far as the risk of private
banking sector is concerned from the politically exposed persons, it becomes very
complex for them to keep a check on the senior officials and the government ministers
along with the state owned enterprises and entities as well as their associates.
Therefore, it is extremely recommended to them to make greater use of the software
programs and global institutions that help in accessing appropriate databases to
recognize and keep a check on their relations with the persons that help them in fulfilling
these kinds of requirements[21]. In addition to this, this will also help the financial
institutions to perform their due diligence fundamentals in an effective way.  The present
money laundering laws and legislation seems to be effective as far as the entire scheme
of law is concerned. This is because firstly, there are disclosure compulsions for the
Regulated Sector under ss.330/331 of POCA[22]. Furthermore, the Supervisory Bodies
are not limited to suspicious conduct by those they supervise and have disclosure
obligations under r.24 of MLRs 2007. Thirdly, other POCA offences are valid to all
organizations and individuals in the UK. Regrettably, it is a fact that this regulatory
framework cannot be completely relied upon, this is because there is no agency or
government department that is willing to take the responsibility for ‘policing’ fulfillment
by businesses and Supervisory Authorities in the regulated sector. At all times, the
preference is to get away from a case back to the local police. Therefore, the single
technique to restore to health of this is the engagement of a national law enforcement
agency for enforcing obedience, and making its work progress on the basis of witness
reports from the businesses and individuals supported by recommendations from local
law enforcement agencies.
Conclusion
Altogether, it has been observed that the United Kingdom has an effective legal
mechanism that helps in the purpose of fighting money laundering, because the crime of
money laundering is considered to be high in encircling the major essentials of the
Vienna and Palermo Conventions. Moreover, the Proceeds of Crime Act, 2002 fortified it
further with the help of powerful unit called the Financial Intelligence Unit. In a view of
the fact that the United Kingdom is a leading player in private banking and investment, it
can be noticed that the Money Laundering Regulations (MLR 2007) helps in ensuring
and enabling the of all types of ‘Financial Institutions’ in accordance with the FATF
recommendations. In the case of customer due diligence, though there were a few
shortages as there was no specific regulation or law checking and controlling the
process of verification and identification in recognizing the beneficial owner of the
accounts. On the other hand the financial services Authority FSA were sufficiently
prepared to be in charge of, scrutinize, and assure the observance of the financial
institutions it synchronized. In addition, the Financial Services Authorities (FSA) teams,
in retort to the FATF’s statement, have recently focused on regular visits to
comparatively less significant Firms, and Banks etc for ensuring its compliance. The
requisites were working and successful as far as the phase of controlling records and
reporting of suspected activities is concerned. Despite the fact that the Joint Money
laundering Steering group has again delivered extensive guiding principles on the
genuine accomplishment which have also been permitted by the HM Treasury.  It can be
noticed that the major problem of vulnerability of the financial sector and the private
banking sector mainly lies in the proper and authentic execution and completion as well
as in making sure that the requirements are met completely. There for it is essential and
significant for the banks and firms to plan and implement various procedures and
policies which directly help in following with the regulations and the laws that have been
anticipated to be followed by them. These policies should grip some of the essential
elements such as ongoing monitoring, customer due diligence methods, responsibilities
and obligations of the money laundering reporting officer; Know your Business; manage
of compliance; report requirements; right treatment and management of court orders,
record keeping; tipping off; risk assessment and management and facilitating awareness
and training to the employees.

4. Relationship between money laundering and Tax Evasion

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Introduction
Layering is the procedure of sorting out the capital gained from illegal actions from
their source using different levels of composite fiscal transactions, for instance
changing cash into traveller’s checks, shares, investments, or acquiring expensive
assets, for example painting or jewellery. 4

Introduction
“In this world nothing can be said to be certain, except death and taxes.”

Benjamin Franklin (1789) Cited in Sharon (2009), p333

International tax havens and money laundering is becoming a major issue in the
current world economy. A tax haven country is a place where certain taxes are levied
at a small rate or does not exist. People and/or businesses can find it smart to move
into those places which will create tax competition amongst governments which also
include illegal activities such as profits gained from unfair trading or frauds in a
company’s accounts and corruption. Goerke (2008) study shows that there is a
negative relationship between tax havens and corruption. This is because a country
with tax evasion policies, the normal tax rate has to be high in order to generate the
same level of income as a country with no tax evasion policy. High tax rate has a
tendency to ease corruption.

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In the UK, Her Majesties Royal Court (HMRC) is trying to gain access to details of
overseas accounts of UK citizens in tax havens countries (Riem, 2009). The Financial
Times in July 2008, reported the Swiss bank UBS will no hold have overseas account
for U.S. citizens following a law suit by the U.S. government in May, 2008 (GFIP,
2009). The US Treasury has lost on an annual basis around US $ 100 billions in
revenue because of the accounts held in tax haven countries. The U.S. congress
introduced the Stop Tax Haven Abuse Act (STHAA) in March 2009 which includes a
list of tax haven countries. Companies are planning to move away from the place
where the Act is in force. The Italian Finance Minister, Guilio Tremonti had the fight
against tax haven countries as his main priority in the G-8 [1] summit in Aquila in July
2009.

Money laundering is the procedure to cover the correct source, possession, route
and use of capital, largely gained from illicit actions with the intend of making appear
is was obtained legally. There are three main ways of doing this, namely: placement,
layering and integration (Shehu, 2003).

Placement occurs when an individual deposits money gained from illegal activities
into financial services providers such as banks.

Layering is the procedure of sorting out the capital gained from illegal actions from
their source using different levels of composite fiscal transactions, for instance
changing cash into traveller’s checks, shares, investments, or acquiring expensive
assets, for example painting or jewellery.

Integration is when an individual uses legal means to hide illicit money, therefore
leaving the illegal funds to be distributed back to criminals. These can take the form
of fake import/export invoices.

Advantages and Disadvantages of International Tax

Havens and Money Laundering
Offshore financial institution offers access to steady political and economic matters.
This is advantageous to the residents who lives in areas of political turmoil who fear
their assets may be frozen. Some banks operate at a low cost base and provide high
interest rates than what is legal in the home country due to the lack of government
interference in the affairs. Money laundering in remote islands and countries helps
increase the economy growth. The services of offshore banks are advantageous when
compared to domestic banks, they offer number of bank accounts, risk is based on
high and low rates of investments. Some individuals have specific tax advantages
because these banks are linked to other offshore companies, trust or foundations.

However, through money laundering the banks have been involved to help terrorist
groups, crime gangs, and other state and non-state actors. Money laundering
encourages tax evasion, by helping them deposit their hidden income in an attractive
place. Access to offshore banks are difficult as they operate in far distant places. Yet
accounts can be created by online and other modes, a country such as India finds it
difficult to deal with the issue of money travelling in and out without restrictions.
Offshore accounts aid this money, and this can cause financial problems in the
country. The charge to uphold these accounts is possible by the high earners . The
tax load falls for the middle income group. Also the people who earn more are left to
pay more taxes to facilitate the economy. Acquisition, possession or use of property,
knowing at the time of receipt that such property was derived from criminal activity
or from an act of participation in such activity (Lockett, 1999).

Government review fiscal transactions to make sure the work is carried out properly
on the administrative side, prevent welfare and other benefits fraud, prevent money
laundering and to detect any other illicit doings (World Bank Institute, 2008). These
advantages, however, government employees gaining access to these data and other
individual might misuse these financial data (World Bank Institute, 2008). These
advantages, however, government employees gaining access to these data and other
individual might misuse these financial data (World Bank Institute, 2008). People who
are involved in trying to hide or transfer properties that are used for criminal
purposes will face legal sanctions (Lockett, 1999). For instance, these properties may
be used for drugs dealing, hide “dirty money”, and any other criminal activities.

Global Overview
International tax havens and money laundering is having a global impact. For
instance, in India, money laundering is become a huge problem as money generated
from illegal activities, such as crimes, terrorism and drug-trafficking, is instantly
transferred to tax havens countries such as Switzerland. India are made up of tax
havens, laws allowing secrecy, disguised corporations, anonymous trust accounts,
fake foundations and assorted money laundering mechanisms which are designed to
move money and keep hidden their sources (Financial Times, 2009).

The local government and authorities, for instance, the Indian Chamber of Commerce
and Industry, seems to have no interest investigating into the matter. Even during the
G-20 meeting in London (2009), the Indian representative though this topic would be
“out of line” when actually tax haven countries and money laundering was making
the headlines. In February 2009, an Indian newspaper reports that several Indian
ministers visited Switzerland on private voyage. (Vaidyanathan, 2009)

Kar and Cartwright-Smith (2008) in a report for the Global Financial Integrity (GFI)
that illicit financial outflow from India for the period 2002-2006 was on an average
low of US $ 22.7 billions and high of US $ 27.3 billions per year ranking India as the
5th largest outflow of illegal money outflow in the world. These come from mainly
second hand goods markets which are not accounted for and largely processed by a
financial service provide named Hawala Bank.

Hawala Bank is a financial services provider which is unlicensed and therefore under
no government authority. The financial institution accept money in all its form in one
country and pays out in another country but does not find it important to keep
proper records of clients and transactions. Their main trading activity is transferring
money from developed countries into the Middle East and North Africa where the
firm originated. Institution trading often goes through Pakistan; Dubai and Africa
countries such as Nigeria before reaching the customer as a means to protect the
privacy of clients and that is the main reason is it use for money laundering as shown
in Appendix 1. No studies manage to analyse the amount of money traded by the
company but it is believed that Hawala bankers are hugely involve for tax evasion
and money laundering. Since it has no legal obligation, preventing them from
trading is almost impossible as it is done in an informal way. (van de Bunt, 2008)

As compared to this, Italy is showing a great concern in tax haven countries and
money laundering. Italy has the highest corporate tax rate in Europe as shown in
Appendix 2 which triggers Italian base companies to send profits in tax haven
countries. De Mooij & Ederveen and Dharmapala (2008) argued that company profits
and income is more responsive to taxes that where the company or individual is
situated. On 3 October 2009, the Italian government granted a grace period for
company and individuals to return profits from tax haven countries for a small charge
of 5% of the capital. They expect around US $ 148bn to flow back in the country
generating tax revenue of US $ 7bn mostly from Switzerland as in the pass, the later
was responsible for 58.3% of inflows of profits from overseas. The Finance Minister of
Italy, Guilio Tremonti, said in an interview in July 2009:

“The true benefit of this measure is that it will close Ali Baba’s cave and measures are
useless if they leave tax havens open.”

Financial Times (16 July, 2009)

In 2008, Giulio Tremonti made the account of all Italian tax payers available online
which was on of his approach to track incomes of Italian tax payers. Scherer &
Salzano (2008) discussed that this would not help the government as it could induce
financial crime as private details of individuals such as income earned and address
were made public and consequently the website was closed.

Furthermore, some countries enjoy labelling themselves as ‘tax haven’ countries such
as the Caribbean Islands. However, offshore financial services firms prefer to promote
themselves as ‘wealth management centre’. A recent approximation by the Tax
Justice Network (2009), show that around a third of the world’s assets is held in these
countries (i.e. US $ 11.5 trillion). Countries such as France, UK and Holland have no
interest in to crack down these tax haven countries as many of them form part of the
colonies. Nevertheless, following the September 11 attack, the U.S. government
wants to eliminate these countries tax policies as it prompts money laundering
therefore helping terrorist groups. Their main targets in the Caribbean are Antigua
and Barbuda, Bahamas, Belize, Cayman Islands, Costa Rica, Dominican Republic, Haiti,
Guatemala, and Panama. This is because these countries have slack financial
authorities which benefit money laundering. Caribbean islands are consequently
joining force to establish guidelines to combat money laundering mainly because of
world regulators (Rosdol, 2007).

Legal Side and Policies

Since the 9/11 incident there has been an interest and growing concern for the rules
and regulations made against serious crimes including money laundering and tax
havens. The Indian government took advantage of the Organisation for Economic
Co-operation and Development (OECD) sanction threats against tax havens and
money laundering. They took a hard look at the country’s Double Taxation
Avoidance Agreements focusing on restricting the outflow of clack money and
adopting measures to arrest anyone involved within the country. In their urge to stop
black money funding growth, the Indian government began a negotiation with
Switzerland to help release their infamous secrecy laws and share data on tax evasion
cases. Since OECD drives against tax havens, many countries have started to sign
international standards on transparency and exchange of information.

For instance the Cayman Islands have recently signed a joint agreement with seven
other countries, which allows them to exchange information on tax matters
unilaterally. If similar agreements like the one Caymans Island took were taken by
India, it would allow tax authorities to track down tax evaders and money launderers
by gaining access to financial information that are hidden. (Basu, 2009)

Before the 2008 tax haven and money laundering laws caused a lot of conflict with
the Caymans and U.S, however political stability, strict and clear regulations has
helped the country escape the OECD clampdown on tax havens. Financial services
comprise around 40% of GDP and have made the Caymans the world’s fifth largest
financial centre. Strict laws against money laundering got the Caymans removed
from the Financial Action Task Force blacklist in 2001 but since then they have
maintained a good relationship with the main hosted banks. Regulations in the
Cayman Island are provided by the Cayman Islands Monetary Authority, which also
manage their currency. (Oxford Economic Country Briefings, 2008)

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In the Bahamas the government is considering introducing VAT, but this is a
challenge for them as the country has built their fortunes on their tax haven status.
The financial sector has undergone a deep transformation recently, since they
brought down the reputation by introducing all surrounding anti-money laundering
legislations. (Oxford Economic Country Briefings, 2008)

The Financing and Money Services Act was enforced by the British Virgin Islands (BVI)
in November 2009. The aim of this act is to make sure BVI laws and regulations are
on the same level with international regulations and policies to fight money
laundering and financing of terrorist. A board will be setup following the act to
monitor licensing, regulation and supervision of financial services provided in the
BVI, which will also include reviewing firms which do not comply with the law (Heath,
2009). There are number of offences which now these financial services providers will
have to be line with so as not to break the law, otherwise fines can go up to US $
60,000 applicable for offenders.

U.S. Policies on International Tax Havens and Money

Laundering
The approach of U.S. law enforcement and regulatory agencies have faced relatively
remarkable changes over the past decade such that money laundering and tax
havens have been now operated as a primary issue. This change in approach and
focus has brought improvement regarding tax havens and money laundering. The
assessment of Obama’s policies consolidates a tremendous amount of information in
this perspective.

In May 2009, president Obama presented a set of proposals focusing at international

tax policies. The objective of Obama is to eradicate the benefits for those companies
and well off individuals that transfer their cash in offshore accounts. He described the
current system as: “a tax code that says you should pay lower taxes if you create a
job in Bangalore, India, than if you create one in Buffalo, New York”. The key feature
of this proposal is to restrict the companies which are exempted of tax payments on
profits earned offshore. The plan of administration is to keep a strict hold on those
companies which are not paying their taxes in U.S. pretending that they paid a huge
amount of foreign taxes.

During his presidential campaign Obama’s party promise to work on tax havens and
money laundering ACT. In February 2009, he said in a conference:
“We need to simplify a monstrous tax code that is far too complicated for most
Americans to understand, but just complicated enough for the insiders who know
how to game the system, finally ending the tax break for corporations that ship our
jobs overseas.”

U.S. President – Barack Obama

This was his outmost priorities in a speech to the Congress that he guarantees to
make the tax code more reasonable.

According to the white house Mr. Obama is trying to close the international tax gaps.
Companies which are investing in foreign countries and creating job opportunities
overseas, will loose their tax advantages as planned by the U.S. President, companies
which are creating job opportunities in U.S. will be offered tax advantages with
incentives.

The President and Treasury Secretary Timothy F. Geithner proposal of tax policy
could help in increasing revenue over next year. The estimated income according to
the studies carried out is US $ 210 billion. However, this proposal has some
drawbacks and has been opposed by several business communities. Congressional
leaders, in March 2009, suggested that this change in tax code result in making USA
companies less competitive around the business globe. About 200 companies and
trade associations, including Microsoft Corp., General Electric Co. and the U.S.
Chamber of Commerce, collectively signed a letter stating that the following changes
to the tax code would set them at a disadvantage with their competitors.

This proposal faced considerable opposition by democrats who are hugely

represented in senate creating a bug opposite for President Obama. During his
election campaign Obama criticised the tax code policy as American companies
deferring their tax liabilities on corporate profits. According to democrats the profit
earning by overseas investment allows American companies to invest this money in
their foreign subsidiaries operations.

The loophole which is not covered by Obama’s policy is transfer pricing. Transfer
pricing is the biggest source of tax avoidance in corporate America. An economics
professor at Rutgers, (Altshuler, 2009), called transfer pricing “the elephant in the
room” as it is a major problem which was not addressed under Obama’s proposal.

According to Ernst Young, reforms in Obama’s policy for outsourcing have no affect
on offshore corporate companies. By creating separate business entity these offshore
corporations can contract with entity to outsource the job.

Obama tax reforms have faced a lot of criticism from critics and the leaders in senate
but the only purpose of these tax reforms is to encourage the U.S companies to
invest locally to create more job opportunities for Americans. The Central Board of
Direct Taxes (CBDT) said that after evaluating the benefits of outsourcing in India, if
the cost of revenue is lower than the tax paid by multinational companies in USA.
They would stop investing in foreign subsidiaries.

To pursue the dream, Obama’s administration announces their budget policy for the
year 2011 which is increasing the tax on richest individuals and decreasing taxes for
the individuals earning less. Individuals earning more than $200,000 have to face
increment of US $ 970billion tax on their earnings. For businesses there is an addition
of US $ 400 billion.

Conclusion
From research a number of laws and regulations have been put in place to improve
tax haven and money laundering crimes however, most of the countries still manage
to avoid those regulations and laws. In future many countries have decided it is best
they work together to put together laws and regulations to decrease the crimes in
the financial system if not like India it could become part of their economy and may
be difficult to resolve in the future.

The Caribbean’s, India and Italy have undertaken the laws and regulations of the
OECD. They undermine the legal economy because money laundering affects normal
competitive conditions of markets which is a threat to the efficiency and stability of
each country’s financial system. In Italy the prevention of money laundering plays a
strategic role in fighting crime and is based in the Anti-Money Laundering (AML)
requirements which are:

 Customer due diligence

 Record-keeping requirements concerning business relationships and
occasional transactions
 Adoption of adequate organisational procedures and internal control
measures
 Suspicious-transaction reporting.

On the other hand, financial privacy is has to be accounted for before deciding
whether to investigate a person’s account and income which may end up on morality
issues. With all the measure enforced recently and future prospects, tax evaders may
want to consider paying the taxes rather than being sued for fraud for moving
money to tax haven countries (Economist, 2009). Money laundering is a different
case however as however strict the laws are, governments do no any proper
knowledge on the amount of illegal paper money circulating. This capital flows to tax
haven countries and they are the one who have to have laws in place to determine
the origin of this money. The Swiss Ambassador in India, H.E. Mr Philippe Welti, said:
“Switzerland was accused of giving shelter to black money and there has been a lot
of inflow of such wealth from India and other countries of the world. I would not say
it would be stopped 100% (under a new law). But through this measure, it would be
controlled up to a certain limit.”

Cited by Vaidyanathan (2009, DNA Read the World [Online])

The capita lost in money laundering can be gained back if there if a political will as
shown in the case of Nigeria, Italy, Philippines and Israel (Vaidyanathan, 2009).

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SARS

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Suspicious Activity Report Regime in the UK

Info: 3754 words (15 pages) Law Essay
Published: 6th Aug 2019

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Jurisdiction(s): UK Law

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The Suspicious Activity Report (SAR) is a piece of information which alerts the
relevant authorities of any suspicious customer activity [1]. This suspicious activity
may be identical to money laundering or terrorist funding behaviour which may
indicate an ongoing or just completed criminal or terrorist activity. Examples of such
suspicious activity may include unusually large or frequent deposits/withdrawal from
an account or the cash purchase of high value assets. [2] These reports are generated
by individuals or corporate persons operating in the UK regulated sector e.g. banking
institutions, building societies, insurance companies and are sent to the UK Financial
Intelligence Unit (UKFIU). The purpose and role of the UK Financial Intelligence Unit
(UKFIU) is to have national responsibility for receiving, analysing and disseminating
financial intelligence submitted through the Suspicious Activity Reports (SARs)
regime [3] which is under the Serious Organised Crime Office (SOCA). The reports
themselves contain information regarding the subject of the disclosure (the
customer/client), details of the transaction under suspicion and the reporter’s
reason(s) for suspicion. This information is then processed by the UKFIU and where
necessary, subsequently passed on to law enforcement agents for action. The UKFIU
is a member of the Egmont Group, an international forum comprised of over 100
FIUs Financial Intelligence Units with the main objective of stimulating cooperation,
particularly by sharing expertise, training and information exchange in the fight
against money laundering and financing of terrorism. By virtue of its membership,
the UKFIU may seek financial intelligence from other members in order to
complement SOCAs efforts in its domestic and international operations and to act as
the conduit to this resource for the wider UK law enforcement community. [4]

The SARs regime in the UK can be traced to its early beginnings in 1986 [5] . At that
time it was primarily concerned with the offence of drug trafficking and offered
immunity from prosecution over a charge for money laundering to reporters who
made disclosures of their suspicions to a relevant authority. [6] From then on the
regime has been shaped by subsequent domestic, regional and international
regulations and statues. More significant to the sustained development of this
reporting system would be the establishment of the Financial Action Task Force
(FATF) by the Organisation for Economic Cooperation and Development (OECD) in
1989 [7] which is widely recognised as the foremost international body responsible
for the formulation, review and recommendation of anti-money laundering and
terrorist finance policy worldwide. [8] The FATF subsequently published forty
recommendations to its member countries concerning anti-money laundering policy
including nine special recommendations on counter terrorist funding strategies. Of
the forty recommendations, Recommendation 13 concerned the issue of mandatory
reporting ans provided thus:
‘If a financial institution suspects or has reasonable grounds to suspect that funds are
the proceeds of a criminal activity, or are related to terrorist financing, it should be
required, directly by law or regulation, to report promptly its suspicions to the
financial intelligence unit (FIU)’. [9]

This purpose of this paper is to offer a critical examination on the efficacy of the
current reporting regime and consider the extent to which it complies with
established international standards. A brief overview of the development of the
domestic legislative framework for reporting requirements will be provided after
which the evaluation of the regime’s efficacy will be considered along with some of
the difficulties facing the current system. and in conclusion, consider some ideas or
recommendations on how the system can be improved.

Development of Legal/Regulatory framework of the

SARs Regime
The reporting requirement is an integral component of the various anti money
laundering initiatives both domestic and international because of its very important
role of providing information on suspicious activity from which money laundering
activities can be detected, prevented and/or sanctioned. This means the
development of the SAR regime in the UK will be more satisfactorily discussed in the
context of the development of the domestic anti money laundering regulatory
framework. Leong, in her article [10] identified the apparatus of civil, criminal and
regulatory law as being involved in the legislative and regulatory anti money
laundering framework with the main actors being;

the Government, which defines criminal offences, sponsors the primary legislation
and makes the money laundering regulations;

the Financial Services Authority (FSA) which formulates regulatory rules to combat
money laundering; and

the Joint Money Laundering Steering Committee (JMLSC) made up of sixteen leading
trade associations and chaired by the British Bankers Association. The committee’s
purpose is to issue guidance on the interpretation and application of the money
laundering regulations and on best practice. A task they have carried on since
1990. [11]

As previously mentioned, the SARs regime has been present in the UK since the
enactment of the Drug Trafficking Offences Act of 1986 which established the
laundering of proceeds of drug trafficking as a criminal offence. [12] Under this Act,
the involvement of professionals in preventing the exploitation of the financial sector
by drug traffickers was achieved through the offer of immunity from prosecution
over a charge for money laundering to those who made disclosures of their
suspicions to a relevant authority. This reporting system was promptly regarded as
defensive or subsequent disclosure [13] . A situation where disclosure was required
only after the completion of the act as long as it was made of the disclosers own free
will and as soon as it was reasonably practical to do so. Not a few commentators saw
this sort of reporting requirement as illogical as it was difficult to rationalise the idea
of allowing such a defense after the completion of all elements of the crime. The
difficulty faced by the reporting requirements under this Act was in striking the
balance between the risks of precluding critical information that could lead to
subsequent arrests/convictions based on the absence of any incentive of immunity
offered to the discloser, and the fact that the immunity offered did not in itself
ensure the cessation of money laundering offences.

The Criminal Justice Act (CJA) 1993 as introduced gave rise to the implementation of
the 1991 EC Directive on the Prevention of the use of the Financial System for
Purpose of Money Laundering [14] also known as the First Money Laundering
Directive (1991) and although it was still narrowly focused on combating the
laundering of drugs proceeds through the traditional financial sector, the scope of
the directive was extended to impose certain obligations on financial sector firms.
More significantly, Section 18 of the 1993 Act introduced a mandatory reporting
requirement for professionals where in the course of their business, they become
aware of or suspect that another person is engaged in drug money laundering. This
was giving effect to provisions under the 1991 EC Directive [15] which placed a duty
to report suspicious transactions to the relevant national authorities either on
request or on the institution’s own initiative without alerting the customer [16] .

14.* Financial institutions, their directors, officers and employees should be:

a) Protected by legal provisions from criminal and civil liability for breach of any
restriction on disclosure of information imposed by contract or by any legislative,
regulatory or administrative provision, if they report their suspicions in good faith to
the FIU, even if they did not know precisely what the underlying criminal activity was,
and regardless of whether illegal activity actually occurred.

b) Prohibited by law from disclosing the fact that a suspicious transaction report
(STR) or related information is being reported to the FIU.

The wording of Section 18 specifies a ‘person’ and indicates that contravention is not
limited to institutions. This is confirmed by the criminal sanctions prescribed for non-
compliance. This clearly showed an improvement from previous legislation which
only provided for defensive disclosure as a preventive measure.

The Money Laundering Regulations (MLR) 1993 [17] supplemented the CJA 1993 in

further fulfilment of the UK’s obligations under the 1991 EC Directive and the main
obligation to financial institutions with regards to the reporting requirement was
under Regulation 14 which provided for the establishment and maintenance of
internal reporting procedures. It particularly required the appointment of an internal
Money Laundering Reporting Officer (MLRO) who would be responsible for receiving
all internal reports of suspicious activity and thereafter making a judgement on
whether the information received gives rise to sufficient suspicion or knowledge to
warrant a further external report to the national authority. This requirement has been
described as a form of quality control and relies heavily on the qualitative judgement
of the MLRO. [18]

The Proceeds of Crime Act (PCA) 2002 is the most important legislative action
against money laundering because it consolidates updates and reforms the criminal
law in relation to money laundering under a single legislation. [19] The Act includes
all previously recognised money laundering offences and some new ones under
Section 7 that deals exhaustively with money laundering. Of more significance to our
discussion on the reporting regime is the establishment of three ‘failure to disclose’
offences to include an offence for employees in the regulated sector; and offence for
nominated officers in the regulated sector; and an offence for other nominated
officers. [20] The cumulative elements that constitute this offence are that the person
who fails to disclose knows or suspects or has reasonable grounds to know or
suspect that information received in the course of business in the regulated sector is
the subject of money laundering activity and fails to disclose this to the relevant
officer as soon as is practicable. This failure to report is punishable under sec 334(2)
(b) on indictment, by a maximum of 5 years in prison and an unlimited fine.

Efficacy of United Kingdom’s SARs Regime

The main objective of a SAR regime or a reporting system in general is three fold: (1)
to act as a deterrent to money laundering and its predicate offences;

(2) facilitate the detection and subsequent sanctioning of money laundering and
predicate offences after they have been committed; and (3) disrupt the actual
commission of these crimes while in progress [21] .

One may easily assume that determining the efficacy or otherwise of this system
should normally be by direct comparisons drawn from the correlation between
relevant variables e.g. growth in SAR filings over a given period and the
arrest/conviction rate for predicate offences over the same period. Or by taking
measurements of relevant statistics such as; total annual budget expended on SARs
versus the total value of proceeds of crime recovered. Unfortunately, deriving a true
assessment of the regime’s efficiency by measuring the impact of SARs on crime rate
or in terms of cost benefit is not so straightforward. This is due to the inherently
complex and sometimes not immediately appreciable nature of SARs which provides
sufficient challenges in applying normal econometric methods. This effectively means
that the method of just ’running the numbers’ is not an adequate measure.
Moreover, the goal(s) of the SARs regime require some manner of definition so as to
give a proper idea of what is to be measured in terms of effectiveness. With
reference to the objectives of SARs mentioned in the opening paragraph, it would
seem that in determining its efficacy, we would need to measure the relationship
between SARs and arrest/conviction rates for either or all of money laundering
activities; predicate offences and maybe even value of recovered assets. These factors
have earlier been identified as measurable indicators of a credible SAR
regime. [22] However, even though these are tangible figures that can actually be
compared against reports, the correlation between them is not assured and so may
not necessarily portray an accurate result. Certain factors may affect the number of
filings recorded but may have no effect on crime statistics e.g. regulatory
requirements that may trigger defensive reporting, or better SARs technology/system
administration or training can boost reporters’ determination on what it consider
suspicious. Another very important data stream that cannot be captured would be
number of instances of money laundering or predicate offences that the mere
existence of a SAR regime has prevented as it is practically impossible to tell what a
criminal has decided not to do due to a greater risk of being detected.

This is not to say that efficacy cannot at all be measured but the specific value or
benefit derived from SARs should be established in order to properly identify the
appropriate yardstick with which to measure its efficiency. Fleming maintains the
importance of a holistic networked view of all data streams as a more pragmatic
approach in determining the actual impact of SARs based on the actual value added
in terms of crime detection and on law enforcement in general [23] . In making this
determination of ‘value’ and ‘benefit’, the consideration of whether SARs reduces
crime through deterrence or by facilitating detection after the crime has been
committed is also critical in determining its effectiveness. Even when considering the
impact on crime, there is still a further determination of whether this should be
restricted to the effects of money laundering specifically, or crime in general.

These foregoing paragraphs are essentially intended to bring attention to the evident
complexities involved in measuring the efficacy of the SARs regime in the UK and this
paper does not propose to delve into a much detailed examination of those various
factors that would inform a thorough enquiry, but will instead focus on an evaluation
of the identified strengths and weaknesses and performance so far of the regime.
This proposed evaluation will be based on the impact of SARs on law enforcement
and in particularly, its performance towards achieving it goals in relation to money
laundering with an effort to arrive at a practical determination of its efficiency.

There have been a number of reports concerning the domestic reporting regime and
although useful information can still be gleaned off them, they are for the most part
regarded as outdated [24] . This is due to the fast pace of development and frequent
change in the regulatory framework which has affected matters like process
management, technology, supervising agency and the like. However there are basic
constituents that have remained the same or have not undergone very significant
change. The KPMG report of 2003 identifies the aims of the SARs regime to be: (1)
Deter and displace money laundering and predicate offences; (2) Detect money
laundering and predicate offences, identify the proceeds, and contribute to the
investigation of these crimes; and (3) Assist in disrupting money laundering and
predicate offences through depriving criminals of their assets, taxation and other
interventions, including prosecution and conviction of offenders [25] . (These aims
have generally remained the same till date). The research attempted, among other
things, to answer a specific question on whether the SARs contribute to crime
reduction in a meaningful way. They achieved this by directly comparing statistical
data on the proportion of reports that had been relevant to achieving the established
aims of the regime. It also identified some of the problems faced by the regime
which at the time included;

lack of defined ownership

growth in reports due to extension regulations to include more categories of

professionals

financial burden of reporting and compliance costs;

poor reporting quality resulting in a huge number of reports that were of little or no
significance

timelines for processing of SARs (well exacerbated by 4 above)

the unsatisfactory use of SARs by law enforcement agencies

Despite these existing issues (some of which have been dealt with by more recent
developments), the research also identified successes with the regime using the
available data which evidently showed that the SAR regime was very useful in
providing assistance in criminal investigations carried out by the law enforcement
agencies. The research also goes further to highlight a number of notable successes
as recorded and noted the outcomes of what it deemed an effective SARs regime
should achieve in the long term to include:

A reduction in money laundering and predicate offences through identification and

recovery of criminal assets.

The protection and enhancement of the reputation of the AML achievements of the
UK and its financial institutions.
Identification of both immediate and long-term criminal trends and typologies, in
particular in relation to serious, organised and volume crime in the UK.

A review of the SARs regime was under taken in 2006. [26] Part 3 of that review
considered the costs, benefits, strengths and weaknesses of the SARs regime

Compliance of the UK SARs regime with International Standards

The Financial Action Task Force (FATF) The FATF is an inter-governmental body,
created in 1989, to develop and promote policies to counter money laundering and
terrorist financing. It sets standards for national anti money laundering and counter
terrorist financing programmes; evaluates the extent to which countries have
implemented measures which meet those standards; and identifies and studies
money laundering and terrorist financing methods and trends. FATF
recommendations form an international benchmark for assessing the effectiveness of
anti money laundering measures. You will find more information about FATF, its
standards and typology reports atwww.fatf-gafi.org.

The Financial Action Task Force (FATF) recommends that:

Countries should establish an FIU that serves as a national centre for the receiving
(and, as permitted, requesting), analysis and dissemination of Suspicious Transaction
Report (STR) and other information regarding potential money laundering or terrorist
financing.

The FIU should have access, directly or indirectly, on a timely basis to the financial,
administrative and law enforcement information that it requires to properly
undertake its functions, including the analysis of SARs.