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BOURNEMOUTH UNIVERSITY

A CRITICAL ANALYSIS INTO THE EFFECTIVENESS OF THE

UK’S ANTI-MONEY LAUNDERING REGIME – A COMPARATIVE

STUDY WITH THE USA

Bachelor of Laws (Hons)

CONOR PEARSON

April 2016

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Table of Contents

Acknowledgements .................................................................................................... 4

Abstract ....................................................................................................................... 5

Introduction ................................................................................................................. 6

Money Laundering Defined ........................................................................................ 8

Significance of Anti-Money Laundering Regimes .................................................. 10

Methodology ............................................................................................................. 15

Aims and objectives ................................................................................................. 16

How the Chapters Will Unfold .................................................................................. 16

Chapter 1: Institutions handling AML in the UK ..................................................... 17

1.1 Introduction ....................................................................................................... 17

1.2 Regulating the Regulators ................................................................................. 17

1.3 The Financial Regulators ................................................................................... 20

1.4 The Investigatory Bodies ................................................................................... 24

1.5 The Enforcement Bodies ................................................................................... 27

1.6 Conclusive Remarks ......................................................................................... 30

Chapter 2: Benchmarks for an Effective AML regime ............................................ 32

2.1 Introduction ....................................................................................................... 32

2.2 Development of International Standards ............................................................ 32

2.3 Theories of Regulation ...................................................................................... 37

2.4 Concepts of Compliance in the Financial Services ............................................ 40

2.5. Conclusive Remarks ........................................................................................ 42

Chapter 3: The Effectiveness of AML Legislation and Regulations in the UK ..... 44

3.1 Introduction ....................................................................................................... 44

3.2 European Law ................................................................................................... 44

3.3 UK Money Laundering Offences ........................................................................ 48

3.4 AML in UK Financial institutes ........................................................................... 50

3.5 Asset Recovery ................................................................................................. 55

3.6 Conclusive Remarks ......................................................................................... 60

Chapter 4: An International Perspective – Comparison with the US Model ......... 62

4.1 Introduction ....................................................................................................... 62

4.2 The Piecemeal Construction of the US Framework ........................................... 62

4.3 US Money Laundering Offences ........................................................................ 64

4.4 AML in US Financial institutes ........................................................................... 66

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4.5 Asset Recovery ................................................................................................. 69

4.6 Conclusive Remarks ......................................................................................... 71

Conclusion ................................................................................................................ 73

Word Count ............................................................................................................... 75

Bibliography .............................................................................................................. 76

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Acknowledgements

I would like to thank my mother, not just for emphatically proof reading this dissertation, but

for everything she has done for me to date. I can assure you that as I’ve got older, as much as

you like to tell your friends that I study law, I like to tell my friends that most credit should go to

you. I would also like to thank my father for being a consistent voice of reason in my life and

helping to prevent the stress get the better of me. I hate to be cliché but there really have been

some ups and downs through university and I couldn’t have made it this far without you both.

I would like to thank my dissertation supervisor Dr Stephen Copp for his guidance through

these past few months and for steering me back on track, as I know I have a propensity to

tangent.

Finally I would like to thank my friends, past and present, for everything. I would especially like

to thank, from Bournemouth University; my legal assistant and the only one who has truly

understood how difficult this year has been, Craig Rogerson. My cooking partner and the best

person at distracting me from it all, Jack Good. Furthermore, appreciation needs to be shown

for the others who have survived separate university struggles and still found time to listen to

my ongoing complaints; Grant Breddy, Teshan Darroux and Bryndley Walker.

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Abstract

When discussing the proceeds of crime, there is a tendency to associate it with the

more distasteful members of society and overlook the white-collar criminals that handle

the dirty money, benefitting directly from it without tarnishing their reputation. Countries

need to enforce an effective Anti-Money Laundering regime to ensure that, no matter

what walk of life you come from, crime truly doesn’t pay. This dissertation explores the

approach taken by the UK to tackle money laundering that is taking place at the top

end of our banks and financial institutes. There is consideration of whether the network

of bodies handling money laundering in the UK have coherent roles within the regime

and coordinate their efforts efficiently. There are then different measures of

effectiveness suggested for evaluating an Anti-Money Laundering regime and these

will be applied to the framework currently being used in the UK. To reflect the

international nature of money laundering, there will be comparisons drawn with the US,

the country unequivocally responsible for the current systems operating in the UK and

elsewhere around the globe.

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Introduction

“Dirty money has no place in our economy, whether it comes from drug deals,

the illegal guns trade or trafficking in human beings. We must make sure that

organised crime cannot launder its funds through the banking system or the

gambling sector… Our banks should never function as laundromats for mafia

money, or enable the funding of terrorists”.1

Many unsuspecting people would assume the UK’s financial sector has no involvement

with this level of crime, but the expression ‘the City of London being the laundry of

choice’ reflects how common and openly accepted it is that London is the money

laundering capital of the world.2 When describing the structure of the international drug

trade in an interview with the Independent Newspaper, investigative journalist, Roberto

Sarviano said “Mexico is its heart and London is its head”.3 This is undoubtedly due to

London being one of the most, if not the most, sophisticated financial centres in the

world.4

The UK is becoming increasingly reliant on its financial services, demonstrated by the

fact that in 2014 the UK’s financial services industry accounted for 8% of the gross

value added to the economy.5 The success of the UK as a global financial centre is

1 Cecilia Malmström, EU Home Affairs Commissioner, speaking about the Fourth EU Money Laundering Directive on 6 February 2013; See European Commission, ‘Anti-Money Laundering: Stronger Rules to Respond to New Threats’ (5 February 2015) <http://europa.eu/rapid/press-release_IP-13-87_en.htm> accessed 27 January 2016 2 Dr Leila Talani, Alexander Clarkson and Ramon Pardo, Dirty Cities: Towards a Political Economy of the Underground in Global Cities (Palgrave Macmillan 2013) 15 3 Roberto Saviano was an investigative journalist and author of the bestselling book ‘Gomorrah’. In his book he exposed the structure and laundering methods of a large mafia-style organisation in Naples. See also James Hanning and David Connett, ‘London is Now the Global Money-Laundering Centre for the Drug Trade, Says Crime Expert’ The Independent (London, 4 July 2015) <http://www.independent.co.uk/news/uk/crime/london-is-now-the-global-money-laundering-centre-for-the-drug-trade-says-crime-expert-10366262.html> accessed 27 January 2015 4 Richard Roberts, The City: A Guide to London’s Global Financial Centre (Bloomberg Press 2008) 21 5 ‘Gross value added’ measures the contribution of a sector to the economy; See Gloria Tyler, ‘Financial Services: Contribution to the UK Economy’ (House of Commons Library, 26 February 2015) <www.parliament.uk/briefing-papers/sn06193.pdf> accessed 7 April 2016

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largely attributable to the reputation of its cross-border bank lending and the financial

institutions in London.6

Due to the clandestine nature of money laundering it is difficult to estimate the true

extent of its economic impact, international estimates can be perceived as nothing

other than educated guesses.7 In 2009, globally, criminal proceeds were thought to

amount to 3.6% of gross domestic product,8 which was around US$2.1 trillion.9 It is

estimated that, from this, the amount laundered is 2.7% of global gross domestic

product, around US$1.6 trillion.10

This is in keeping with the International Monetary Fund’s (IMF) consensus range of 2-

5% that was originally published in 199811 but is still applied today12 as few others have

made an attempt to quantify it.13 The IMF is an international organisation with a vested

interest in the prevention of money laundering because it seriously impedes their ability

6 Andrew Clark and Peter Burrell, A Practitioner’s Guide to International Money Laundering Law and Regulation (City & Financial Publishing 2003) 1009; See also TheCityUK ‘Key facts about the UK as an international financial centre’ (June 2014) <https://www.thecityuk.com/assets/2015/Reports-PDF/Key-Facts-about-international-financial-and-related-professional-services-2015.pdf> accessed 20 March 2016 7 United Nations Office on Drugs and Crime, ‘Money-Laundering and Globalization’ <https://www.unodc.org/unodc/en/money-laundering/globalization.html> accessed 13 April 2016 8 ‘Gross domestic product’ is the monetary value of all goods and services produced at the end of a set time period, in the world of finance this is usually quarterly or yearly; See Emily Cadman, Steven Bernard and Tom Pearson, ‘The UK Economy at a Glance’ The Financial Times (London, 2016) <https://ig.ft.com/sites/numbers/economies/uk> accessed 7 April 2016 9 European Commission, ‘Impact Assessment accompanying the document Proposal for a Directive of the European Parliament and of the Council on the prevention of the use of the financial system for the purpose of money laundering, including terrorist financing and Proposal for a Regulation of the European Parliament and of the Council on information accompanying transfer of funds’ (Staff Working Document) SWD (2013) 21 10 United Nations Office on Drugs and Crime, ‘Estimating illicit financial flows resulting from drug trafficking and other transnational organized crimes: Research report’ (October 2011) <https://www.unodc.org/documents/data-and-analysis/Studies/Illicit_financial_flows_2011_web.pdf> accessed 16 February 2016 11 Michel Camdessus, Managing Director of the International Monetary Fund, speaking at the Plenary Meeting of the Financial Action Task Force on Money Laundering on 10 February 1998; See International Monetary Fund, ‘Money Laundering: the Importance of International Countermeasures’ <https://www.imf.org/external/np/speeches/1998/021098.htm> accessed 14 April 2016 12 United Nations Office on Drugs and Crime (n 10) 13 Brigitte Unger, The Scale and Impacts of Money Laundering (Edward Elgar Publishing 2007) 9

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to meet their overriding responsibility, to ensure stability of the international monetary

system.14

Money Laundering Defined

The actual term ‘money laundering’ was coined around the 1920’s prohibition era in

America, during which the mafia used ‘Laundromats’ to integrate illicit funds into the

economy.15 However, integrating the proceeds of crime into the mainstream economy

has been practised since time immemorial and can be traced back to at least 3000 BC.

It was reported that around this time Chinese merchants were forced to conceal or

invest their wealth outside of China to avoid its confiscation by oppressive rulers.16

The IMF defines money laundering as ‘…a process by which the illicit source of assets

obtained or generated by criminal activity is concealed to obscure the link between the

funds and the original criminal activity’.17

An alternative is offered by the Financial Action Task Force, a body dedicated to setting

international standards to prevent money laundering through the financial institutes and

professional services. In their interpretation, money laundering was defined as ‘…the

processing of these criminal proceeds to disguise their illegal origin. This process is of

critical importance, as it enables the criminal to enjoy these profits without jeopardising

their source’.18

Many institutes define money laundering in slightly different ways but the general

principle behind them all is that money laundering entails the process by which dirty

14 International Monetary Fund, ‘The IMF at a Glance’ <https://www.imf.org/external/np/exr/facts/glance.htm> accessed 5 February 2016 15 Kevin Sullivan, Anti-Money Laundering in a Nutshell (Apress 2015) 1 16 Sterling Seagrave, Lords of the Rim: The Invisible Empire of the Overseas Chinese (Putnam 1995) 12 17 International Monetary Fund, ‘The IMF and the Fight Against Money Laundering and the Financing of Terrorism’ (21 March 2016) <http://www.imf.org/external/np/exr/facts/aml.htm> accessed 5 February 2016 18 Financial Action Task Force, ‘Money Laundering’ <http://www.fatf-gafi.org/faq/moneylaundering/> accessed 5 February 2016

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money is passed through a system that will make it appear clean on the other side.19

The inability of organisations to agree on a global definition for money laundering is an

inherent weakness in the tackling of the problem.20 It is a global issue that undermines

the integrity and stability of financial markets and institutions,21 requiring a unitary and

comprehensible approach to tackle it effectively.22 Modern day money laundering can

be simplified to a three-stage process:

The first stage is placement in which the ‘dirty money’23 makes its initial entry into the

legitimate financial system. This is the stage where launderers are most vulnerable as

large sums of money are likely to throw up warning flags to regulators.24

The second stage is layering which tends to be the most complex albeit vital step. It

often involves establishing companies to undertake a series of cross-border

transactions, in order to destroy the audit trail and prevent the authorities tracing the

funds to their illicit origin.25

The final stage is integration in which the criminal is reunited with the laundered money

from what appears to be legitimate sources. 26 To prevent drawing attention from the

authorities, this stage usually involves the purchase of property or dissipating the funds

through day-to-day living costs.27

19 Guy Stessens, Money Laundering: A New International Law Enforcement Model (Cambridge University Press 2008) 6 20 Unger (n 13) 22 21 Kern Alexander, Rahul Dhumale and John Eatwell, Global Governance of Financial Systems: The International Regulation of Systemic Risk (Oxford University Press 2004) 67 22 Unger (n 13) 18 23 ‘Dirty money’ is interchangeable with terms such as ‘criminal proceeds’ and ‘proceeds of crime’ 24 Toby Graham, Evan Bell and Nicholas Elliott, Money Laundering (Butterworths 2003) 5 25 ibid 26 ibid 27 Organisation for Economic Co-operation and Development, Money Laundering Awareness Handbook for Tax Examiners and Tax Auditors (OECD Publishing 2009) 14

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In recent years, money laundering has also been seen to include terrorist financing.28

There are usually significant overlaps between the methods used by criminals and

terrorists to raise their funds but the motives differ. Though this dissertation will be

focusing on traditional money laundering, the financing of terrorism will be mentioned

as it has played such a critical role in developments since the 9/11 terrorist attacks.

It is important to note, funds that finance terrorism may come from legitimate sources

but are encompassed in the money laundering bracket because the end result is for

illegitimate purposes,29 also known as reverse money laundering.30 The motives of

terrorists are ideological, rather than the material financial gain sought by the traditional

money launderers such as drugs dealers or fraudsters. Particular similarities can be

drawn between the fact they both aim to disrupt and damage the domestic economy.

Significance of Anti-Money Laundering Regimes

Though money laundering is no longer restricted to the proceeds from drug trafficking,

it would be wrong not to acknowledge the fact that most countries developed their

proceeds of crime strategies primarily to combat the illegal drug trade.31 The British

problems with money being generated from the illegal drug trade can be traced back to

the opium traders that operated out of Britain’s colony in India and catered to the

considerable Chinese market. The British opium traders continued their activities, even

28 International Convention for the Suppression of the Financing of Terrorism (adopted 9 December 1999, entered into force 10 April 2002) 2178 UNTS 000 29 Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime and on the Financing of Terrorism (opened for signature 16 May 2005, entered into force 1 May 2008) CETS 198 30 Yuliya G. Zabyelina, ‘Reverse Money Laundering in Russia: Clean Cash for Dirty Ends’ (2015) 18 JMLC 202 31 Mary Gallant, Money Laundering and the Proceeds of Crime: Economic Crime and Civil Remedies (Edward Elgar Publishing 2005) 20; see also Jeffrey Robinson, The Laundrymen: Inside the World’s Third Largest Business (2nd edn, Pocket Books 1998) 168

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after opium was prohibited in both China and Britain, as the potential prosperity was

subjectively viewed to outweigh the risks.32

Money laundering has become so prevalent in recent times due to a combination of

two factors. Firstly, the use of offshore tax havens and shell companies,33 thought

initially as a means of legitimate tax avoidance, have since become an efficient way to

shield criminal proceeds from investigations.34 ‘Such offshore jurisdictions usually offer

ease of nominee company formation, banking confidentiality and a minimum amount of

banking regulation’.35 ‘Shell companies’ are non-trading businesses that are usually set

up with an ulterior motive, such as tax avoidance or as a front for illegal enterprise.36

An insight into how extensively these arrangements are utilised was revealed following

the so called ‘Panama papers’ on 3 April 2016.37 Confidential files were leaked from

Panamanian law firm, Mossack Fonseca, exposing a myriad of public officials using

offshore tax havens and shell companies.38 Though this form of tax planning is not

technically illegal, for many of the people in prominent positions, it also called into

question the legitimacy of these funds, hinting at corruption39 and money laundering.40

32 Stuart Stein, International Diplomacy, State Administrators, and Narcotics Control: The Origins of a Social Problem (Gower 1985) 6 33 Ronen Palan, Richard Murphy and Christian Chavagneux, Tax Havens: How Globalization Really Works (Cornell University Press 2009) 17 34 Vanessa Houlder, ‘Tax Havens are Cog in Global Economy, Say Defenders’ The Financial Times (London, 7 April 2016) <http://www.ft.com/cms/s/0/7fe30aa0-fcd6-11e5-b3f6-11d5706b613b.html#axzz45QHRTJQL> accessed 7 April 2016 35 Peter Birks, 1995, Laundering and Tracing (Clarendon Press Oxford 1995) 97 36 Ryan C. Hubbs, ‘Shell Games’ Fraud Magazine (Austin, July/August 2014) <http://www.fraud-magazine.com/article.aspx?id=4294983054> 14 April 2016; See also McClatchy DC, ‘Offshore Corporations – The Secret Shell Game’ (2 April 2016) <http://www.mcclatchydc.com/news/article69025202.html> accessed 20 April 2016 37 International Consortium of Investigative Journalists, ‘Giant Leak of Offshore Financial Records Exposes Global Array of Crime and Corruption’ (3 April 2016) <https://panamapapers.icij.org/20160403-panama-papers-global-overview.html> accessed 7 April 2016 38 International Consortium of Investigative Journalists, ‘Panama Papers: The Power Players’ (3 April 2016) <https://panamapapers.icij.org/the_power_players/> accessed 7 April 2016 39 HM Government, ‘UK Anti-Corruption Plan’ (December 2014) <https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/388894/UKantiCorruptionPlan.pdf> accessed 19 April 2016 40 Global Witness, ‘Call for Tax Havens to Open Up After Offshore Exposé’ (3 April 2016) <https://www.globalwitness.org/en/press-releases/call-tax-havens-open-after-offshore-expose/> accessed 8 April 2016

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This was particularly damaging for the UK, with its financial services found to be at the

‘heart of super-rich tax-avoidance network’.41

The second reason money laundering has become so prevalent is the progression of

technology that now allows for the easy electronic transfer of funds. Money can now be

transferred between multiple jurisdictions as a ‘stream of electrons’,42 with often very

little questions asked about the legitimacy of its source. Money laundering would

appear to have developed over time to become a comprehensive process that can

incorporate many cross-border transactions in order to leave no trace.

In response to this, international and domestic authorities have begun to develop and

enforce Anti-Money Laundering (AML) frameworks, consisting of legislation,

regulations and company procedures. The businesses and relevant individuals subject

to these AML regulations are aptly referred to as the ‘regulated sector’.43 The financial

services are one of the most heavily regulated and supervised sectors, not just in

economic superpowers such as the UK, but also in less developed countries.44 This

comes as no surprise after considering the sectors impact on an economy, the

globalisation of financial systems, and the scope for criminals to launder their dirty

money through it.45

Effective AML regimes should not only take a preventative approach that encourages

the financial institutions to identify illegitimate funds and prevent them from entering the

41 Charlie Cooper, Jum Armitage and Cahal Milmo, ‘David Cameron Urged to Act on Panama Papers as UK Named ‘at Heart of Super-Rich Tax-Avoidance Network’, The Independent (London, 5 April 2016), <http://www.independent.co.uk/news/uk/politics/panama-papers-david-cameron-uk-tax-avoidance-tax-havens-overseas-territories-a6968791.html> accessed 7 April 2016 42 Agip (Africa) Ltd v Jackson [1989] 3 WLR 1367 (Ch) I383 (Millett J) 43 Proceeds of Crime Act 2002, sch 9, pt 1, s 1 44 Daniel Hardy, ‘Regulatory Capture in Banking’ (2006) 11 Offshore Red 44 45 Philip R. Lane, ‘Financial Globalisation and the Crisis’ (Trinity College Dublin and CEPR, June 2012) <http://www.lse.ac.uk/researchAndExpertise/units/growthCommission/documents/pdf/contributions/lseGC_lane_FinGlob.pdf> accessed 18 April 2016

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clean economy. 46 They should also take a repressive approach through criminal law

that deters criminals from using the financial services to launder their criminal

proceeds.47 This all needs to be carefully balanced against the fact that these

measures should not place unfair burdens on the financial institutions and stifle the

industry.48

There should be a robust system of asset recovery measures to confiscate the

proceeds of crime, through a criminal conviction or civil law means, in any effective

AML regime. Confiscation can frustrate the movement or laundering of illicit funds and

lead to the eventual breakdown of criminal organisations.49

For the purpose of this study, there will be a focus on the so called ‘high-end’ money

laundering, whereby large amounts are laundered, through the banks and financial

institutions.50 The reasoning behind focusing on this area of money laundering is

because it is thought to be at the core of the regulated sector.51 This is because

financial institutions, ‘as gateways to the financial system, to economic power and

possibilities, are considered to be one of the major vehicles for money laundering’.52

46 Stessens (n 19) 108 47 A. De Nauw, Les Métamorphoses du Droit Pénal de L’enterprise (Mys & Breech 1994) 48 48 British Institute of International and Comparative law, ‘Comparative Implementation of EU Directives (II) – Money Laundering’ (December 2006) <https://www.cityoflondon.gov.uk/business/economic-research-and-information/research-publications/Documents/2007-2000/Comparative%20Implementation%20of%20EU%20Directives%20ll_Money%20Laundering.pdf> accessed 10 April 2016 49 Financial Action Task Force, ‘Best Practices on Confiscation (Recommendations 4 and 38) and a Framework for Ongoing Work on Asset Recovery’ (October 2012) <http://www.fatf-gafi.org/media/fatf/documents/reports/Best%20Practices%20on%20%20Confiscation%20and%20a%20Framework%20for%20Ongoing%20Work%20on%20Asset%20Recovery.pdf> accessed 20 April 2016 50 National Crime Agency, ‘High End Money Laundering Strategy and Strategy Action Plan’ (December 2014) <http://www.nationalcrimeagency.gov.uk/publications/625-high-end-money-laundering-strategy/file> accessed 19 February 2016 51 Robin Booth and others, Money Laundering Law and Regulation (Oxford University Press 2011) 201 52 Antoinette Verhage, The Anti Money Laundering Complex and Compliance Industry (Routledge 2011) 1

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This was reflected in the HM Treasury’s money laundering risk assessment of 2015, in

which financial institutions were identified as the sector at most significant risk.53 This

dissertation will not consider the AML efforts on a regional and local level but, for

contextual reasons, it is worth mentioning that local police forces are broadly tasked

with the responsibility to deal with money laundering on the ground.54

This research is important because it will analyse whether the current AML regime in

the UK is effectively deterring criminals from using the respected UK financial sector to

launder their criminal proceeds. It will also consider whether the AML regime effectively

promotes good practice through the financial institutes themselves. The effectiveness

of the UK AML regime will subsequently be compared to that of the regime in the US.

In this instance, the UK should be compared with another Western jurisdiction because

there are less regulatory gaps between their legal systems.55 The US, in particular, is

the logical country to draw comparisons with for several reasons. Firstly, their

prominence in international affairs and the almost international consensus that they

have the responsibility to marshal global crime.56 Secondly, it would be nonsensical to

compare with another EU country as they are likely to implement broadly similar

measures to the UK, in line with European law. Finally, because New York and London

both vie for being the financial centre of, not just Western society, but the world. 57

53 HM Treasury, ‘UK National Risk Assessment of Money Laundering and Terrorist Financing’ (October 2015) <https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/468210/UK_NRA_October_2015_final_web.pdf> accessed 4 February 2016 54 National Crime Agency, ‘The NCA Commitment to Working in Partnership with UK Operational Partners’ (August 2015) <http://www.nationalcrimeagency.gov.uk/publications/178-the-nca-commitment-to-working-in-partnership-with-uk-operational-partners/file> accessed 18 April 2016 55 Doreen McBarnet, Crime, Compliance and Control (Routledge 2004) 220 56 Gallant (n 31) 75 57 Michael Pooler, ‘New York and London Vie for Crown of World’s Top Financial Centre’ The Financial Times (London, 1 October 2014) <http://www.ft.com/cms/s/0/b388de4c-174b-11e4-87c0-00144feabdc0.html?siteedition=uk#axzz45L8Ff5rL> accessed 8 April 2016; See also Mark Yeandle, ‘The Global Financial Centres Index 18’, (Z/Yen Group and Qatar Financial Centre, September 2015) <http://www.finance-montreal.com/sites/default/files/publications/gfci18_23sep2015.pdf> accessed 8 April 2016

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Methodology

This research will be conducted using comparative law, which is the systemic study

and comparison of legal traditions and rules in separate legal jurisdictions.58 It is best

considered as ‘an intellectual activity with law as its object and comparison as its

process’.59 Comparative law has become a more prominent practice due to the

‘globalisation’60 of the legal discipline as a whole.61

This dissertation intends to compare both the common and civil law approaches to

combat money laundering in the UK and US with reference to; statutory materials, case

law, official materials, legal textbooks, academic journals, newspaper articles and web

documents. For the majority of sources, there will be observance of the OSCOLA

referencing system, but as US citations are not covered, there will be use of Bluebook

referencing for US legislation and cases.

This dissertation intends to incorporate international standards, economic and

regulatory theories, and government statistics to compare the effectiveness of each

AML’s regime in preventing and punishing money laundering. Though there are

information gaps in the true extent of money laundering proceeds,62 there has been a

concerted effort to use the most recent statistics available in this dissertation.

Information on money laundering should be readily available to the public but, in reality,

it can prove troublesome to obtain as it often indicates the shortcomings of government

regimes.

58 Peter De Cruz, Comparative Law in a Changing World (3rd edn, Routledge-Cavendish 2007) 3 59 Konrad Zweigert and Hein Kötz, An Introduction to Comparative Law (North-Holland 1977) 2 60 Esin Örücü and David Nelken, Comparative Law: A Handbook (Hart Publishing 2007) 69 61 Ibid 84 62 HM Treasury (n 53)

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Aims and objectives

Aim: Evaluate the effectiveness of the money laundering regime in the UK

Objective: Considering the bodies tackling money laundering in the UK and how

well they coordinate their efforts

Objective: Set benchmarks for what exactly makes an effective AML framework

Objective: Apply these benchmarks to the UK AML framework

Objective: Analyse the AML regime in the US and draw comparisons

How the Chapters Will Unfold

This dissertation is structured into four chapters. Firstly it will look at the UK bodies that

regulate and enforce AML measures in the UK. Secondly, it will explore the different

ways effectiveness is measured by different groups. Thirdly, it will review the strategies

of the UK and the aforementioned bodies to curbing money laundering. This will

predominantly be the national legislation in response to European law and international

standards. Finally, it will study the AML regime in the US and compare its effectiveness

with that of the UK system.

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Chapter 1: Institutions handling AML in the UK

1.1 Introduction

Since coming to the forefront as a global issue, in a type of knee jerk reaction, the UK

government has made a public display of assigning a variety of organisations to

tackling the money laundering problem. This tact works effectively in reassuring the

public that actions are being taken but does not necessarily go any further to resolving

the fundamental problem. This chapter will explore the overcrowding of institutions

attempting to work in conjunction to regulate, investigate and enforce AML measures in

the UK financial sector.

1.2 Regulating the Regulators

When analysing whether the bodies in the UK AML regime are working efficiently

together, it’s important to have criteria for an effective regulator. As regulators are

‘creatures of statute’, their duties and powers are found within the legislation that

established them, also known as their ‘statutory remit’.63 Regulators should therefore

be mindful not to stray beyond the duties prescribed by Parliament.

Guidance can also be found in the principles of good regulation and code of practice,

both laid down in the Legislative and Regulatory Reform Act 2006. The principles of

good regulation hold that ‘regulatory activities should be carried out in a way which is

transparent, accountable, proportionate and consistent....targeted only at cases in

which action is needed’.64 Regulators must have regard for these principles when

exercising their regulatory functions and should be the foundation of all decision

making.

63 Select Committee on Regulators, UK Economic Regulators (HL 2006-07, 189-I) para 1.1 64 Legislative and Regulatory Reform Act 2006, s 21

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The Regulators’ Code was written in accordance with the code of practice.65

Government agencies must regard the code when developing policies and operational

procedures that affect their regulatory activities, as well as when setting standards that

will guide the regulatory activities of others.66 An effective regulator should, therefore,

comply with the statutory principles and Regulators’ Code to the best of its abilities.

Though these benchmarks are designed for regulators, the generalised criteria is

transferable to the investigatory and enforcement bodies in the AML regime.

Moreover, it is worth considering the ‘budget-maximizing model’ proposed by American

economist, William Niskanen.67 The premise of this theory is that bureaucracies are

either already out of control or are becoming too difficult for the government to

control.68 The theory stipulates that powerful governmental agencies seek to maximise

their budgets by relying on informational advantages over the government that provides

for overwhelming bargaining power.69 This suggests that the agency’s knowledge of

the organisational procedures required to implement policies gives them the

opportunity and incentive to manipulate government decision making.70

The main way to control this form of bureaucracy is through a rigorous reporting

mechanism that makes agencies directly accountable to the government for their

performance and spending. 71 This accountability to political principles ensures the

agency has a ‘distinctly subordinate and responsive role’. 72 Striking the somewhat

65 Legislative and Regulatory Reform Act 2006, s 23 66 Department for Business, Innovation & Skills, ‘Better Regulation Delivery Office: Regulators’ Code’ (April 2014) <https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/300126/14-705-regulators-code.pdf> accessed 19 April 2016 67 William A. Niskanen, Bureaucracy and Public Economics (2nd edn, Edward Elgar Publishing 1996) 68 H. George Frederickson and others, The Public Administration Theory Primer (2nd edn, Westview Press 2011) 35 69 Thomas G. McGuire, ‘Budget-Maximizing Governmental Agencies: An Empirical Test’ (1981) 36 Public Choice 313 70 B. Dan Wood and Richard W. Waterman, Bureaucratic Dynamics: The Role of Bureaucracy In a Democracy (Westview Press 1994) 23 71 McGuire (n 69) 72 Melvin Dubnick, ‘Accountability and the Promise of Performance: In Search of the Mechanisms’ (2005) 28 PPMR 376

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paradoxical balance between independence and accountability of regulators is at the

heart of the regulation debate.73

The ‘budget maximization’ theory can easily be applied to the regulators of the financial

services. The regulators themselves struggle to understand the internal AML

procedures of the regulated firms, resulting in a chain of information failure. This leaves

ample scope for the regulators to demand excessive funding from the government,

producing an ineffective regulatory framework that is feckless when allocating its

resources.

A further problem arises in the fact that people believe external public bodies are not

effective in monitoring the financial sector and preventing corporate misconduct. It is

thought that governments are reluctant to alienate business interests, that the use of

criminal law here can be costly, and that external agencies prefer a pragmatic

approach to ensure a good working relationship with the companies they monitor.74

This view is substantiated in provisions 1 and 2 of the Regulators’ Code that place an

early focus on economic growth and ensuring a good working relationship with the

financial institutes, rather than advocating prudent monitoring.75

The financial regulators should therefore be scrutinised by, and held accountable to,

the government due to the form of bureaucratic decision making they wield. This is

particularly important for domestic regulators, acting under a system of powers

conferred by the legislature and exercising a form of discretionary decision making.76

73 Daniel Hemel, ‘How to Hold Bank Regulators Accountable’ Forbes (Jersey City, 18 December 2008) <http://www.forbes.com/2008/12/18/sec-fdic-regulation-oped-cx_dh_1218hemel.html> accessed 21 April 2016 74 James Gobert and Maurice Punch, Rethinking Corporate Crime (Butterworths 2003) 315 75 Department for Business, Innovation & Skills (n 66) 76 Julia Black, Rules and Regulations (Clarendon Press Oxford 1997) 185

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1.3 The Financial Regulators

The Financial Services Act 2012 abolished the Financial Services Authority (FSA) and

restructured the regulatory framework bringing macroprudential and mircoprudential

regulation under the control of the Bank of England (BoE).77 The BoE redistributed the

roles of the FSA between its two newly formed subsidiaries, the Financial Conduct

Authority (FCA) and the Prudential Regulation Authority (PRA).78 This became known

as ‘twin peaks’ regulation because firms falling under their jurisdiction are dual-

regulated,79 with the PRA responsible for their prudential regulation and the FCA

responsible for conduct of business and supervision.80

At a forecasted cost of £664 million for the dual-regulation of the financial services by

the FCA and PRA, the government needs to consider whether they can coordinate

their activities or if returning to one regulatory body is more efficient.81 Furthermore, this

dual-regulation may place an unnecessary burden on the financial institutes, who have

to adapt to the supervision of two regulators. 82

The BoE’s credibility was called into question after being ill prepared for a significant

scandal, in which the collapse of the Bank of Credit and Commerce International

(BCCI) subsequently revealed the bank’s involvement in arms trafficking, prostitution

77 ‘Macroprudential regulation’ regards the welfare of the entire financial system, whereas ‘microprudential regulation’ focuses on the welfare of individual financial institutes. 78 Financial Services Act 2012, s 6 79 George Walker and Robert Purves, Financial Services Law (3rd edn, Oxford University Press 2014) 3, 56; See also KPMG, ‘Twin-peaks regulation: key changes and challenges’ (November 2012) <https://www.kpmg.com/ZA/en/IssuesAndInsights/ArticlesPublications/Financial-Services/Documents/Twin%20Peaks%20Regulation%20Key%20Changes%20and%20Challenges%20-%2019%20Oct%2012.pdf> accessed 18 March 2016 80 Financial Action Task Force, ‘Guidance for a Risk-Based Approach: Effective Supervision and Enforcement by AML/CFT Supervisors of the Financial Sector and Law Enforcement’ (October 2015) <http://www.fatf-gafi.org/media/fatf/documents/reports/RBA-Effective-supervision-and-enforcement.pdf> accessed 20 April 2016 81 National Audit Office, ‘Report by the Comptroller and Auditor General: Regulating Financial Services’ (25 March 2014) <https://www.nao.org.uk/wp-content/uploads/2015/03/Regulating-financial-services.pdf> accessed 20 April 2016 82 Jeremy Hill, ‘The UK’s New Financial Regulatory Structure – The Shape of Things to Come’ (2013) 28 JIBLR 156

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and money laundering.83 The BCCI crash caused a devastating blow of £20 billion in

liabilities and led to the unprecedented decision by the liquidators to attempt civil

proceedings against BoE for misfeasance in public office.84

The BoE was accused of taking a decidedly relaxed approach to risk management of

BCCI merely because it was incorporated in Luxembourg. This was despite the fact

BoE even described the bank as ‘on its way to becoming the financial equivalent of the

SS Titanic’ in an internal memo.85 In the wake of this scandal, the risk management

conducted by BoE and its subsidiaries will need to have been reviewed and potentially

reformed, to show an ongoing commitment to improving the effectiveness of the UK

AML regime and the integrity of its financial services.

This dissertation will scrutinise the FCA but it is important to observe both regulators to

some degree. This is because, although the FCA has a more hands-on role in tackling

financial crime,86 they are obligated to work closely with the PRA when tackling these

issues.87 Both regulators change the behaviour of the financial sector in order to meet

their objectives and therefore impact the effectiveness of the UK’s AML regime.88

83 Simon Bowers, ‘Files Close on BCCI Banking Scandal’ The Guardian (London, 17 May 2012) <http://www.theguardian.com/business/2012/may/17/files-close-bcci-banking-scandal> accessed 19 April 2016 84 James Moore, ‘Bank of England Demands £70m After BCCI Case Collapses’ The Telegraph (London, 3 November 2005) <http://www.telegraph.co.uk/finance/2925179/Bank-of-England-demands-70m-after-BCCI-case-collapses.html> accessed 19 April 2016; See also Three Rivers DC v Bank of England (Indemnity Costs) [2006] EWHC 816 85 Simon Bowers, ‘BCCI Scandal: Long Legal Wrangling Over Collapsed Bank’ The Guardian (London, 17 May 2012) <http://www.theguardian.com/business/2012/may/17/bcci-scandal-long-legal-wranglings> accessed 19 April 2016 86 HM Treasury, ‘Anti-Money Laundering and Counter Terrorist Financing Supervision Report 2012-13’ (24 March 2015) <https://www.gov.uk/government/publications/anti-money-laundering-and-counter-terrorist-finance-supervision-reports/anti-money-laundering-and-counter-terrorist-finance-supervision-report-2012-13> accessed 20 April 2016 87 Financial Services Act 2012, s 6, pt 3D 88 Angela Hayes and Carlos Conceicao, A Practitioner’s Guide to Financial Services Investigations and Enforcement (3rd edn, Sweet & Maxwell 2014) 299

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Though the PRA has powers to impose sanctions, the circumstances where

enforcement actions are going to be pursued by the PRA are anticipated to be rare.89

The FCA’s statutory remit is to protect consumers and financial markets, promote

competition, and generally maintain the integrity of the financial services.90The FCA

appears to operate with broadly the same objectives as the FSA did, with some

insubstantial amendments.91 This may be the sign of an ineffective regulator because

the government has made little systemic changes to the functions of its failed

predecessor.92 This is further validated by the fact the FCA ‘transitioned existing FSA

rules and other provisions to the FCA Handbook’, only making subtle changes in order

to comply with the 2012 Act.93

The PRA’s statutory remit is to promote the safety and soundness of regulated firms to

ensure the stability of the UK financial system.94 The overlaps in the remits can cause

conflicts over the jurisdiction of the two regulators, which is why the Treasury is

provided with the power to establish boundaries between their responsibilities.95

Accountability to the Treasury is in line with the principles of good regulation, however,

this overlap of responsibilities indicates an ineffective AML regime. Overlaps can result

in replicated work and an inefficient use of government resources. Alternatively, it could

lead to certain matters ‘falling through the cracks’, as each regulator believes it falls

within the jurisdiction of the other.

89 Bank of England and Financial Services Authority, ‘The PRA’s Approach to Banking Supervision’ (October 2012), <http://www.fsa.gov.uk/static/pubs/other/pra-approach-banking.pdf> accessed 6 April 2016 90 Financial Services Act 2012, s 6, pt 1B 91 Financial Services and Markets Act 2000, pt 1 92 Rinita L. Sarker, ‘Reform of the Financial Regulatory System’ (1998) 19 Comp Law 11 93 Financial Services Authority, ‘Policy Statement PS13/5: The New FCA Handbook’ (March 2013) <http://www.fca.org.uk/static/documents/policy-statements/fsa-ps13-05.pdf> accessed 19 April 2016 94 Financial Services Act 2012, s 6, pt 2B 95 Financial Services Act 2012, s 6, pt 3G

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In order for an AML regime to operate effectively there should be clear advice and

guidance provided to the financial institutes by regulators, as per provision 5

Regulators’ Code.96 Both regulators furnish the UK financial institutions with regular

industry guidance that is approved by the Treasury. There is often outreach by the

regulators beyond this guidance, such as through AML training and establishing call

centres for AML-related queries.97

The FCA is authorised to ‘fine, suspend, prohibit, bring criminal convictions or take

other action to prevent markets abuse, such as insider trading’.98 However, following

the decision in R v Rollins,99 the FCA has shown that they are now prepared to

prosecute for an offence of money laundering, where previously it was thought that

they only had the authority to prosecute for this as an adjunct to an insider trading

offence.100

The FCA is authorised to share information with other relevant public bodies101

provided it is not material the FCA is explicitly prevented from disclosing.102 It seems

redundant to prevent other regulatory bodies from being privy to information when they

have similar objectives. Fortunately a disclosure of materials relating to AML is likely

permissible as they provided it is ‘made for the purpose of facilitating the carrying out of

a public function’.103

96 Department for Business, Innovation & Skills (n 66) 97 HM Treasury, ‘Anti-Money Laundering and Counter Terrorist Finance Supervision Report 2013-14’ (24 March 2015) <https://www.gov.uk/government/publications/anti-money-laundering-and-counter-terrorist-finance-supervision-reports/anti-money-laundering-and-counter-terrorist-finance-supervision-report-2013-14#annex-a-anti-money-launderingcountering-the-financing-of-terrorism-supervisors> accessed 20 April 2016 98 Financial Services and Markets Act 2000, pt 8; See also Financial Conduct Authority, ‘Our Powers’ (1 April 2014) <http://www.fca.org.uk/firms/markets/our-powers> accessed 18 April 2016 99 R v Rollins [2010] UKSC 39; See also Hayes and Conceicao (n 88) 4 100 Financial Services and Markets Act 2000, s 402(1) 101 Financial Services and Markets Act 2000, s 354(1B) 102 Financial Services and Markets Act 2000, s 348 103 Financial Services and Markets Act 2000, s 349(1)

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A further area the FCA have shown themselves to be an effective regulator is in the

transparency of their approaches, under provision 6 Regulators’ Code.104 This is

demonstrated by their clear strive to continually develop and improve an accessible

complaints procedure,105 an area that is blatantly obfuscated by some government

bodies.

The UK AML regime appears to be constructed with the ‘budget maximization’ theory in

mind. Both the FCA and PRA are entirely funded by the fees charged to financial

institutions, in completing their roles as financial regulators.106 Though this raises

concerns about monitoring their fee structure, it prevents them from using their

informational advantage to manipulate the government into extra funding and is a very

effective mechanism in the AML framework.107

1.4 The Investigatory Bodies

The National Crime Agency (NCA) is the principal UK law enforcement body handling

high-end money laundering.108 The NCA superseded the Serious Organised Crime

Agency following its formation under the Crime and Courts Act 2013.109 As set out in its

statutory remit, the NCA’s principle functions are crime-reduction and gathering

criminal intelligence.110 The NCA’s first strategic priority, 111 set in the Home Secretary’s

2015/16 Annual Plan, is to identify and disrupt serious organised crime by investigating

and enabling the prosecution of those responsible.112

104 Department for Business, Innovation & Skills (n 66) 105 Financial Conduct Authority, ‘PS15/19: Improving Complaints Handling, Feedback on CP14/30 and Final Rules’ (23 July 2015) <https://www.fca.org.uk/news/ps15-19-improving-complaints-handling> accessed 20 April 2016 106 Financial Services and Markets Act 2000, s 99 107 Financial Services Authority, ‘Journey to the FCA’ (October 2012) <https://www.fca.org.uk/static/documents/fsa-journey-to-the-fca.pdf> accessed 22 April 2016 108 National Crime Agency (n 50) 109 Crime and Courts Act 2013, ss 1-15 110 Crime and Courts Act 2013, s 1(4)-(5) 111 Crime and Courts Act 2013, s 3 112 National Crime Agency, ‘NCA Annual Plan 2015/16’ (26 March 2015) <http://www.nationalcrimeagency.gov.uk/publications/541-nca-annual-plan-2015-16-v1-0/file> accessed 8 March 2016

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The first priority reflects that the NCA’s overall role in the AML framework will be to

gather intelligence and drive for better coordination of cases and resources between

the other UK agencies involved.113 Designated NCA officers have the powers of a

police constabulary.114 This allows the NCA to, on occasion, act on their intelligence

with the aim of disrupting money launderers and denying them their assets.115 Though

this may give NCA investigations more teeth, it is a role that can easily be fulfilled by

local police force and strays from the NCA’s statutory remit.

Due to the variety of roles that must be undertaken to meet its strategic priorities, the

NCA is organised into eight operational branches.116 The branches concerned with

AML are the intelligence hub, which gathers and analyses relevant data, and the

Economic Crime Command, which leads responses and co-ordinates resources to

counter economic crime across the UK.117

Each member of the IMF is responsible for creating its own Financial Intelligence Unit

(FIU) that receives, analyses and distributes financial intelligence gathered from

suspicious activity reports (SARs).118 The UKFIU is a subdivision of the NCA, though it

has the authority to act autonomously.119 Its role in the AML framework is to make sure

113 National Crime Agency, ‘A Plan for the Creation of a National Crime-Fighting Capability’ (June 2011) <https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/97826/nca-creation-plan.pdf> accessed 17 April 2016 114 Home Office, ‘The National Crime Agency: Operational Powers’ (January 2013) <https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/98448/fs-nca-powers.pdf> accessed 17 April 2016 115 HM Treasury (n 53) 116 These include; Border Policing Command, CEOP Command, Economic Crime Command, Organised Crime Command, Intelligence, Operations, Specialist Capabilities and Proceeds of Crime Centre. 117 HM Treasury (n 53) 118 International Monetary Fund ‘Financial Intelligence Units: An Overview’ (July 2004) <https://www.imf.org/external/pubs/ft/FIU/fiu.pdf> accessed 9 March 2016 119 HM Treasury (n 53)

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strategic and tactical intelligence provided by these reports is then made available to

the relevant law enforcement agency for further investigation.120

It would appear that the NCA has been sub-divided into several separate bodies with

tenuous differences in their function which unnecessarily stretches their resources.

Notably, if it were not an obligation of the UN to have a separate FIU, the UKFIU could

easily be amalgamated with the intelligence hub. This said, with over 380,000 SARs

produced in 2015, it could be argued an effective AML regime would have a separate

body dedicated to processing them efficiently.121

The NCA was identified in a government report as the main body that needed

improvement in the fight against organised crime; suggesting ‘investment is needed to

improve the technology and analytical capability that an effective criminal intelligence

system requires’.122 As intelligence gathering is the crux of the NCA’s statutory remit,

for it to be technologically unequipped is a serious flaw and detriment to the

effectiveness of the entire AML regime.123

120 Financial Action Task Force, ‘International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation’ (February 2012) <www.fatf-gafi.org/recommendations.html> accessed 7 March 2016 121 National Crime Agency, ‘Suspicious Activity Reports (SARs) Annual Report 2015’ <http://www.nationalcrimeagency.gov.uk/publications/677-sars-annual-report-2015/file> accessed 15 April 2016 122 HM Chief Inspector of Constabulary, ‘State of Policing: The Annual Assessment of Policing in England and Wales’ (February 2016) <https://www.justiceinspectorates.gov.uk/hmic/wp-content/uploads/state-of-policing-2015.pdf> accessed 19 April 2016 123 Crime and Courts Act 2013, s 1(5)

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1.5 The Enforcement Bodies

The Crown Prosecution Service (CPS) is the principal independent prosecuting

authority in England and Wales, established under the Prosecution of Offences Act

1985. The two main documents that govern the CPS are the ‘Code for Crown

Prosecutors’ and the ‘Casework Quality Standards.124 The CPS prosecutes for money

laundering and other criminal offences investigated by the police, NCA and many other

government bodies.125

The CPS prosecutions are headed by the Director of Public Prosecutions, who is in

turn superintended by the Attorney General.126 As a member of the government, the

Attorney General is accountable to Parliament for the work of the CPS.127 The CPS

brings money laundering cases before the courts and applies for restraint, receivership

and confiscation orders.128 The CPS also enforces overseas confiscation orders further

to requests for mutual legal assistance from foreign enforcement bodies,129 a service

which it also reciprocates.130 Mutual legal assistance provides an avenue for countries

to formally request help from another country where evidence is located, a system that

contributes to making the global AML regime more effective.131

The CPS works in partnership with the police, the courts, the Home Office, the Ministry

of Defence and many other agencies, in what is collectively known as the ‘criminal

124 Crown Prosecution Service, ‘The Code for Crown Prosecutors’ (January 2013) <https://www.cps.gov.uk/publications/docs/code_2013_accessible_english.pdf> accessed 5 March 2016 125 Crown Prosecution Service, ‘Introduction’ <http://www.cps.gov.uk/about/> accessed 4 March 2016 126 Prosecution of Offences Act 1985, s 3 127 Crown Prosecution Service, ‘Facts About the CPS’ <http://www.cps.gov.uk/about/facts.html> accessed 4 March 2015 128 HM Treasury (n 53) 129 Financial Action Task Force, ‘FATF Recommendation 36: Mutual Legal Assistance and Extradition’ <http://www.un.org/en/sc/ctc/docs/bestpractices/fatf/40recs-moneylaundering/fatf-rec36.pdf> accessed 19 April 2016 130 Home Office, ‘Requests for Mutual Legal Assistance in Criminal Matters: Guidelines for Authorities Outside of the United Kingdom’ (2015) <https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/415038/MLA_Guidelines_2015.pdf> accessed 20 April 2016 131 Serious Fraud Office, ‘What We Do’ <https://www.sfo.gov.uk/about-us/#ourfundingandbudget> accessed 20 April 2016.

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justice system.132 The government has recently proposed to modernise the criminal

justice system and intends to implement administrative budget cuts of up to 50% that

will consequentially also diminish the CPS’s resources, preventing them from fulfilling

their public service roles as effectively.133 It is likely that regulators will soon have to be

more prudent when deciding to bring enforcing actions through the CPS and this will

severely impede the administration of justice and the effectiveness of the AML regime.

The Serious Fraud Office (SFO) is a specialist prosecuting authority, brought into being

under the Criminal Justice Act 1987. The SFO’s remit is to coordinate activity across

the economy to make the UK a hostile environment for fraudsters.134 This has led the

SFO to tackle the top level of serious or complex fraud, bribery, corruption and cartel

offences.135 When deciding which economic crime cases the SFO will investigate, the

Director of the SFO applies his Statement of Principal, which importantly includes the

criterion that targets criminal offences, such as high-end money laundering, that

undermine ‘financial interests in general and the City of London in particular’.136 This

will usually be assigned to the SFO’s Proceeds of Crime Division which has the power

to freeze assets and issue overseas confiscation orders.137

On 3 August 2015, the SFO successfully secured the first conviction in relation to the

manipulation of LIBOR scandal138 and subsequently obtained a substantial confiscation

132 Crown Prosecution Service, ‘The Criminal Justice System’ https://www.cps.gov.uk/about/cjs.html> accessed 8 April 2016 133 HM Government, ‘Ministry of Justice’s Settlement at the Spending Review 2015’ (25 November 2015) <https://www.gov.uk/government/news/ministry-of-justices-settlement-at-the-spending-review-2015> accessed 19 April 2016 134 HM Government, ‘Serious Fraud Office’ <https://www.gov.uk/government/organisations/serious-fraud-office> accessed 18 April 2016 135 Caroline Binham, ‘Serious Fraud Office Gears Up for UK Forex Trading Probe’ The Financial Times (London, 20 June 2014) <http://www.ft.com/cms/s/0/9bf0324e-1002-11e4-90c7-00144feabdc0.html#axzz46JRgDfYd> accessed 19 April 2016 136 Serious Fraud Office, ‘About Us’ <https://www.sfo.gov.uk/about-us/> accessed 2 March 2016 137 HM Treasury (n 53) 138 Serious Fraud Office, ‘First LIBOR Defendant on Trial Found Guilty’ (3 August 2015) <https://www.sfo.gov.uk/2015/08/03/first-libor-defendant-on-trial-found-guilty/> accessed 17 April 2016

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order.139 Prior to the SFO’s involvement, the circumstances of the scandal were subject

to extensive FSA investigations, resulting in civil penalties for a number of financial

institutions.140 However, its successor the FCA apparently handed over responsibility to

the SFO and engaged in criminal proceedings to do with a completely separate

matter.141

This demonstrates the absurd arrangements between the public bodies, for the

investigation and prosecution of complex fraud and financial crime.142 There is a further

illustration of blurred lines between the SFO and other AML bodies, by the fact that the

CPS has a Specialist Fraud Division.143 This suggests the SFO’s cases could

effectively be investigated by the police or NCA and prosecuted by the CPS.144 The

main difference being the SFO has the unique authority to both investigate and

prosecute, allowing for better continuity and case efficiency as it remains with one

body.145

The SFO has the authority to share confidential information with HM Revenue &

Customs (HMRC) or the CPS, provided it is for the purposes of an offence relating to

taxation.146 If the confidential information does not fall into this bracket, a member of

139 Serious Fraud Office, ‘Tom Haynes Ordered to Pay £878, 808 Confiscation Order’ (23 March 2016) <https://www.sfo.gov.uk/2016/03/23/tom-hayes-ordered-pay-878-806-confiscation-order/> accessed 17 April 2016 140 Johnathan Fisher QC, ‘Who Should Prosecute Fraud, Corruption and Financial Crime?’ (The London School of Economics and Political Science) <https://www.lse.ac.uk/collections/law/projects/lfm/LFMP%20313%20Who%20Should%20Prosecute%20Financial%20Markets%20Crime.pdf> accessed 17 April 2016 141 Financial Conduct Authority, ‘Eight Convicted for Role in Unauthorised Collective Investment Scheme’ (1 June 2015) <https://www.fca.org.uk/news/eight-convicted-for-role-in-unauthorised-collective-investment-scheme> accessed 15 April 2016 142 ibid 143 Crown Prosecution Service, ‘Specialist Fraud Division’ <https://www.cps.gov.uk/your_cps/our_organisation/sfd.html> accessed 20 April 2016 144 Justice Committee, The Work of the Serious Fraud Office (HC 2012-13, 740-I) para 1.6 145 ibid para 9.10 146 Criminal Justice Act 1987, s 3(1)

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the SFO may still provide information to other regulatory bodies147 if the Director of the

SFO has specifically designated them to perform that function.148

This high level of authority required, suggests it is unlikely the SFO will be inclined to

share information with regulators outside the realms of taxation. Further to the fact the

SFO does not fully comply with provision 4 Regulators’ Code on sharing information, it

could also be susceptible to the ‘budget-maximizing’ theory. The SFO regularly

exceeds its annual spending budget and is able to request additional funding through

its current ‘blockbuster’ funding arrangement with the Treasury.149

1.6 Conclusive Remarks

Looking at the complex network of domestic bodies assigned to tackle money

laundering in some respect, it is no wonder there is thought to be inefficiencies and

inconsistencies between them. This can be seen as a so-called “regulators turf war” in

which, several regulatory bodies currently have separate spheres of influence but

overlapping jurisdiction.150

There would be a case for shifting the UK from the ‘twin peaks’ approach, to an

integrated approach through creation of a single regulator.151 This could have greater

effect if this supervisor was solely tasked with AML monitoring, as opposed to the

present situation in which the FCA and PRA are responsible for all forms of financial

regulation. There is a possibility that the government is making a concerted effort to

veer away from the structure of the FSA due to the negative connotations surrounding

147 Criminal Justice Act 1987, s 3(6)(I) 148 Criminal Justice Act 1987, ss 3(3)-3(5) 149 Serious Fraud Office (n 136) 150 Alex Bailin QC, ‘Case Comment: R v Rollins; R v McInerney [2010] UKSC 39’ (UKSC Blog, 29 July 2010) <http://ukscblog.com/case-comment-r-v-rollins-r-v-mcinerney-2010-uksc-39/#comments> accessed 6 April 2016 151 Financial Action Task Force (n 80)

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it, however, this does not debunk the theory that a single regulator may result in a more

effective AML regime.

The criticism surrounding the SFO clearly has some basis, as several aspects make it

appear to be the most ineffective tool in the UK’s AML regime. It may be worth the

government undertaking a cost benefit analysis of the SFO to decide whether it

successfully fulfils its function of being a specialist prosecuting authority or is in fact a

drain on resources and a further complication in the network of AML bodies.

Under the assumption that spreading resources across less bodies leads to a more

effective overall response. It could be argued that a single universal supervisor with

investigation, regulation and enforcement duties would lead to the most effective

handling of the AML regime in the UK.

If the government was intent on keeping the same structure, the areas these bodies

would benefit most from improvement are their governance and ease and willingness

to share information with one another. Under provision 4.2 Regulators’ Code, this

should be one of their main considerations when regulating.152 The main obstacle to

information sharing between the regulators is explicit confidentiality legislation. The

effectiveness of the UK’s AML regime could therefore benefit from legislation that

encourages further information-sharing, through formal and informal channels, such as

meetings of the Money Laundering Advisory Committee.153

152 Department for Business, Innovation & Skills (n 66) 153 Organization for Economic Cooperation and Development, ‘Policy Framework for Effective and Efficient Regulation’ (2010) <http://www.oecd.org/finance/financial-markets/44362818.pdf> accessed 20 April 2016

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Chapter 2: Benchmarks for an Effective AML regime

2.1 Introduction

When analysing whether a country is employing an effective AML regime, it is

important to understand the qualities that an effective regime should have. This chapter

will outline the benchmarks for effectiveness by considering international standards,

economic theories of regulation and concepts of regulatory compliance.

2.2 Development of International Standards

Due to the transnational nature of money laundering, it is important to take into account

the international organisations that either directly affect the AML procedures of financial

institutions, or indirectly affect them by influencing a national legislature’s decision

making processes.

One of the forefront global issues in the 1980’s was the rise of the major drug cartels,

particularly around the South Americas region. The Medellín and Cali cartels were

known to control the majority of the global cocaine trade. Infamous drug lord, Pablo

Escobar of the Medellín Cartel was quoted giving this explanation of how he laundered

the dirty money he accumulated working in the drug trafficking industry “Simple: you

bribe someone here, you bribe someone there, and you pay a friendly banker to help

you bring the money back”.

The Cali Cartel, another powerful player in the drug trafficking game at that time, had

so many informants in government offices that the American Drugs Enforcement

Administration referred to them as the “Cali KGB”.154 This not only helps to understand

the extent of control and efficiency exercised by the drug cartels at the time, but also

154 This is drawing a comparison between the strong spy network run by the Cali Cartel and that of the Komitet Gosudarstvennoy Bezopasnosti (KGB), the infamous security service for the Soviet Union.

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highlights the problems with corruption and money laundering associated with the

financial sector.

The apparent wealth and power of these major drug cartels was brought to the

attention of the United Nations (UN),155 an international organisation established to

tackle problems facing humanity as a whole and ‘to be a centre for harmonizing the

actions of nations in the attainment of these common ends’.156 Under its founding

Charter, the UN General Assembly is expected to conduct studies into international law

and its codification.157

The UN passed the Vienna Convention in 1988 with the aim of combating the drug

trafficking cartels. The convention laid down a series of drug trafficking offences but

vitally also included ‘organisation, management or financing’ of these drug offences. 158

The three money laundering offences under Article 3 are; conversion or transfer,

concealment and acquisition.

The UN went on the pass the Palermo Convention in 2000, which reinforced the same

three money laundering offences but Article 6 extended the scope from the proceeds of

drug trafficking offences, to the proceeds of all serious crime.159 These two conventions

were the foundations of international approach to combating money laundering.

The Financial Action Task Force (FATF) was established to set standards and promote

effective implementation of legal, regulatory and operational measures for combating

money laundering and other related threats to the integrity of the international financial

155 Annie Mills, Essential Strategies for Financial Services Compliance (John Wiley & Sons 2008) 11 156 Charter of the United Nations (adopted 26 June 1945, entered into force 24 October 1945) 1 UNTS XVI 157 ibid 158 Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (adopted 20 December 1988, entered into force 11 November 1990) 1582 UNTS 000 art 3 159 Convention Against Transnational Organized Crime and the Protocols thereto (adopted 12 December 2000, entered into force 29 September 2003) 2225 UNTS 000 art 6

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system.160 FATF aims to structure its standards in a way that complements the UN’s

AML legal instruments.161

FATF released a list of Recommendations that, if applied correctly, should provide a

country with an internationally accepted amount of protection from money

laundering.162 This international recognition is important in an increasing interlinked

world of finance and, therefore, suggests the extent to which a country complies with

the Recommendations can be used as an indicator as to how effective their AML

regime is.

FATF R.1 suggests to assess risks and then apply a risk-based approach to prevent

and mitigate money laundering.163 All members of FATF are expected to identify the

sectors most at risk from money laundering and allocate resources in the most effective

way to deal with this. The risk-based approach is a concept of regulatory compliance

that will be explored later in this chapter.

FATF R.3 calls for a common standard for the offence of money laundering ‘on the

basis of the Vienna and Palermo conventions. Countries should apply the crime of

money laundering to all serious offences, with a view to including the widest range of

predicate offences’.164 ‘Predicate offences’ are the underlying criminal activities, such

as drug trafficking or arms smuggling, that give rise to the offence of money

laundering.165

160 Financial Action Task Force (n 120) 161 Financial Action Task Force, ‘The Implementation of Financial Provisions of United Nations Security Council Resolutions to Counter the Proliferation of Weapons of Mass Destruction’ (June 2013) <http://www.fatf-gafi.org/media/fatf/documents/recommendations/Guidance-UNSCRS-Prolif-WMD.pdf> accessed 19 April 2016 162 Financial Action Task Force (n 120) 163 From this point on, the word Recommendation has been abbreviated. Therefore ‘R.1’ refers to the first Recommendation, according to the new numbering laid down in the 2012 edition of the FATF Recommendations. 164 ibid 165 Crown Prosecution Service, ‘Proceeds of Crime Act 2002 Part 7 – Money Laundering Offences’ <http://www.cps.gov.uk/legal/p_to_r/proceeds_of_crime_money_laundering/#Proving_that_proceeds> accessed 15 March 2016

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FATF R.4 suggests legislative measures that allow regulatory bodies to freeze, seize

and confiscate criminal assets. It is also highly recommended that that there is a civil

procedure in place to recover assets because, at times, criminal convictions are too

slow or unlikely to be possible at all.

There are a variety of preventative measures provided by FATF R.9-23. ‘Customer Due

Diligence’ (CDD) under R.10, provides that financial institutions should be required to

identify the customer and beneficial owner when starting a new business relationship.

The ‘beneficial owner’ is the underlying owner of the assets and the person the income

from those assets is attributable to.166

There should also be ongoing due diligence in regard to existing customers and

scrutiny of their transactions throughout the business relationship, to ensure the

customer’s level of risk is monitored. There are stricter measures for a politically

exposed person (PEP), who are considered more at risk of money laundering offences

because of their noteworthy position. PEP’s are defined by FATF as ‘an individual who

is or has been entrusted with a prominent public function’.167

FATF R.11 provides record-keeping needs to be maintained for a minimum of five

years after the date of every transaction, whether it is domestic or international.168 This

is because authorities investigating money laundering offences may not trace the funds

to that particular financial institute until a few years after the date of the transaction. As

166 Ross Fraser and J. David. B. Oliver, ‘Beneficial Ownership: HMRC’s Draft Guidance of the Indofood Decision’ (2007) 1 BTR 39; See also Financial Action Task Force, ‘Transparency and Beneficial Ownership’ (October 2014) <http://www.fatf-gafi.org/media/fatf/documents/reports/Guidance-transparency-beneficial-ownership.pdf> accessed 20 April 2016 167 Graham Gibson and Richard Farquhar, ‘The Significant Seven’ (2013) 58 JLSS 20; See also Financial Action Task Force, ‘Politically Exposed Persons (Recommendations 12 and 22)’, (June 2013) <http://www.fatf-gafi.org/media/fatf/documents/recommendations/Guidance-PEP-Rec12-22.pdf> accessed 13 March 2016 168 Financial Action Task Force (n 120)

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previously mentioned, money launderers use a variety of complex cross-border

transactions that make it difficult for authorities to trace.

Every nation that is a member of FATF should have in place a system whereby

suspicious transactions could be reported to their respected FIU, according to FATF

R.20. A financial institution should be required to report a transaction to the FIU if it

‘suspects or has reasonable grounds to suspect that funds are the proceeds of criminal

activity, or are related to terrorist financing’.169

FATF R.21 suggests members should ensure that their domestic laws associated with

banking confidentiality do not inhibit implementation of the Recommendations.170

Financial institutions should not be held in breach of criminal or civil law if a suspicious

transaction is reported in good faith to the FIU. ‘Tipping-off’ any party that a suspicious

transaction has been reported to the FIU, or any other relevant information, should be

prohibited by domestic law.171

Due to the cross-border element of modern day money laundering, FATF R.36-40 push

for increased international co-operation to assist with more efficient tracing of the

funds. There is a focus placed on mutual legal assistance, whereby countries have

mechanisms in place to harmonise their legal systems and make it easier for freezing

and confiscation orders to be made where there is dual criminality172.

FATF R.33 states that certain statistics can provide more concise answers to the

effectiveness of an AML regime. These are factors such as; money laundering

investigations, prosecutions and convictions, frozen and seized assets, deficiencies in

169 ibid 170 ibid 171 ibid 172 ibid

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financial institutions identified by regulatory bodies, and quality of co-operation and co-

ordination between financial institutions, regulatory and law enforcement agencies.173

Chaikin, a known commentator on matters of AML compliance, criticises the fact that

these statistics ‘focus entirely on compliance and effectiveness in terms of outcomes.

The rating system rewards outputs and ignores inputs’.174 Chaikin’s argument is that

FATF’s measures of effectiveness are limited because true effectiveness should also

consider the cost effectiveness of a nation’s laws, financial institutions and systems.

2.3 Theories of Regulation

Regulation is defined in a bewildering variety of ways because of the different contexts

it could be considered; in the realms of law, governance and social control.175 The

central concept is a ‘sustained and focused control exercised by a public agency over

activities that are valued by a community’.176 Regulations can take a number of forms,

best categorised as; information requirements, ‘proscriptions’ preventing certain actions

from being taken and ‘mandates’ asserting that certain actions must be taken.177

Economic regulation is the pattern of intervention in specific industries by the

government and regulatory agencies178 as a means of overcoming market failure.179

‘Properly defined, the term refers to taxes and subsidies of all sorts, as well as to

explicit legislative and administrative controls over rates, entry, and other facets of

173 Protivi Inc, ‘Guide to U.S Anti-Money Laundering Requirements’ (November 2012) <http://www.protiviti.co.uk/en-US/Documents/Resource-Guides/Guide-to-US-AML-Requirements-5thEdition-Protiviti.pdf> accessed 28 March 2016 174 David Chaikin, ‘How Effective are Suspicious Activity Transaction Reporting Systems?’ (2009) 12 JMLC 253 175 Anthony I. Ogus, Regulation: Legal Form and Economic Theory (Hart Publishing 2004) 1 176 Riger G. Noll, Regulatory Policy and the Social Sciences (University of California Press 1992) 363 177 Edward J. Balleisen and David A. Moss, Government and Markets: Toward a New Theory of Regulation (Cambridge University Press 2012) 25 178 Organisation for Economic Co-operation and Development, ‘Financial Services’ (24 July 2002) <https://stats.oecd.org/glossary/detail.asp?ID=4468> accessed 29 March 2016 179 Sara Connolly and Alistair Munro, Economics of the Public Sector (Financial Times/ Prentice Hall 1999) 438

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economic activity’.180 The rationale for regulation in the financial services industry is to

protect against; monopolies stifling competition, clients suffering an unfair loss and

systemic issues such as ‘runs’181 from banks.182 This dissertation considers two of the

main, albeit contradicting, schools of thought on economic regulation. These are Arthur

Pigou’s ‘public interest’ theory183 and George Stigler’s ‘capture’ theory.184

The public interest theory proposes that regulation is implemented in response to

public demand. The public may demand regulation of a market due to factors such as

inefficient or inequitable market practices, usually these practices will be to the public’s

detriment.185 The underlying assumption of the theory is that regulation benefits society

as a whole, as opposed to selective vested interests, indicating an effective regulatory

regime.186 In addition, the theory assumes that markets are likely to function

inefficiently or inequitably and that the appointed regulatory bodies benevolently

represent the interests of society.187 The main criticisms of this theory are attributable

to these assumptions and the near impossibility in validating them.188

The capture theory is associated with public choice theorists,189 who are much more

cynical of the government’s behaviour.190 The capture theory holds that regulation is

actually implemented in response to pressure from incumbent industry interest

groups,191 struggling among themselves to maximise the profits of their members.192

180 Richard A. Posner, ‘Theories of Economic Regulation’ (1974) 5 Bell Journal of Economics 335 181 Charles Goodhart and others, Financial Regulation: Why, How and Where Now? (Routledge 1998) 9 182 ibid 4 183 Arthur C. Pigou, The Economics of Welfare (Palgrave Macmillan 1920) 184 George J. Stigler, ‘The Theory of Economic Regulation’ (1971) 2 Bell Journal of Economics 3 185 Posner (n 180) 186 Imad A. Moosa, Good Regulation, Bad Regulation: The Anatomy of Financial Regulation (Palgrave Macmillan 2015) 7 187 ibid 188 Ogus (n 175) 3 189 ibid 69-73 190 Saul Levmore, ‘From Cynicism to Positive Theory in Public Choice’ (2002) 87 Cornell L Rev 375 191 Brian R. Cheffins, Company Law: Theory, Structure, and Operation (Oxford University Press 2000) 178 192 E.J. Misham, Welfare Economics: An Assessment (North-Holland 1969)

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Regulatory capture can be seen as a form of political corruption whereby the regulatory

agencies, apparently acting in the public interest, instead advance the interests of the

industry they are charged with regulating.193 These ‘captured agencies’ can sometimes

prove worse than no regulation as they wield the authority of the government.194 It is a

form of government failure that enables the regulated firms to act in a way that is

injurious to the public.195

The financial services are complex and, as part of policy, the regulators are required to

consult the financial institutes to allow them to present their ideas and offer their

expertise.196 Furthermore, it is widely accepted that financial institutes and banking

associations exercise an excessive amount of control, thus the capture of the

regulatory agencies may not be a far-fetched idea.197

The consequences of a captured financial sector differ from other captured industries.

Smaller financial institutes, with less resources to manage compliance, may wish for

de-regulation in order to have a ‘level playing field’.198 On the other hand, large

incumbent firms are more likely to push for stricter regulation. This is because

regulation works as a form of barrier to entry that inhibits competition from smaller or

foreign financial institutions.199 The intent of the larger firms is often masqueraded

under the reasoning that stricter regulations prevent isolated incidents by the more

193 Moosa (n 186) 8 194 Michael Levine and Jennifer L. Forrence, ‘Regulatory Capture, Public Interest, and the Public Agenda: Toward a Synthesis’ (1990) 6 JL Econ & Org 167 195 Moosa (n 186) 8 196 Hardy (n 44) 197 Manolis Kalaitzake, ‘Political Capture by the Financial Industry’ (College of Europe) <https://www.coleurope.eu/sites/default/files/research-paper/gclc_working_paper_02-09_-_daniel_sokol.pdf> accessed 18 April 2016 198 Stefano Pagliari, Making Good Financial Regulation (Grosvenor House Publishing 2012) 32 199 D. Daniel Sokol, ‘Limiting Anti-Competitive Government Interventions That benefit Special Interests’ <https://www.coleurope.eu/sites/default/files/research-paper/gclc_working_paper_02-09_-_daniel_sokol.pdf> accessed 19 April 2016

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reckless financial institutes, affecting the confidence of the public in the financial sector

as a whole.200

2.4 Concepts of Compliance in the Financial Services

When considering the more recent, practical application of regulations, it is important to

regard the concepts of regulatory compliance. Since around 1990, most European

regulatory regimes applied a ‘principles-based’ approach to regulation of the financial

services.201 The FSA in particular led the advocacy of its use in the UK, 202 a country

known for its ‘light-touch’ regulation.203 Principles-based regulation moved away from

detailed and prescriptive rules and instead relied upon a high-level, broadly stated set

of principles and standards by which regulated firms should conduct their business.204

The rationale behind the principles-based approach is that firms and their management

are better placed than the regulators to determine what actions are required within the

business to meet their regulatory aims.205 The approach gave firms more flexibility,

allowing them to better respond to the constantly changing financial markets.206 Placing

more power in the firms to regulate themselves meant an “intensified reliance” on the

senior management of the regulated firms.207

200 Phillip Inman and Angela Balakrishnan, ‘Crisis of Confidence Could Engulf Banking Sector After Northern Rock’s Emergency Loan’ The Guardian (London, 14 September 2007) <http://www.theguardian.com/business/2007/sep/14/money1> accessed 18 April 2016 201 Black (n 76) 91 202 Financial Services Authority, ‘Principles-Based Regulation: Focusing on the Outcomes that Matter’ (April 2007) <http://www.fsa.gov.uk/pubs/other/principles.pdf> accessed 13 April 2016 203 Jill Treanor, ‘Farewell to the FSA – and the Bleak Legacy of the Light-Touch Regulator’ The Guardian (London, 24 March 2013) <http://www.theguardian.com/business/2013/mar/24/farewell-fsa-bleak-legacy-light-touch-regulator> accessed 20 April 2016 204 Julia Black, Martyn Hopper and Christa Band, ‘Making a Success of Principles-Based Regulation’ (May 2007) <https://www.lse.ac.uk/collections/law/projects/lfm/lfmr_13_blacketal_191to206.pdf> accessed 15 April 2016 205 Herbert Smith LLP, ‘Principles-Based Regulation: In Principle and in Practice’ (February 2007) <https://www.lse.ac.uk/collections/law/projects/lfm/5924%20PBR%20Brochure%20D3.pdf> accessed 13 April 2016 206 Financial Services Authority (n 202) 207 Sir Callum McCarthy, Chairman of the FSA, speaking at the Financial Services Skills Council 2nd Annual Conference on 31 October 2006; See Herbert Smith LLP (n 205)

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At this time, the US was using a more rule-based approach, which was criticised by

Europeans because it interpreted the rules the way they were laid down in law, rather

than using any judgement in their interpretation. However, removing this element of

judgement is exactly why the US thought their approach was superior, because it

resulted in more consistent regulation across the board.208

‘Driven by hubris, greed and stupidity bankers led the nation to charge off the

cliff’.209

The 2008 financial crisis led to global scrutiny of compliance in the financial sector.

There was increased pressure placed on the regulatory bodies to prevent an economic

catastrophe on such a scale happening again.210 This meant a complete about-face in

attitudes to compliance within financial services, gone were the lax days where

‘maintaining a satisfactory set of systems was determined by whether a set of rules’ or

principles were being complied with’.211

There is now a general consensus by bodies tackling money laundering, particularly

within regulators of the financial services, that a risk-based approach to regulation is

the most appropriate.212 ‘Risk-based’ regulation, in its simplest form is ‘problem-based

regulation: regulators seek to anticipate problems and deal with them’.213 It is, some

would say, a quite logical concept whereby regulatory activity is prioritised in line with

the perceived risk of each area.

208 Brigitte Burgemeestre, Joris Hulstjn and Yao-Hua Tan, ‘Rule-Based Versus Principle-Based Regulatory Compliance’ <http://homepage.tudelft.nl/w98h5/Articles/jurix.pdf> accessed 20 April 2016 209 John Doe, American Betrayal (XLIBRIS 2013) 185 210 Robert J. Shiller, The Subprime Solution: How Today’s Global Financial Crisis Happened, and What to Do About It (Princeton University Press 2008) 10 211 Stuart Bazley, Andrew Haynes and Tony Blunden, Risk-Based Compliance (Butterworths 2001) 1 212 Financial Action Task Force, ‘Guidance for a Risk-Based Approach: The Banking Sector’ (October 2014) <http://www.fatf-gafi.org/media/fatf/documents/reports/Risk-Based-Approach-Banking-Sector.pdf> accessed 29 March 2016 213 Julia Black, Martin Lodge and Mark Thatcher, Regulatory Innovation, (Edward Elgar Publishing 2006) 156

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The risk-based frameworks constructed by the financial services regulators consist of

relatively abstract and generalised principles. It is then left to the regulated firms to

supplement these with more detailed internal procedures and guidance.214 This

approach recognises that the financial institutions themselves will be the most qualified

to assess the risks because it is their system, products and customers.215 This risk-

based framework developed by financial services regulators is unique, the degree of

harmonisation and overall detail is unprecedented by the standards of any other

integrated regulator.216

2.5. Conclusive Remarks

The international standards suggest an effective AML regime will establish strong

disincentives from using the financial services as facilitators of illicit activities. The

weight of the sentence for a money laundering offence is the most obvious deterrence

to potential money launderers. Encouraging transparency by collecting information on

your customer and notifying the authorities of any suspicious behaviour, has also

proved a crucial way to deter money launderers.217 Furthermore, the ease for

government agencies to recover these funds, with or without a criminal conviction,

demonstrates the effectiveness of an AML regime, both before and after the funds

have been laundered.

Under the economic theories of regulation, an effective AML regime will have public

agencies implementing regulation in the public interest, as opposed to the interests of

the financial institutes they are regulating. When considering the concepts of regulatory

214 ibid 215 Philip Robinson, The Risk-Based Approach to AML: an Opportunity Not to be Missed (2006) 134 Money LB 1 216 Black, Lodge and Thatcher (n 213) 157 217 Ian Carrington and Heba Shams, ‘Seminar on Current Developments in Monetary and Financial Law’ (International Monetary Fund, October 2006) <https://www.imf.org/external/np/seminars/eng/2006/mfl/cs.pdf> accessed 8 April 2016

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compliance, it is apparent the risk-based approach is now heavily embedded within

most AML regimes, after being endorsed on the international stage by FATF, the Basel

Committee and the Wolfsberg Committee among others.218 The transition to the risk-

based approach needs to be analysed to see whether it has led to more effective AML

regimes, or if it has even been implemented at all.

218 The ‘Basel Committee on Banking Supervision’ is a meeting between the central banks of the G10 countries in an attempt to facilitate co-operation of banking regulation. The ‘Wolfsberg Group’ is an association of thirteen global banks who develop guidance on AML procedures known as the ‘Wolfsberg Principles’; See also The Wolfsberg Group, ‘Guidance on a Risk Based Approach for Managing Money Laundering Risks’ (2006), <http://www.wolfsberg-principles.com/pdf/standards/Wolfsberg_RBA_Guidance_(2006).pdf> accessed 6 April 2016

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Chapter 3: The Effectiveness of AML Legislation and Regulations in

the UK

3.1 Introduction

This chapter will consider the current AML regime implemented in the UK, which

includes the various sources of European law. The effectiveness of the regime will be

analysed using the benchmarks identified in the previous chapter. There will be

consideration of the different money laundering offences, the AML measures within

financial institutions and finally the methods by which the criminal proceeds can be

recovered.

3.2 European Law

Formed in the aftermath of the Second World War, the European Union (EU) was

originally known as the European Economic Community, suggesting it was created with

financial benefits in mind. Its function at that time was merely to encourage trade

between Member States which would, in theory, avoid future conflicts on such a scale.

To many this was a step in the right direction towards lasting peace in Europe, a

continent marred by a history of conflict.219 Through the process of integration, the EU

has gone on to become a political partnership with powers that transcend national

boundaries or governments.220

One of the four fundamental freedoms within the EU, entrenched in the Treaty on the

Functioning of the European Union,221 is the free movement of capital.222 The free

movement of capital ‘permits individuals and legal entities of a Member State to freely

219 European Union, ‘The EU in Brief’ <http://europa.eu/about-eu/basic-information/about/index_en.htm> accessed 1 March 2016 220 Mark A. Pollack, The Engines of European Integration: Delegation, Agency and Agenda Setting in the European Union (Oxford University Press 2002) 4 221 Consolidated Version of the Treaty on the Functioning of the European Union [2012] OJ C326/47 222 Case-C483/99 Commission V France [2002] ECR I-4782; See also Catherine Barnard, The Substantive Law of the EU: The Four Freedoms, Fourth Edition, (4th edn, Oxford University Press 2013) 579

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export their assets to another EU country, unhampered by any legal barriers’.223.The

EU’s Financial Services Action Plan is one of the most relevant developments to AML,

with the aim being to create a single market in financial services which aimed to raise

corporate finance within Europe on a cost efficient basis.224 This means once dirty

money enters into the EU financial system, it can pass almost effortlessly between

Member States.

As a full member of FATF,225 the EU not only seeks to implement the

Recommendations into European law, but actively participates in the development of

the international AML standards.226 The binding statutory instruments available to the

EU, such as Treaties, Regulations and Directives, together with the EU’s initial

understanding of the Recommendations, means it should be able to accurately and

effectively implement consistent AML measures throughout its Member States.227

Treaties are considered a primary legislative source because they form the backbone

of the EU legal framework and all other forms of legislative sources are regarded as

having a ‘secondary nature’. 228 Treaties are ‘directly applicable’ which means that, from

the day the Treaty is ratified, it will supersede any national law of the Member States

that is contrary to the Treaty provisions.

These secondary legislative sources are adopted by the EU to fulfil a specific function

in the development of Union law. This means that all secondary legislation authority

‘will derive from Treaty articles empowering the Institutions to legislate and is known as

223 Matthias Haentjens and Pierre de Gioia-Carabellese, European Banking and Finance Law (Routledge, 2015) 6 224 Stuart Bazley and Dr Andrew Haynes, Financial Services Authority Regulation and Risk-based Compliance (2nd edn, Tottel Publishing 2006) 75 225 Financial Action Task Force, ‘FATF Members and Observers’ <http://www.fatf-gafi.org/about/membersandobservers/> accessed 17 April 2016 226 European Commission, ‘Frequently asked questions: EU fight against money-laundering and terrorist financing moves up a gear: European Commission takes action to meet the revised international standards adopted by the Financial Action Task Force’ (16 February 2012) <http://europa.eu/rapid/press-release_MEMO-12-112_en.htm> accessed 17 April 2016 227 Booth and others (n 51) 12 228 Haentjens and Gioia-Carabellese (n 223) 5

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the “legal base”’.229 Regulations are the most effective form of secondary legislation

because they are also ‘directly applicable’.230

The EU has demonstrated it prefers to implement FATF’s Recommendations

throughout its Member States by passing EU Directives,231 these Directives have their

own legal status and compelling authority.232 The main way to distinguish Directives

from the previous EU statutory instruments is that they are not ‘directly applicable’; this

said, it is still mandatory for each Member State to transpose a Directive into national

law within a set time frame.

The First Money Laundering Directive (1MLD)233 was the initial application of the FATF

Recommendations, restricted to the proceeds of drug trafficking through financial

institutions. The objective was ‘to impose duties on those credit and financial

institutions which are likely to be asked to process the proceeds of crime’.234

Importantly, it also provided the common standard for money laundering offences to be

criminalised.

The Second Money Laundering Directive (2MLD)235 merely amended 1MLD, extending

the scope of money laundering from the proceeds of drug trafficking, to a number of

predicate offences covered by the umbrella term ‘serious crime’.236 There was sporadic

and inconsistent application of 2MLD by Member States which is a consequence of the

229 Karen Davis, Understanding European Union Law (4th edn, Routledge 2011 ) 60 230 Consolidated Version of the Treaty on the Functioning of the European Union [2012] OJ C326/47, art 288 231 ibid 232 Booth and others (n 51) 12 233 Council Directive 91/308/EEC of 10 June 1991 on the prevention of the use of the financial system for the purpose of money laundering [1991] OJ L166/77 234 Birks (n 35) 98 235 Directive 2001/97/EC of the European Parliament and of the Council of 4 December 2001 amending Council Directive 91/308/EEC on prevention of the use of financial system for the purpose of money laundering – Commission Declaration [2001] OJ L344/44 236 ‘Serious crime’ was defined in Joint Action 98/699/JHA of 3 December 1998 adopted by the Council on the basis of Article K.3 of the Treaty on European Union, on money laundering, the identification, tracing, freezing, seizing and confiscation of instrumentalities and the proceeds from crime [1998] OJ L333/1

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perceived lack of clarity in the definitions it used.237 The UK’s AML regime is less

effective if the implementation of European law is inconsistent across the board.

The Third Money Laundering Directive (3MLD)238 repealed the previous two Directives

to form a new text, though there were no substantial divergences in AML

procedures.239 However, it should be noted that this was the first occasion European

law expressly advised the use of a risk-based approach.240 The most recent piece of

legislation from the EU, the Fourth Money Laundering Directive (4MLD),241 was

approved in June 2015, in response to the latest FATF Recommendations published in

2012. The UK will need to transpose the Fourth Directive into national law within 2

years. It will repeal 3MLD, with the main focus being on clarifying areas such as; the

risk-based approach, CDD, PEPs and ongoing monitoring of customers.242

The UK’s AML regime is directly affected by whether European law is consistently

implemented by other Member States. This is because countries, such as the UK, that

enforce strict compliance, ‘are effectively subsidising efforts elsewhere, as their

intelligence is disseminated to less strictly compliant countries’.243 This also means

237 British Institute of International and Comparative law (n 48) 238 Directive 2005/60/EC of the European Parliament and of the Council of 26 October 2005 on the prevention of the financial system for the purpose of money laundering and terrorist financing [2005] OJ L309/15 239 Paula Reid and Peter Law, ‘What Does the Third Money Laundering Directive Mean for Compliance in Ireland?’ (The Anti-Fraud Network, 1 September 2007) <http://antifraudnetwork.com/2007/09/what-does-the-third-money-laundering-directive-mean-for-compliance-in-ireland/> accessed 12 April 2016 240 British Institute of International and Comparative law (n 48) 241 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 [2015] OJ L141/73 242 Deloitte, ‘The Fourth EU Anti Money Laundering Directive’ (2015) <https://www2.deloitte.com/content/dam/Deloitte/ie/Documents/FinancialServices/investmentmanagement/ie_2015_The_Fourth_EU_Anti_Money_Laundering_Directive_Deloitte_Ireland.pdf> accessed 5 April 2016 243 James Dean, ‘UK Unfairly Burdened by Money Laundering Regulations’ The Law Society Gazette (London, 19 February 2009) <http://www.lawgazette.co.uk/news/uk-unfairly-burdened-by-money-laundering-regulations/49509.fullarticle> accessed 21 April 2016

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financial institutions in the UK are at a competitive disadvantage with financial

institutions in countries that employ less draconian AML regimes.

Furthermore, it is easier for countries to coordinate efforts to retrieve the proceeds of

crime through mutual legal assistance when there are less gaps between their

legislation and regulations. The EU needs to ensure that it has acknowledged the

failures of previous directives, particularly the varied approaches taken in 2MLD,244

when overseeing the transposing of 4MLD by Member States.

3.3 UK Money Laundering Offences

The UK’s strategy and attitude towards money laundering was reviewed in a 1998

Home Office Working Group report.245 After reviewing the failures of the current

legislation, the government passed the Proceeds of Crime Act 2002 (POCA) and the

subsequent Money Laundering Regulations 2007 (MLR).246

There are three substantive money laundering offences under POCA, on the basis of

the Vienna and Palermo conventions; concealing, arrangements and acquisition.247

The arrangements offence is the most relevant to the financial institutions that either,

wittingly or unwittingly, launder on behalf of others.248 As this is in compliance with

FATF R.1, it can be considered an effective part of the UK AML regime.

These are triable-either way offences, 249 which is also an effective element of the UK

AML regime because minor offences can be dealt with through the more efficient

244 Peter Snowdon and Simon Lovegrove, ‘Money Laundering Regulations 2007’ (2008) 54 COB 1 245 Great Britain Home Office Organised and International Crime Directorate, Home Office Working Group on Confiscation: Third Report: Criminal Assets (HM Stationery Office 1998) 1; See also Simon Young, Civil Forfeiture of Criminal Property: Legal Measure for Targeting the Proceeds of Crime (Edward Elgar Publishing 2009) 18 246 Gallant (n 31) 109 247 Proceeds of Crime Act 2002, ss 327-329 248 Crown Prosecution Service (n 158) 249 David Omerod and Karl Laird, Smith and Hogan’s Criminal Law (14th edn, Oxford University Press 2015) 35

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magistrates’. If the magistrates’ sentencing powers do not suffice for the severity of the

crime,250 the court will ‘decline jurisdiction’ and transfer to the Crown Court for trial.251

This avoids over burdening the Crown Court with a time consuming case load, allowing

them to concentrate their efforts on the more serious offenders. For a conviction of a

substantive money laundering offence, the Crown Court has the discretion to sentence

up to 14 years imprisonment, an unlimited fine, or both.252

It was held in Ahmad v HM Advocate253 that there was nothing in the language of

POCA that suggested money laundering was tied to a certain type of property resulting

from a certain set of offences.254 ‘Criminal property’ is defined as constituting a

person’s benefit from criminal conduct.255 ‘Criminal conduct’ is, in turn, defined as

anything considered a criminal offence under UK law.256

Money laundering offences under POCA can therefore be linked to the benefits from all

forms of crime rather than just ‘serious crimes’. This broader interpretation of money

laundering makes the UK a more effective AML regime because it goes beyond what is

required by international standards and European law.

The Ministry of Justice have revealed that in 2014, of the 2,095 money laundering

cases proceeded against, only 1,143 were successfully convicted and 60 obtained

250 Legal Aid, Sentencing and Punishment of Offenders Act 2012, s 85 provides that any summary conviction in the magistrates’ court, for an offence occurring after 12 March 2015 can be subject to an unlimited fine. Any offences prior to this date must regard the previous legislation for sentencing, usually capped at £5,000. 251 FindLaw UK, ‘What is Meant by “Summary Offence,” “Triable Either Way” and “Indictment”?’ <http://findlaw.co.uk/law/criminal/what-is-meant-by-summary-offence-triable-either-way-and-indictment.html> accessed 29 March 2016 252 Proceeds of Crime Act 2002, s 334 253 Ahmad v HM Advocate [2009] HCJAC 60; See also R v Anwoir [2009] 1 WLR 985 (CA) 254 Proceeds of Crime Act 2002, s 340 255 Proceeds of Crime Act 2002, s 340(3) 256 Proceeds of Crime Act 2002, s 340(2)

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discharges. This resulted in a total of £7,779 in fines and £162,356 paid out in

compensation to victims.257

This shows that, although from a legal perspective the UK has an effective AML regime

through tough substantive money laundering offences, in application the UK has

proven to be somewhat ineffective. Almost half of the cases are still being proceeded

against after presumably being tied up in convoluted litigation. This is further

exemplified by the fact that there has been a steady decrease in money laundering

cases proceeded against and successful convictions since 2010.258

Moreover, the amount recovered in fines and compensation is a drop in the water

compared to the hundreds of billions of US dollars that the NCA estimates are being

laundered through UK financial institutes and their subsidiaries each year.259 It should

be noted that these figures do not include the amount of criminal assets retrieved

through the government’s asset recovery procedures, which will be discussed later in

this chapter.

3.4 AML in UK Financial institutes

UK law not only criminalises the overt processes designed to disguise the illegal origins

of criminal property, but also imposes criminal liability for employees of financial

institutes that fail to comply with AML requirements. In particular, these relate to the

reporting, monitoring and CDD requirements outlined in the FATF Recommendations.

257 Ministry of Justice, ‘Criminal Justice Statistics Outcomes by Offence Data Tool’ (21 May 2015) <https://www.gov.uk/government/statistics/criminal-justice-system-statistics-quarterly-december-2014> accessed 12 April 2016 258 Ibid 259 National Crime Agency, ‘National Strategic Assessment of Serious and Organised Crime’ (23 June 2015) <http://www.nationalcrimeagency.gov.uk/publications/560-national-strategic-assessment-of-serious-and-organised-crime-2015/file> accessed 19 February 2016

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A conflict arises between the SARs reporting requirement under FATF R.20 and

financial institution secrecy laws.260 To resolve this, POCA provides an ‘authorised

disclosure’ defence,261 which is usually coupled with a request to the NCA for consent.

Consent allows the financial institute to proceed with a transaction that would usually

give rise to a substantive money laundering offence.262 Letting the transaction take

place gives law enforcement agencies the chance to investigate the source of the

funds without alerting the potential money launderer.

Faults have been highlighted with the consent regime under SARs and it appears to be

working ineffectively in the AML regime. Many firms abuse the system in place by filing

a consent in order to obtain legal protection and then, in effect, offloading the due

diligence for the transaction to law enforcement.263

Further to the defence for ‘authorised disclosure’, there is an offence for ‘failure to

disclose’ if a person does not ‘make the required disclosure as soon as is

practicable’.264 Financial institutes must also be careful not to notify the client that a

SAR has been filed or may face a ‘Tipping off’ offence. 265 For a conviction of either of

these disclosure-related offences, the courts have the discretion to sentence up to 5

years imprisonment, an unlimited fine, or both.266

In the NCA’s annual report of 2015 on the SARs regime, there had been an increase of

7.82% of total SARs reported. 267 Whether this reflects an increase in the effectiveness

260 National Crime Agency, ‘Submitting a Suspicious Activity Report (SAR) Within the Regulated Sector’ (February 2015) <http://www.nationalcrimeagency.gov.uk/publications/517-submitting-a-suspicious-activity-report-sar-within-the-regulated-sector/file> accessed 28 March 2016 261 Proceeds of Crime Act 2002, s 338 262 National Crime Agency, ‘Obtaining Consent from the NCA under Part 7 of the Proceeds of Crime Act (POCA) 2002 or under Part 3 of the Terrorism Act (TACT) 2000’ (February 2015) <http://www.nationalcrimeagency.gov.uk/publications/515-obtaining-consent-from-the-nca-1/file> accessed 28 March 2016 263 Money Laundering Bulletin, ‘UK SARs – Another Year-on-Year Rise’ (2016) 232 Money LB 4 264 Proceeds of Crime Act 2002, s 330 265 Proceeds of Crime Act 2002, s 333 266 Proceeds of Crime Act 2002, s 334 267 National Crime Agency (n 121)

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of the SARs system to detect money laundering, or just an increased understanding of

its functioning with the finance sector is non-conclusive. However, both suggest a more

effective approach to AML in this area.

There is a clear distinction between the treatment of reporting requirements under

POCA and the CDD and record-keeping requirements for financial institutions268 under

MLR.269 The sentencing powers for breaches under POCA provide for much heavier

sentences than those under MLR.

A criminal conviction under an MLR offence can be issued in conjunction with a civil

penalty decided by the appropriate regulatory body,270 which in most circumstances will

be the FCA.271 Reg. 45 MLR provides that failure to comply with CDD or record-

keeping requirements can lead to a person being liable for an unlimited fine under a

summary conviction. Under a conviction of indictment, he can be sentenced up to 2

years imprisonment, an unlimited fine, or both.272

There are no such civil penalties available under a breach of the POCA reporting

requirements. It can be argued that combining the civil penalties procedure under Reg.

42(1) with Reg. 20(1) failure to ‘establish and maintain appropriate and risk-sensitive

policies and procedures’, provides for an ad hoc method of issuing civil penalties for

breach of reporting requirements.273

By criminalising breaches of reporting, monitoring and CDD duties, the UK has not only

demonstrated itself to be dedicated to complying with the FATF Recommendations, it

268 Money Laundering Regulations 2007, SI 2007/2175, reg 3(1)(b) 269 Miriam Goldby, Anti-Money Laundering Reporting Requirements Imposed by English Law: Measuring Effectiveness and Gauging the Need for Reform, (2013) 4 JBL 367 270 Money Laundering Regulations 2007, SI 2007/2175, reg 42(1) 271 Money Laundering Regulations 2007, SI 2007/2175, reg 42(4) 272 Money Laundering Regulations 2007, SI 2007/2175, reg 45 273 Goldby (n 269)

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has shown itself to be one of the more effective AML regimes, as most countries only

enforce civil penalties for breaches.

The Joint Money Laundering Steering Group aims to promulgate good AML practices

and contributes to a more overall effective AML regime by assisting financial intuitions

with the interpretation of the Money Laundering Regulations.274 The main way it

achieves this is through regularly updated industry Guidance Notes.275 Although the

Guidance Notes ‘are just what they say on the box – guidance – you would be rather

foolish to ignore them’. 276

This is because regulators with the power to bring prosecutions regard observance of

the Guidance Notes as an indicator that a firm complies with their own AML

requirements. Moreover, once the Guidance Notes are approved by the Treasury,277

they become a persuasive authority for the courts when considering whether a

defendant complied with AML measures in a money laundering prosecution.278

From an economic perspective, the theory of capture extends to the idea that

government decision making itself can be captured. The notion that this happens

through under-the-table bribes of public officials, although not completely unfounded, is

still a fallacy.279 The more likely reasoning is the strength of the banking lobbies280 or

the availability of jobs for regulatory officers that demonstrate appreciation for the

challenges of the financial industry.281 This has the potential to have resoundingly

274 Joint Money Laundering Steering Group, ‘What is JMLSG?’ <http://www.jmlsg.org.uk/what-is-jmlsg> accessed 8 March 2016 275 Joint Money Laundering Steering Group, ‘JMLSG Guidance’ <http://www.jmlsg.org.uk/industry-guidance/article/jmlsg-guidance-current> accessed 17 April 2016 276 Mills (n 155) 12 277 Joint Money Laundering Steering Group (n 275) 278 Proceeds of Crime Act 2002, s 330(8) 279 Jean-Jacques Laffont and Jean Tirole, ‘The Politics of Government Decision-Making: A Theory of Regulatory Capture’ (1991) 106 Quarterly Journal of Economics 1089 280 Cheffins (n 191) 181 281 Gordon Adams, The Politics of Defence Contracting: The Iron Triangle (Transaction Publishers 1981) 82

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worse repercussions on the effectiveness of an AML regime than the capture of the

regulators.

In the wake of the 2008 financial crisis, the UK has become one of the most heavily

regulated and aggressively enforced nations in Europe.282 Yet under the government’s

Principles of Regulation, regulations should only be applied in circumstances where

alternatives such as self-regulation and non-regulatory approaches do not achieve the

desired outcome.283 It is possible that under the guise of the financial crisis, the larger

firms and resurgent lobbyists have been able to influence the government to over-

regulate the industry, contributing to an ineffective AML regime.284

The effectiveness of the risk-based approach is difficult to gauge because of the

problems, as anticipated, in the duration it has taken to implement.285 Whilst some

financial institutes have dedicated significant time and resources to its implementation,

others have made no progress towards implementing the approach at all.286 This

appears to be due to a lack of understanding as how to translate their assessment of

risks into specific monitoring actions.287

282 Brooke Masters, ‘Regulation: Wariness Over EU’s Level Playing Field’ The Financial Times (London, 9 May 2012) <http://www.ft.com/cms/s/0/acbee398-8f9b-11e1-98b1-00144feab49a.html#axzz46khC11mH> accessed 20 April 2016 283 National Audit Office, ‘A Short Guide to Regulation’ (July 2015) <https://www.nao.org.uk/wp-content/uploads/2015/08/Regulation-short-guide.pdf> accessed 20 April 2016; See also HM Government, ‘Better Regulation Framework Manual: Practice Guidance for UK Government Officials’ (March 2015) <https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/468831/bis-13-1038-Better-regulation-framework-manual.pdf> accessed 19 April 2016 284 Ben Chu, ‘Resurgent Banking Lobby Sets Regulatory Alarm Bells Ringing’ The Independent (London, 19 October 2015) <http://www.independent.co.uk/news/business/news/resurgent-banking-lobby-sets-regulatory-alarm-bells-ringing-a6699286.html> accessed 17 April 2016 285 Michael Foot, ‘Delivering Cost-Effective Regulation Through Risk-Based Supervision’ (1999) 1 JIFM 89 286 HM Treasury (n 53) 287 ibid

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3.5 Asset Recovery

Under POCA288 and guidance from the Attorney General, 289 the NCA and specified

prosecuting authorities are able to exercise four types of asset recovery powers, each

with particular features that contribute to the effectiveness of the AML regime. Aside

from these, restraint orders can be made at any stage of the investigation or criminal

proceedings to freeze the assets of the potential money launderer.290 Since June 2014,

asset recovery has been handled by CPS Proceeds of Crime, a specialist team

responsible for restraining assets before money laundering prosecutions and

confiscation of assets after convictions.291

‘Confiscation’ orders are the main method used by the government to recover criminal

proceeds.292 Confiscation orders can be made following the conviction of a criminal

offence. The court must consider a number of legislative triggers to help decide

whether the defendant led a ‘criminal lifestyle’. If the criminal lifestyle requirements are

satisfied, the court applies assumptions293 about the property that came under the

defendant’s possession over the past six year to calculate the ‘recoverable amount’.294

It is not uncommon for a confiscation order to be a considerably larger sum than the

proceeds of the actual crime for which the offender was convicted.295 Though it could

be argued this is a miscarriage of justice, the risk of losing more than the proceeds of

288 Proceeds of Crime Act 2002, s 2A 289 Attorney General’s Office, ‘Asset Recovery Powers for Prosecutors: Guidance and Background Note 2009’ (November 2012) <https://www.gov.uk/guidance/asset-recovery-powers-for-prosecutors-guidance-and-background-note-2009> accessed 1 April 2016 290 Proceeds of Crime Act 2002, ss 40-47 291 Crown Prosecution Service, ‘Asset Recovery’ (February 2016) <http://www.cps.gov.uk/your_cps/our_organisation/asset_recovery.html> accessed 13 April 2016 292 National Audit Office, ‘Confiscation Orders’ (17 December 2013) <https://www.nao.org.uk/wp-content/uploads/2013/12/10318-001-Confiscation-Book.pdf> accessed 13 April 2016 293 Proceeds of Crime Act 2002, s 10 294 Proceeds of Crime Act 2002, s 7 295 Karen Bullock and others, ‘Examining Attrition in Confiscating the Proceeds of Crime’ (July 2009) <https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/116617/horr17-report.pdf> accessed 14 April 2016

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the predicate offence, further deters criminals from laundering through UK financial

intuitions and makes for a more effective AML regime.

To encourage offenders to be prompt, interest of 8% per annum296 will be due on the

confiscation order if payment is not made by the due date,297 with no discretion for the

courts to waive the payment.298 Failure to make full payment of the confiscation order

may also result in a default sentence of imprisonment,299 though sentencing is still at

the judge’s discretion.300 It should be noted that confiscation orders remain outstanding

after serving the default sentence, which avoid criminals with high value assets opting

for a jail sentence to maintain their funds.

This said, there was only £155 million collected in 2014-15, leaving a total outstanding

debt from confiscation orders of £1.61 billion.301 Furthermore, from this outstanding

debt, it is thought that only £203 million is realistically collectible.302 Despite being

considered the best tool in the government’s asset recovery repertoire, these figures

demonstrate the difficulties the UK has in recovering criminal proceeds through

confiscation orders and portrays an ineffective tool in the AML regime.

‘Civil recovery’ orders provide the courts with a form of asset forfeiture without the

requirement for there to be a criminal conviction.303 The court brings civil proceedings

against the property obtained through unlawful conduct rather than the individual

themselves. This is useful when the person in possession of the property was not

296 Judgements Act 1838, s 17 specifies the rate of interest and is not frequently changed. 297 Proceeds of Crime Act 2002, s 12 298 Hansford v Southampton Magistrates’ Court [2008] EWHC 67 299 Powers of Criminal Courts (Sentencing) Act 2000, s139 (as amended by the Serious Crime Act 2015, s 10) 300 R v Pigott [2009] EWCA 2292 301 National Audit Office, ‘Confiscation Orders: Progress Review’ (11 March 2016) <https://www.nao.org.uk/press-releases/confiscation-orders-progress-review/> accessed 21 April 2016 302 HM Courts & Tribunals Service, ‘Trust Statement 2014-15’ (16 July 2015) <https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/446101/hmcts-trust-statement-2014-15.pdf> accessed 21 April 2016 303 Proceeds of Crime Act 2002, s 240

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associated with the crime but it would still be in the public interest to recover the

property without a conviction.304 However, this method of asset recovery is only

applicable within the jurisdiction of the UK and neglects the transnational nature of

money laundering.305

As this is a civil matter, the standard of proof is on the balance of probabilities. The

property can be recovered on the basis the court believes it is more likely the proceeds

of unlawful conduct than not. Rather than pinpointing the exact crime the property was

obtained through, it will be sufficient to show it is attributable to a particular predicate

offence.306 The courts cannot use civil recovery merely because a defendant cannot

identify lawful income to justify their lifestyle, however, it does allow them to infer that

the source was likely to be unlawful.307

Although a non-conviction based method of asset recovery is in compliance with FATF

R.4, in its application of civil recovery, the UK AML regime has been decidedly

ineffective. Proceedings can often become contentious and result in drawn-out and

costly affairs for the government. This is particularly likely with high-end money

laundering as many of the wealthy criminals are able to employ expensive solicitors to

tie the prosecutor up in litigation.308

‘Cash forfeiture’ is a quick and effective procedure through the magistrates’ court that

allows for the recovery of criminal cash without the need for a conviction.309 For a party

to prevent the cash from being seized, they must be able to prove to the court that the

cash came from a legitimate source.310

304 Richard Alderman, ‘Civil Recovery Orders’ (8 July 2009) <https://www.youtube.com/watch?v=qNAW9zEVwNE> accessed 26 March 2016 305 Perry v SOCA [2012] UKSC 35 306 Attorney General’s Office (n 289) 307 Director of the Assets Recovery Agency v Green [2005] EWHC 3168 308 Attorney General’s Office (n 289) 309 Proceeds of Crime Act 2002, s 298 310 Attorney General’s Office (n 289)

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Cash forfeiture is usually an alternative to criminal proceedings although, under POCA,

it is an offence to be in possession of criminal property.311 Therefore, following a

conviction for a money laundering offence, a cash seizure can create potential for a

more substantial confiscation order further down the line.312 As this form of asset

recovery allows for hasty recovery of criminal proceeds and can lead to larger

confiscation orders at a later date, it is arguably an effective tool in the UK AML regime.

‘Criminal taxation’ is the final power granted by POCA and also requires no criminal

conviction.313 It varies from the previous recovery options because it does not result in

criminal property physically being recovered. 314 Uniquely, this allows a tax to be

charged on the person’s income, profits or gains where there are reasonable grounds

to suspect that they arise or accrue from criminal conduct. This is regardless of

whether the criminal conduct is on the part of that person or another.315

Only the NCA Director is entitled to exercise the criminal taxation powers under the

legislation but this does not interfere with HMRC’s usual powers in respect of

taxation.316 Both the NCA and HMRC can issue tax assessments to disrupt tax payers

they believe could be linked to some form of criminal activity without any inference

given to the person in question that there is a suspicion their income or gain is the

result of crime.317 Criminal taxation is an innovative form of asset recovery used by the

UK and improves the overall effectiveness of the AML regime.318

311 Proceeds of Crime Act 2002, s 329 312 Attorney General’s Office (n 289) 313 Proceeds of Crime Act 2002, pt 6 314 Attorney General’s Office (n 289) 315 Proceeds of Crime Act 2002, s 317 316 HM Treasury (n 53) 317 Attorney General’s Office (n 289) 318 Nicola Shaw, ‘Tax and the Proceeds of Crime’ (Gray’s Inn Tax Chambers, April 2003) <http://taxbar.com/documents/tax_proceeds_crime_ns_000.pdf> accessed 18 April 2016

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The CPS argues that POCA has transformed the criminal justice system’s strategy to

recovering the proceeds of crime and provided for a more effective AML regime.319 This

is on the grounds that, prior to the Act, criminal justice agencies recovered a combined

total of around £25 million a year in criminal assets.320 After application of the changes

to asset recovery laid down in POCA, 321 the amount recovered in criminal assets has

often exceeded £150 million.322

Though this reflects an improvement in effectiveness since POCA, it does not

necessarily evidentiate the idea that the UK is using these new powers to their full

potential, or even effectively at all. When looking beyond the superficial comments of

those with a vested interest, such as the CPS, the effectiveness of asset recovery can

be seen in a different light.

In 2012-13 approximately 26p in every £100 of criminal proceeds was recovered

through confiscation orders. After including the other forms of assets recovery, this

rose to a mere 35p. This was attributed to information failure between government

departments, outdated IT systems and ineffective sanctions.323 The Home Office

continues to neglect the asset recovery regime in 2015, after implementing only one of

six recommendations made by the Public Accounts Committee to improve its

success.324

319 Crown Prosecution Service, ‘CPS Asset Recovery Strategy’ (June 2014) <https://www.cps.gov.uk/publications/docs/cps_asset_recovery_strategy_2014.pdf> accessed 13 April 2016 320 Criminal Justice Joint Inspection, ‘Joint Thematic Review of Asset Recovery: Restraint and Confiscation Casework’ (March 2010) <http://www.justiceinspectorates.gov.uk/hmic/media/joint-thematic-review-of-asset-recovery-restraint-and-confiscation-casework-full-report-20100324.pdf> accessed 13 April 2016 321 R v Rezvi [2002] UKHL 1 [7]-[8]; See also R v Waya [2012] UKSC 51 [3]-[4] 322 Crown Prosecution Service (n 319) 323 National Audit Office (n 292) 324 National Audit Office (n 301)

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3.6 Conclusive Remarks

The UK’s sovereignty has been curtailed through membership of the EU and it has

partially sacrificed its decision making powers over its AML regime. Although the use of

Directives have afforded the UK the ability to choose how to implement European law,

the fact remains that it must be implemented. The upcoming ‘Brexit’ referendum is an

interesting recent development as it is scheduled for 23 June 2016, before the

transposing of 4MLD is required.325 Despite regaining sovereignty if choosing to leave

the EU, it is likely the UK’s approach will not stray from that of the EU as they both

submit to the same international standards and have close links between their financial

services.326

In the FATF follow-up report on the UK in 2009 the UK’s AML regime was found to be

in sufficient compliance with the core Recommendations, which led to its removal from

the follow-up process.327 This suggests that the UK is operating an effective AML

regime by complying with FATF’s international standards.

The UK legislative framework is theoretically effective in tacking AML as it not only

provides tough sentences for anyone convicted of a substantive money laundering

offence, but also criminalises the actions of employees of financial institutions who fail

to comply sufficiently with AML procedures. In practice, however, the UK can be

argued to be ineffective, struggling to secure convictions or use its asset recovery

options efficiently.

It is possible to argue that the over-regulation in the financial sector is because the

government or regulators have been captured and are acting in the interests of the

325 Richard Gabbertas, ‘What Does Brexit Mean?’ (2015) 146 MFG 28 326 Christopher Howarth and others, ‘Continental Shift: Safeguarding the UK’s Financial Trade in a Changing Europe’ <http://openeurope.org.uk/intelligence/economic-policy-and-trade/eu-financial-regulation/> accessed 23 April 2016 327 Financial Action Task Force, ‘Mutual Evaluation Fourth Follow-Up Report, Anti-Money Laundering and Combating the Financing of Terrorism: United Kingdom’ (October 2009) <http://www.fatf-gafi.org/media/fatf/documents/reports/mer/FoR%20UK.pdf> accessed 11 March 2016

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financial institutes. As public interest is an alternative explanation, which is at the

complete opposite end of the spectrum, there are limitations to using this theory as an

indicator of the regimes effectiveness.

Due to there not yet being enough information on the success of the risk-based

approach, it is difficult to compare its effectiveness to the previous principle-based

approach employed by the UK. The failure of the UK to correctly educate financial

institutes and ensure consistent implementation of the risk based approach does,

however, demonstrate an ineffective element of the AML regime.

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Chapter 4: An International Perspective – Comparison with the US

Model

4.1 Introduction

The US has always had a reputation for being one of the heaviest regulators in the

world.328 The sheer vastness and complexity of its financial services seems to

necessitate such an approach when combating money laundering. The scale of the

problem facing AML bodies in the US is made evident by the fact that the Federal

Reserve’s settlement system, Fedwire, processes an average of US$3.5 trillion per

day.329 This chapter compares the effectiveness of the way the US has chosen to

tackle money laundering, against that of the UK.

4.2 The Piecemeal Construction of the US Framework

It should be mentioned that although the US does not fall under the jurisdiction of

European law, it has responsibilities to implement the international standards laid down

in the UN statutory instruments and FATF Recommendations.

Currently, the two seminal statutes in the US AML regime are the Bank Secrecy Act 1970

(BSA)330 and the USA PATRIOT Act 2001 (UPA).331 The BSA was the first major piece

of money laundering legislation in the US, around the time of the South American drug

trafficking problem and the so-called ‘war on drugs’.332

328 James Landis, The Administrative Process (Yale University Press 1938) 160; See also Julie Froud, Controlling the Regulator (Palgrave Macmillan 1998) 163 329 Fedwire, ‘Fedwire® Funds Service Disclosure’ (14 December 2015) <https://www.frbservices.org/files/serviceofferings/pdf/fedwire-funds-service-disclosure.pdf> accessed 17 April 2016 330 Bank Secrecy Act 1970, Pub L No 91-508, 84 Stat 1118 331 Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT Act) Act of 2001, Pub L No 107-56, 115 Stat 272 332 President Richard Nixon (17 June 1971) “America’s public enemy number one in the United States is drug abuse. In order to fight and defeat this enemy it is necessary to wage a new, all-out offensive”; See Gerhard Peters and John T. Woolley, ‘Remarks About an Intensified Program for Drug Abuse Prevention and Control’(The American Presidency Project) <http://www.presidency.ucsb.edu/ws/?pid=3047> accessed 3 April 2016

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The BSA is viewed as the foundation of the AML efforts and, under the US framework,

all further AML legislation was simply amendments to this Act.333 It aimed to make the

financial services more transparent by deterring secret foreign bank accounts and

creating an audit trail so that enforcement agencies could trace the source of illicit funds.

It was thought that an audit trail could be established through accurate reporting and

record-keeping between financial institutions.

The BSA has developed from good practices in record-keeping and reporting, to a

regime that places requirements on the entire corporate governance of financial

institutions, with a concentration on internal control. Every financial institute is expected

to develop AML policies and procedures, designate an AML compliance officer, and

continue to train employees in recent AML techniques.334

The UPA focuses on counter terrorist financing, having being passed in response to the

9/11 terrorist attacks and the ensuing scrutiny of these terrorist organisations.335 AML

measures were extended to almost all financial institutes and implemented client

identification for new and existing customers.336 In addition to this, it extended the scope

of the AML regime’s influence on the international stage.

Similar to the UK, there is a large group of government agencies that develop, and

ensure compliance with the US AML regime. These include, but are not limited to, the

US Treasury, Financial Crimes Enforcement Network (FinCEN) and the federal financial

supervisory agencies.337 The BSA authorises the US Treasury Secretary to issue AML

333 This has led to all AML legislation in the US being collectively referred to as ‘BSA/AML’ 334 Clark and Burrell (n 6) 1025 335 President George W. Bush (7 October 2002) “On September 11 2001, America felt its vulnerability even to threats that gather on the other side of the Earth. We resolved then, and we are resolved today, to confront every threat from any source that could bring sudden terror and suffering to America”; See ABC News, ‘Bush Transcript: Case for Action’ (7 October 2002) <http://abcnews.go.com/US/story?id=91159> accessed 3 April 2006 336 William J. Sweet and Joseph W. Halliday, ‘US Patriot Act Targets Money Laundering’ (2002) 121 MIP 6 337 The most relevant federal banking agencies include: Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the currency, and Office of Thrift Supervision.

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regulations but many of these powers have since been delegated to FinCEN.338 The US

has taken the same approach as the UK to prevent political influence by making the

regulators financially independent from government. They are able to fund themselves

through fees charged to the regulated sector for their assessment services.339

Though not directly incorporated into the US AML regime, it is important to mention the

Office of Foreign Assets Control (OFAC). The reason OFAC should be considered

when analysing the US AML regime is because many of their sanctions are

administered against international money launderers and foreign financial institutes that

facilitate money laundering within the US.340

4.3 US Money Laundering Offences

The US was the first country to establish money laundering as a criminal offence in its

own right, rather than in conjunction with another crime.341 The Money Laundering

Control Act 1986 outlined four substantive money laundering offences; promotional,

concealment, structuring and tax evasion.342 These offences do not just comply with

the FATF Recommendations but actually predate them and may have been the basis

on which they were established.

These substantive offences relate to any ‘financial transactions’343 that handle

proceeds resulting from ‘specified unlawful activities’. These specified unlawful

338 Clark and Burrell (n 6) 1023 339 Hemel (n 73) 340 Federal Financial Institutions Examination Council ‘Bank Secrecy Act/ Anti-Money Laundering Examination Manual’ (August 2007) <https://www.ffiec.gov/bsa_aml_infobase/documents/BSA_AML_Man_2014_v2.pdf> accessed 2 April 2016 341 Clark and Burrell (n 6) 1021; See also Betty Santangelo, ‘International Ramifications of U.S. Anti-Money Laundering Policy: Whose Law is the United States Enforcing?’ (2000) 15 JIBL 91 342 18 USC § 1956 343 18 USC § 1956(c)(4) broadly defines ‘financial transactions’ as a transaction which in any way or degree affects interstate or foreign commerce (i) involving the movement of funds by wire or other means or (ii) involving one or more monetary instruments, or (iii) involving the transfer of title to any real property, vehicle, vessel, or aircraft, or (B) a transaction involving the

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activities have developed over time to include most forms of serious crimes.344 The

approach taken by the US is typical of most countries complying with the FATF

Recommendations, however it is not as far-reaching as the UK regime that

encompasses the benefits of all crime.

Individuals can be imprisoned for up to 20 years for each separate345 money laundering

transaction conducted.346 There is an additional offence for spending more than

US$10,000 of criminal proceeds associated with a substantive offence, which is

punishable by up to a further 10 years imprisonment.347 Businesses, which includes

financial institutions and individuals, can be fined up to the greater of US$500,000 or

twice the value of the transaction.348

The US AML regime is arguably more effective in sentencing because the US penalties

for a criminal conviction have the potential to be far more severe than their UK

counterpart.349 On the other hand, the UK civil penalties are not restricted to by value of

the transaction and can take into consideration the past 6 years of the offender’s

lifestyle, providing for much steeper fines.

The US has a reputation for being the most heavy-handed nation in tackling the

proceeds of crime yet there is still an estimated US$300 billion generated annually

through illicit activities.350 In the US Sentencing Commission’s report of March 2016, it

was found that of 68,270 convictions by the US Department of Justice, 667 were

use of a financial institution which is engaged in, or the activities of which affect, interstate or foreign commerce in any way or degree. 344 Sarah Wilson, The Origins of Modern Financial Crime (Routledge 2014) 77 345 United States v Prescott, 42 F.3d 1165 (8th Cir. 1994); See also United States v Conley, 826 F. Supp. 1536 (W.D. Pa. 1993) 346 18 USC § 1956(a) 347 18 USC § 1957 348 18 USC §§ 1956(a)(1)-(a)(2) 349 Dennis Cox, Handbook of Anti-Money Laundering (John Wiley & Sons 2014) 133 350 Department of the Treasury, ‘National Money Laundering Risk Assessment’ (2015) <https://www.treasury.gov/resource-center/terrorist-illicit-finance/Documents/National%20Money%20Laundering%20Risk%20Assessment%20%E2%80%93%2006-12-2015.pdf> accessed 17 April 2016

66

convicted of money laundering as the primary offence.351 It has been suggested this

figure is low because prosecutors prefer to secure convictions for a predicate offence

as it can prove harder to fulfil the conditions for money laundering.352 If evidence was

provided to validate this, it would be a substantial flaw in the entire repressive side of

the US AML regime.

4.4 AML in US Financial institutes

The first measure the US took to tackle money laundering was to diminish the powers

of banking confidentiality through implementation of the Currency Transaction Report

(CTR), 353 a reporting requirement for most types of financial institutions.354 A CTR

needs to be filed with FinCEN for transactions that exceed US$10,000, though there

have been exemptions laid out for circumstances where daily high value transactions

are expected.355 The US is one of the only countries that requires reporting of all

transactions over a certain limit, regardless of whether they appear suspicious. This

measure does not apply the risk-based approach and many argue it overburdens

FinCEN, resulting in an ineffective use of their resources.

‘Structuring’ splits large deposits into smaller transactions that do not trigger the CTR

reporting requirements.356 Financial institutes may advise customers of the CTR filing

requirement, however, they cannot instruct their employees to assist with avoidance

351 United States Sentencing Commission, ‘U.S. Sentencing Commission, Final Quarterly Data Report’ (March 2016) <http://www.ussc.gov/sites/default/files/pdf/research-and-publications/federal-sentencing-statistics/quarterly-sentencing-updates/USSC-2015_Quarterly_Report_Final.pdf> accessed 5 April 2016 352 Financial Action Task Force, Third Mutual Evaluation Report on Anti-Money Laundering and Combating the Financing of Terrorism’ (23 June 2006) <http://www.fatf-gafi.org/media/fatf/documents/reports/mer/MER%20US%20full.pdf> accessed 11 April 2016 353 Scott Sultzer, ‘Money Laundering: The Scope of the Problem and Attempts to Combat It’ (1995) 63 Tenn L Rev 143 354 31 CFR § 1010.311 (formerly 31 CFR 103.22) 355 Phase I & II CTR Exemptions under the Money Laundering Suppression Act of 1994, Pub L No 103-325, 108 Stat 2243 (31 CFR 1020.315(b)(1)-(7)) 356 Sarah N. Welling, ‘Smurfs, Money Laundering and the Federal Criminal Law: The Crime of Structuring Transactions’ (1989) 41 Fla L Rev 287

67

techniques. If customers, of their own volition, structure their payments to evade the

CTR threshold, a financial institute would be expected to file a SAR in compliance with

FATF R.20.357

To further deter money laundering, FinCEN was given the power to terminate bank

operating licences under the Annunzio-Wylie Anti-Money Laundering Act 1992, if a

bank was convicted of a money laundering offence.358 Under this Act,359 the US also

became the first jurisdiction to introduce the SARs regime.360 The SARs system

created a central repository, owned by FinCEN in conjunction with the federal financial

supervisory agencies, for the reporting of certain criminal activity and suspicious

financial transactions.361 Unlike CTR reporting, the BSA specifies that financial

institutions should not let the customer know that a SAR is being filed,362 as per FATF

R.20-21. In compliance with FATF R.11, financial institutions must also maintain all

records required under BSA for a minimum of 5 years from the date of filing.363

After the US realised their efforts were being undermined by less vigilant countries,

they imposed special measures on jurisdictions considered more at risk of money

laundering.364 This is arguably more effective than the UK that only applies the risk-

based approach to individuals and entities, without considering the transnational scale

money laundering has risen to.365

357 Protivi Inc (n 173) 358 Anunzio-Wylie Anti-Money Laundering Act, Pub L No 102-550, 106 Stat 4044 (1992) (codified as scattered amendments of 12 USC, 22 USC and 31 USC) 359 Annunzio-Wylie Anti-Money Laundering Act, Pub L 102-550, 106 Stat 4044 (1992) § 1517(b) 360 31 CFR 1020.320 (formerly 31 CFR 103.21) 361 Financial Crimes Enforcement Network, ‘Preparing Suspicious Activity Reports (SARs)’ (February 1997) <https://www.fincen.gov/news_room/rp/advisory/html/advissu8.html> accessed 2 April 2016 362 Protivi Inc (n 173) 363 Cox (n 349) 136 364 Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT Act) Act of 2001, Pub L No 107-56, 115 Stat 272 § 311 (codified in 31 USC § 531(a)); See also Clark and Burrell (n 6) 1022 365 Sidley Austin LLP, ‘US and UK Anti-money Laundering Requirements Compared’ (International Law Office, 5 September 2008) <http://www.internationallawoffice.com/Newsletters/Banking/USA/Sidley-Austin-LLP/US-and-UK-Anti-money-Laundering-Requirements-Compared?redir=1> accessed 29 March 2015

68

There was a significant case for suggesting that regulatory capture had occurred in the

US in the years before the 2008 financial crisis and was a possible causal link to it. The

concept of the ‘well-oiled’ revolving door between the government, regulatory agencies

and the financial industry suggests individuals transitioned between them regularly and

their interests were very likely aligned.366 When considering the possibility of capture

after the crisis, the same theories circulate as with the UK regime. Large US firms may

have used pressure exerted on the government and regulators to propose the system

of strict regulation that is now in place when, in reality, the motives were to inhibit

competition.

The US financial institutes appear to have had more success with implementing a risk-

based approach. Thousands of the SARs reporting structuring were attributable to

financial institutions effective monitoring of the higher risk customers.367 There have,

however, been problems encountered with assessing the risk of accounts that have

beneficial owners368 and the lack of transparency at poorly regulated foreign financial

institutes.369

366 Daniel Carpenter and David A. Moss, ‘Preventing Regulatory Capture: Special Interest Influence and How to Limit It’ (Cambridge University Press 2013) 31 367 Department of the Treasury (n 338) 368 31 CFR §§ 1010.610-620 369 United States Drug Enforcement Administration, ‘DEA Programs: Money Laundering’ <http://www.dea.gov/ops/money.shtml> accessed 16 April 2016

69

4.5 Asset Recovery

‘A direct assault on the asset base of crime, a violation resulted in the forfeiture

of any interests in property connected therewith.370

Forfeiture derives from English common law and the deodands doctrine, though the US

has since developed the law much further.371 Forfeiture is an enforcement tool that

allows the US government to confiscate property with a close proximity to some form of

criminal activity.372 The application of forfeiture has often been critiqued as harsh and,

at times, decidedly unfair.373 Property can be restrained before or after a trial if there is

probably cause to believe the property could be subject to forfeiture.374

There are both civil and criminal forfeiture devices available to the US when attempting

to impair the financial infrastructure of crime.375 Criminal forfeiture arises after a

criminal conviction relinquishes the right to hold property.376 Criminal forfeiture is

therefore triggered as a consequence of, and very much dependent on, a criminal

conviction.377

The way civil forfeiture differs from its criminal counterpart, is that it does not require a

criminal conviction or a link to personal liability. It instead considers the liability of the

property itself, under the legal fiction that property can be culpable of wrongdoing.378

Due to the nature of civil forfeiture there have been several instances where litigation

370 Gallant (n 31) 80 371 Jacob J. Finkelstein, The goring Ox: Some Historical Perspectives on Deodands, Forfeitures, Wrongful Death and the Western Notion of Sovereignty (1973) 46 Temp LQ 169 372 18 USC 981; See also Charles Doyle, ‘Crime and Forfeiture’ (Congressional Research Service, 22 January 2015) <https://www.fas.org/sgp/crs/misc/97-139.pdf> accessed 3 April 2016 373 Dan Frosch, ‘Asset-Forfeiture Laws Raise Concerns’, The Wall Street Journal (New York, 5 July 2015) <http://www.wsj.com/articles/asset-forfeiture-laws-raise-concerns-1435868428> accessed 3 April 2016 374 21 USC 853(e) 375 Criminal forfeiture: 18 USC 982 and Civil forfeiture: 18 USC 981 376 William Blackstone, Commentaries on the Laws of England, Volume 4 (University of Chicago Press 1979) 373 377 Gallant (n 31) 83 378 ibid

70

has been instigated citing that it is unconstitutional,379 though it is consistently

reinforced by the courts that civil forfeiture cannot be prevented on a constitutional

basis.380

Forfeiture laws comply with FATF R.4 on asset recovery and the amount recovered

shows the US system is operating much more effectively than the UK. In 2014 the US

took control of an additional US$2,560.8 million through asset forfeiture, which

increased the total value of assets held by 36.3%.381 This said, as law enforcement is

able to keep around 90% of the assets, these successes may be attributable to profit-

seeking motives.382 Agencies are no longer reliant on public resources and may detract

from the democratic role they are supposed to fulfil. The US has persisted with a

financially-based drugs control strategy largely due to the substantial revenue

generated, basically making it self-funded in nature.383

In the recent case of US v HSBC Bank USA, the American division of the leading UK

bank was heavily penalised for failing to conduct sufficient CDD for foreign

individuals.384 HSBC agreed to forfeit US$1.256 billion and pay US$665 million in civil

penalties to regulators.385 Despite this showing their asset recovery being used more

379 Astol Calero-Toledo v Pearson Yacht Leasing, 416 U.S. 663 (1974); See also Bennis v Michigan, 516 U.S. 442 (1993) 380 Gallant (n 31) 94 381 Office of the Inspector General: U.S. Department of Justice, ‘Audit of the Assets Forfeiture Fund and Seized Asset Deposit Fund Annual Financial Statements Fiscal Year 2014’ (January 2015) <https://oig.justice.gov/reports/2015/a1508.pdf#page=1> accessed 19 April 2016; See also United States Department of Justice, ‘Justice Department Returned Over $4 Billion to Victims of Crime Through Asset Forfeiture (22 April 2015) <https://www.justice.gov/opa/pr/justice-department-returned-over-4-billion-victims-crime-through-asset-forfeiture-program> accessed 21 April 2016 382 Chip Mellor, ‘Civil Forfeiture Laws and the Continued Assault on Private Property’ Forbes

(Jersey City, 8 June 2011) <http://www.forbes.com/2011/06/08/property-civil-forfeiture.html> accessed 23 April 2016 383 Donald J. Boudreaux and A.C. Pritchard, ‘Civil Forfeiture and the War on Drugs: Lessons from Economics and History’ (1996) 33 San Diego L Rev 82 384 United States v HSBC Bank USA, N.A. and HSBC Holdings PLC (2013) WL 3306161 385 Jimmy Huang, ‘Effectiveness of US Anti-Money Laundering Regulations and HSBC Case Study’ (2015) 18 JMLC 525; See also Aruna Viswanatha and Brett Wolf, ‘HSBC to Pay $1.9 Billion U.S. Fine in Money-Laundering Case’ Reuters (London, 11 December 2012) <http://www.reuters.com/article/us-hsbc-probe-idUSBRE8BA05M20121211> accessed 18 April 2016

71

competently than the UK’s, there were no criminal convictions, implying US authorities

considered financial institutions ‘too big to fail, bail or jail’.386 The unwillingness of the

US authorities to impose criminal sanctions on financial institutions is a fundamental

weakness in the US AML regime.

4.6 Conclusive Remarks

Both the UK and US AML regulations compare favourably due to the extensive regimes

for financial institutions to implement and maintain AML procedures.387 Similarly to the

UK, the US appears to be in sufficient compliance with the international standards, as

to warrant no additional monitoring by FATF.388

The US legislative framework provides tougher criminal sanctions for its substantive

money laundering offences. Though the sentencing powers for financial institutes are

tougher, they focus on structuring offences and fail to provide an equivalent to the UK

criminal sanctions for breaches of AML practice.

In theory the UK approach should be more effective but the US approach would seem

to be applied with more tenacity, providing for a more effective approach in practice.

The US has shown more capabilities with its asset recovery than the UK but there is a

clear reluctance to prosecute financial institutes beyond civil penalties.

Due to there not yet being enough information on the success of the risk-based

approach, it is difficult to compare its effectiveness to the previous rule-based approach

employed by the US. The US has seen better results than the UK with implementation

386 Alison Haugen, ‘More than Sanctions: Criminally Prosecute Big Banks for Money Laundering’ The International Affairs Review (Washington DC, 23 April 2015) <http://www.iar-gwu.org/content/more-sanctions-criminally-prosecute-big-banks-money-laundering> accessed 20 April 2016 387 Sidley Austin LLP (n 365) 388 Financial Action Task Force (n 352)

72

of the approach within its financial institutions, although there have been problems with

assessing the risk of individuals protected both by domestic and foreign privacy laws.

The extraterritorial jurisdiction of the US AML regime makes it one of the most effective

AML regimes in the world. The UK might benefit from implementing the US system’s

approach to tackling the transnational nature of money laundering.389 This said, the US

has been criticised for implementing an intrusive regime that violates banking

confidentiality.390 To avoid this intrusive aspect, every country should start to develop

better international relationships through mutual legal assistance.

To compare these two jurisdictions in any further depth would be facile without more

accurate statistics and a less restrictive word count to discuss them in. Furthermore,

comparing crime and asset recovery would fail to take into account the differences

between the countries in terms of population size, frequency of crime or fluctuations in

exchange rates. It has proven difficult to source money laundering statistics both in the

UK and US. One would assume these statistics should be readily available to the

public to make government activities and spending transparent, failure to do so

appears to be a calculated decision by both governments.

389 Betty Santangelo, ‘International Ramifications of U.S. Anti-Money Laundering Policy: Whose Law is the United States Enforcing?’ (2000) 15 JIBL 91 390 ibid

73

Conclusion

The UK utilises a complex network of bodies that has led to overlaps in jurisdictions

and resulted in a power struggle between the different bodies attempting to take

responsibility beyond their statutory remit.

Though coordinating efforts between the AML bodies could go some way to making the

UK AML regime more effective, a single universal supervisor handling all aspects of

AML would surely be the more effective option. If the government wishes to keep the

regulatory, investigatory and enforcement functions separate, it should still consider

carrying out cost benefit analyses on the different bodies. This could go some way to

improving the governance and information sharing abilities of the regulatory framework.

The future of the European AML obligations in the UK are uncertain, following the

pending ‘Brexit’ referendum. However, due to the international nature of money

laundering and the close links between financial services in Europe, it could be argued

that the UK will continue to implement fairly similar AML measures, in line with its

European cousins.

There are various considerations when analysing the effectiveness of an AML regime.

This dissertation chose to appreciate the transnational nature of money laundering and

use the international standards set by FATF as the predominant benchmark. To offer

alternative measures of effectiveness, there was consideration of whether the AML

measures appeared to be implemented in the public interest or the interests of the

financial institutes. Finally, the varying concepts of regulatory compliance were seen as

a benchmark and whether the risk-based approach has contributed to an overall more

effective AML regime.

The UK was found to comply sufficiently with FATF’s international standards, however

there were clear ineffective elements identified. The UK’s legislation appears effective

on the surface, with tough criminal sentences for substantive money laundering,

74

inclusion of offences for failure to comply with AML and a variety of asset recovery

tools available. In practice, it appears difficult for the UK to efficiently identify money

laundering and then convict the perpetrator of the offence. Furthermore, the asset

recovery tools are inconsistently used and make a marginal impact when considering

the full extent of criminal proceeds in circulation.

The US applies a broadly similar approach to AML and is also in sufficient compliance

with the FATF Recommendations. The US appears to be a more effective regime in

respect to its dedication to severe punishments for substantive money laundering

offences, its tenacity in recovering the proceeds of crime and its acknowledgement that

money laundering needs to be addressed on the international stage. It could be argued

that the US takes a more lenient approach than the UK to punishing breaches in AML

procedures within financial institutions, by demonstrating a clear reluctance to

administer criminal sanctions.

It is plausible that regulatory capture may have occurred in the UK and US. Both

jurisdictions have enforced stricter regulations since the 2008 financial crash which can

inhibit competition from small and foreign financial institutions. This would work in

favour of the large incumbent firms, who have the resources and access to regulators

to encourage such decisions. However, it is difficult to prove that these measures were

not implemented in the public interest, as protection from the ramifications of another

financial crisis.

Many would argue the risk-based approach has been more successful than the

previous approaches, however, until both the UK and US implement the approach

properly, it will be difficult to evaluate. The US appears to be far more successful in

educating the financial institutes about using a risk-based approach, who only flounder

in areas such as beneficial ownership and lax foreign regulation.

75

This dissertation acknowledges the limitations of the statistics it has used, not just

because of the clandestine nature of money laundering, but also the clandestine nature

of the governments in releasing statistics. In both jurisdictions considered, the

government departments have ensured these statistics are not easily accessible to the

public. It would appear that governments may even manipulate the statistics that are

released, in order to show their respective AML regimes in the best light possible.

Word Count

14,996

76

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