Learning to counter economic crime

With the UK proving to be an attractive location for money laundering, what steps are being taken to prevent it? 

“It is estimated that at least £100bn is laundered through the UK every year,” says the House of Commons Home Affairs Committee in Proceeds of crime, the recent report on the findings from its inquiry into money laundering. That amount, notes the report, is higher than the GDP of more than 130 countries worldwide.

The factors that make the UK an attractive place for legitimate financial activity – political stability, sophisticated professional services and the use of English – also make it attractive to those who want to launder money made through criminal activities such as drug dealing, prostitution, people trafficking, illegal arms sales, insider trading, embezzlement and computer fraud. In addition, the sheer volume of financial transactions carried out in the UK means that there are plenty of opportunities to disguise ‘dirty’ money. The National Crime Agency (NCA), which leads UK law enforcement's fight against serious and organised crime, says: “The scale of the laundering of criminal proceeds, despite the UK’s leading role in developing international standards to tackle it, is a strategic threat to the UK’s economy and reputation. Some of the financial transfer systems used by organised criminals in the UK are also used by terrorist groups both domestically and overseas.”

Money laundering is often complex and is carried out in a number of different ways. In its simplest form, criminals smuggle untraceable cash in high-denomination euro and dollar notes out of the UK or use casinos to swap cash for gaming chips, which they then cash out. High-end laundering schemes involve shell companies, trusts, tax havens and investment in luxury goods, such as fine art or jewellery. Criminals also invest heavily in property as it enables the laundering of large amounts of money in a single transaction. 
How much is laundered through the UK each year, according to the House of Commons Home Affairs Committee

Rachel Davies, Senior Advocacy Manager at Transparency International UK, an anti-corruption NGO, which is carrying out research in partnership with the NCA, says: “Detecting money laundering is extremely difficult; it is by nature clandestine which means we don’t know the exact amount laundered through the UK each year. Once corrupt wealth has been detected there are further difficulties in recovering it. The resources and powers available to law enforcement agencies are insufficient, which helps to explain the low levels of asset recovery and repatriation.”

The NCA says that criminals need ‘professional enablers’ to help them carry out these complex laundering schemes and it warns: “Lawyers, trust and company formation agents, investment bankers and accountants are among those at greatest risk of becoming involved, either wittingly or unwittingly in high-end money laundering.”

Under the Proceeds of Crime Act 2002 (POCA 2002), financial institutions, estate agents, solicitors and dealers in luxury goods, among others, have to file a Suspicious Activity Report (SAR), with the NCA if they suspect a client may be involved in money laundering. However, despite a growing focus on money laundering by politicians, the police and companies, and the introduction of anti-money laundering laws and ‘know your customer’ rules that require organisations to carry out due diligence, money laundering is still a growing problem. 

Davies says that sanctions against these enablers are not strong enough: “The penalties are not sufficient. Fines for non-compliant firms are not high enough and there should be personal liability for individuals who facilitate money laundering.”

She adds that the current anti-money laundering regime is “not fit for purpose”, due to a patchwork of 27 different supervisory bodies that oversee key sectors such as real estate, accountancy and legal firms. “This does not provide a coherent response to the threat money laundering poses. The vast majority of institutions that are meant to deal with money laundering are not up to the job. If the UK wants to permanently shut the door on dirty money there must be a serious change to this flawed system,” she says.

Transparency International has published a report called Don’t look, won’t find: weaknesses in the supervision of the UK’s anti-money laundering rules which suggests that a third of banks dismissed serious money-laundering allegations without adequate review and that in the accountancy sector, at least 14 different supervisors have some responsibility – leading to widespread inconsistency and variations. And in the property sector, only 179 cases were deemed suspicious and reported by estate agents in 2013/14, while art and auction houses reported only 15 suspicious cases.
"The vast majority of institutions that are meant to deal with money laundering are not up to the job. If the UK wants to permanently shut the door on dirty money there must be a serious change to this flawed system" The Home Affairs Committee’s inquiry also identified a number of problems with the current anti-money laundering regime. For example, ELMER, the computer database that handles SARs, is overloaded and processes more than 380,000 reports a year but is only designed to manage 20,000. The inquiry acknowledged that the private sector shared these concerns over ELMER: “Laurence Sacker, Partner, Corporate Finance and Money Laundering Reporting Officer at UHY Hacker Young said that his perception was that the system was so overloaded, that many SARs were never actually investigated.” 

Another problem is that when a report is made, the police have 31 days to investigate, which is generally agreed to be much too short a period to investigate complex cases. 

In addition, there is a lack of specialist investigators with the skills to track money laundering, as financial institutions are increasingly poaching public sector investigators. And, when money laundering is detected and criminals prosecuted, it is often very difficult to recover the money. The National Audit Office says that the proceeds of crime actually confiscated are “paltry” at about 26p in every £100. Those who are convicted are subject to confiscation orders but enforcement rates are very low – the total debt outstanding last year has been calculated at £1.61bn. The Home Affairs Committee’s Proceeds of crime report explains: “Given the organised nature of many of the criminals subject to large confiscation orders, it is likely that the majority of this money has now been hidden and is beyond the reach of the authorities.”

Jonathan Fisher QC, who specialises in proceeds of crime cases, says: “There needs to be a culture change. Before the ‘Mr and Mrs Bigs’ even think the police might be looking at them, they should be struck with a restraint order. Unless and until we start freezing assets, we are not going to have assets against which to confiscate.” 
The total outstanding debt owed by convicted money launderers in 2015

With growing criticism of the UK’s inability to deal effectively with money laundering, the government has taken some steps to address the problem. In 2015 it launched the NCA-led Joint Money Laundering Intelligence Taskforce, which works with 20 major banks to identify money laundering. As a result, between February 2015 and April 2016, 21 people were arrested. Almost 2,000 suspicious accounts were identified and £583,000 of suspected criminal funds was seized.

Theresa May’s Government is now planning to tighten the rules in what it describes as “the most significant change to the UK's anti-money laundering and terrorist finance regime in over a decade”. It proposes that courts will have the power to force suspected money launderers to explain where their money comes from, and those who fail to satisfy the authorities will have their property and cash seized. It also proposes to reform the supervisory regime to ensure it is consistent, and to increase the sharing of information between international law enforcement agencies.

Davies adds: “The government has made a number of promising commitments which, if implemented, would help to curb the amount of money laundered through the UK. These commitments, like requiring the beneficial owner of foreign companies to be revealed before buying UK property, would help bring those who launder corrupt money through the UK to justice as well as deter corrupt individuals from targeting the UK in the future.” 

For more information on the changing face of money laundering, read the academic section, Review of Financial Markets, in the July and March issues of The Review

In March, Kenneth Murray, Head of Forensic Accounting at Police Scotland, analysed the 'identity crisis' of money laundering, and in July, he asked whether the Proceeds of Crime Act 2002 is up to the challenge of organised crime.

Download both issues here.

Published: 07 Sep 2016
  • Wealth Management
  • The Review
  • Compliance, Regulation & Risk
  • Capital Markets & Corporate Finance
  • Anti Money Laundering
  • Regulation
  • economic crime

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