Conference and Academic Papers

2011 What's wrong with Counter-Money Laundering Laws? (part 1)

This five part series was published by Complinet (now part of Thompson Reuters) in 2011.

This is Part 1

Part 2 of this article is here: Part 2
Part 3 of this article is here: Part 3
Part 4 of this article is here: Part 4
Part 5 of this article is here: Part 5

"Counter-" v "Anti-"

Some readers may wonder why this series of articles is headed "counter-money laundering" instead of "anti-money laundering". The reason is at the heart of much that is wrong with laws designed to combat this most pure of financial crimes. Money laundering cannot be prevented. Indeed, sometimes governments do not want it to be prevented, but it can be combated; in short, it can be countered. So we should speak of "counter-money laundering", not "anti-money laundering".

Equally, in relation to terrorist financing, governments aim to stop it, to prevent it from moving at all, much less reaching its intended user: therefore we should speak of "anti-terrorist financing", not "counter-terrorist financing". All too often, however, policy, laws and regulations are driven not by a precise need or purpose but by a dangerous reaction to events or by such things as a desire on the part of governments to be popular.

As an example, take the issue of tax evasion as a predicate crime for money laundering purposes. To gain public support for laws to detect and deter money laundering, little or no mention was made of tax evasion. In fact, so far as the public was concerned, the Financial Action Task Force appeared to focus almost entirely on narcotics. At least, that was what the media reported and what many commentators said. In the mid-1990s, it was common to hear from supposedly authoritative figures, including the then-secretary of the British Bankers' Association in a BBC TV interview, that "tax fraud" was not a predicate crime for the purposes of the UK's counter-money laundering laws as set out in the Criminal Justice Act 1993 (and exported into the CJA 1988).

This was a clear and fundamental error as the law related to all offences for which a person could be sentenced to jail for 12 months or more. Tax evasion is and was one of those offences. The situation became so untenable that the FATF later modified the explanatory note to Recommendation 15 to specify that "tax fraud", an offence not known to UK criminal law, incidentally, should be regarded as a predicate offence. It nevertheless demonstrated that governments foresaw that they would be very unpopular if they explained how the strong laws, including denouncement provisions, would affect everyone.

Since then, the same problems have recurred. There has been a non-stop tirade of drivel as buzzwords have taken over from substance, because it is easier to get a buzzword into a newspaper than it is to get an explanation into an article that might be 400 words long for a tabloid or into a 50-second TV news item. Worse, in the past decade or so, there has been a significant change in the way laws are drafted. In an attempt to make them "accessible", terms that have long been judicially defined have been tossed away and replaced by contorted and in some cases utterly impenetrable clauses, some of which contradict clauses elsewhere in the same Act.

Laws have become longer and longer but they are no clearer. Now, in many countries, the new-style "accessible" laws are accompanied by a raft of explanatory notes. Seemingly the irony of needing to explain "plain English" is lost on the draftsmen. In the same way as software "bloats", so do laws.

The debate over whether regulations should be prescriptive raged until won, arguably, by the wrong side. Now regulations are bolstered by guidance notes which run to hundreds of pages. It should not be necessary. Worse, because of the prescriptive nature of the regulations and notes, they are widely regarded as a target not as a starting point and some advisers even go so far as to say that compliance with the guidance notes is a full defence should money laundering occur. This is wrong: if that were the case, there would be no need for the (quite proper) overlaying of a risk management regime onto the compliance regime.

What is wrong with counter-money laundering laws is that those drafting the laws and regulations have lost sight of the objectives and have focused on the means. The legislation has become too focussed on compliance and not sufficiently focussed on risk management.

The laws which have been developed since the mid-1980s, when what now seem rather rudimentary laws were enacted, have created a ridiculously complex and expensive burden for both the private sector and the enforcement side of the industry, to say nothing of making prosecutions more difficult than they need be.

Further, lack of clarity and lack of precision have allowed judges to undermine the effectiveness of laws. It is therefore important to identify the parts of laws that defendants will exploit as wiggle-room and to remove them at the legislation stage, because history shows that, in many jurisdictions, judges will take a pro-defendant or liberal approach when interpreting the provisions. Indeed, it is a fundamental principal of US Federal law that any ambiguity should be resolved in favour of the defendant.

This author argues that counter-money laundering laws and regulations should be thrown away and a much simpler and clearer model adopted, a model which will achieve the required objectives, reduce the compliance burden for financial services businesses and for others, and provide both the financial sector and government with a better return on investment. In addition, the laws should be clear and comprehensive and reduce the opportunity for argument over the precise meaning of the Act.

This could be done by drastically simplifying everything from the Financial Action Task Force Recommendations (and those of the FATF-style regional bodies), laws (including the EU directives) and regulations. Investigation, enforcement and confiscation could be similarly simplified by improving the value of financial intelligence units. There is one important caveat: the drafts which will be set out in this series of articles are designed for a common law environment and some modification would be required for a civil/Roman law environment. However, most of the draft is applicable to both systems.

Why do we have counter-money laundering laws?

The answer to that question is easy: money laundering is the financial crime equivalent of fencing stolen goods. Indeed, before it was nagged into developing a specific Counter-Money Laundering Act, Malaysia's Penal Code specifically included provisions which regarded the dealing in the proceeds of crime as akin to handing stolen goods. Most governments have recognised the link so that the penalty for money laundering is often the same as that for handling stolen goods.

The argument against both handling stolen goods and money laundering is the same, as this author pointed out in his 1996 book "How Not To Be A Money Launderer": "The basic reason for crime is to make money, and preferably to make more money than could be generated from a broadly similar amount of legitimate endeavour."

By breaking the links between the commission of a crime and benefiting from it, the whole point of committing an offence is called into question.

How are those links broken?

Counter-money laundering laws are based on two premises. The first is that right-thinking people will not want to deal with criminals or to help them benefit from their crimes, so that laws to force the general populace to shun criminals (by imposing severe penalties on those that help them) will make it more difficult for them to gain the advantage they seek from their criminal actions. The second is that by compelling all or specified sections of society to make reports of suspicions that someone may be dealing with or benefiting from the proceeds of crime, investigators will be able to trace the proceeds back to the offence and therefore the offender, or to trace from the offender to the proceeds.

Counter-money laundering laws have developed some very specific objectives: to identify the proceeds of criminal conduct and to freeze, seize and confiscate them so that criminals, and their families and associates, do not benefit; and, perhaps just as importantly, the state can secure those benefits which are then passed into the government coffers.

To achieve these ends, counter-money laundering laws rely on intelligence gathered from society at large. In short, they are denouncement laws, similar in principle to those in Roman times. It is this denouncement principle that led France and Italy to delay their adoption of the First Money Laundering Directive. The countries said that they already had in place laws which required citizens to report suspicion of a crime and that therefore the directive's requirements for suspicious transactions to be reported added nothing except cost and complexity to their existing systems.

Within society there are nevertheless those who will, for a price or by reason of threats or because they are unthinking or even stupid, aid the criminal to hide, move and invest the proceeds of his criminal conduct. Those who provide such aid themselves become money launderers, not as conspirators or as someone who aids and abets the original offence but as principals. They are the financial equivalent of the fence who handles stolen goods.

There are also those who will provide intelligence not to the authorities but to the criminals. These, too, commit an offence, usually termed "tipping off". It is also important to criminalise the possession, ownership, custody or use of any thing that, in whole or in part, represents the proceeds of crime. This must be tempered with an appropriate level of mens rea (state of mind); because so much turns on this, it is appropriate to decide on the necessary mens rea.

Defining the mens rea

At various points in the drafting of any law and any subsequent criminal trial, the question of the state of mind of the accused will arise. Sometimes this is confused with motive but in fact it is very different. The topic of mens rea takes up whole books but can be greatly simplified to mean that the accused knew what he was doing and intended the consequences (or some other consequence) of his actions. It is not necessary to prove that the accused knew his actions to be illegal as laws already prove that "ignorance of the law is no defence", although this may be a point for mitigation.

The reason that a person does an act is not, in relation to most offences, applicable to guilt, so that the old mantra of "means, motive and opportunity" is not generally relevant. This is important because it has often been said that a person who aids a money launderer by, e.g., tipping off or by failing to make a report because he is put in fear, would not be able to raise that fear as a defence.

That does seem harsh. If a bank manager's family is under threat and he opens the safe so that it may be robbed, he is not regarded as a willing participant and it is difficult to see how the same approach would not be applicable to money laundering, except for one aspect: once a transaction is completed, a report could then be made, whereas in the case of a cash robbery, the money has physically gone. Motive does, however go to the question of sentencing, but as a matter for sentencing, there is no need to provide for it in the law relating to the creation of the offence. Words such as "intending" can therefore be used when drafting.

"Knowing", "believing", "suspecting" and "wilful blindness"

There is a big difference between knowing the law and knowing a fact. While knowledge of the law is presumed, knowledge of facts is not. Knowledge of a fact can be inferred, however, even in the face of a denial by the defendant, as can belief or suspicion. There is common accord that a person who "knows" that an asset represents the proceeds of crime but nevertheless deals with it is a money launderer. But there is less agreement as to the position which is short of knowledge:
• Knowledge is where the defendant is certain of a fact because he has evidence that it is so.
• Belief is where the defendant is certain of a fact but has no evidence to support that certainty.
• Suspicion is where the defendant has no evidence to support his view but even so thinks that it is possible (note, not "probable") that a fact is so.

This is subjective, however. Some people "know" there is a God, some "believe" there is a God and some merely "suspect" it. Others are completely convinced and therefore "know" that there is no God, that there are multiple gods or that the God they believe in is an entirely different God from the one others follow.

As a result, any fact must first be proved to the satisfaction of the court and, after that, the defendant's state of mind with regard to it. All countries refer to a person who "knows" that an asset represents the proceeds of criminal conduct and even so carries out a particular course of action as a money launderer, but beyond that things get a little muddy. Some countries add in "or believes" and others choose "or suspects".

When it comes to requiring the making of a suspicious transaction report, however, the common standard (self-evidently) is "knows or suspects". This anomaly is undesirable: lawyers may be equipped to pick their way between "belief" and "suspicion" (although probably not, in reality) but non-lawyers are not. It makes no sense to place different mindsets on the same person in relation to the same conduct, especially conduct of a third party.

For reporting purposes, staff are required to identify suspicion. It makes no sense to tell them that they must make a report but that, if they do so, they are safe from prosecution if they continue to deal with the asset unless they "believe" it to be tainted. Any properly drawn law should therefore adopt the consistent standard of "suspicion" in relation to both reporting and being involved in money laundering.

Above, it was said that knowledge, belief or suspicion can be inferred. The way in which this is done is by the concept of "wilful blindness".

To this author's amazement, prosecutors all over the world are reluctant to use this concept even though it is the nuclear weapon of evidence. Many judges do not understand it and fail properly to explain it to a jury. Even the English Court of Appeal in R v Forsyth [1997] 2 Cr App R 299 failed to consider the application of wilful blindness, although to be fair, this was in part because it had not been fully argued below and the trial judge had rejected a submission that a jury may find a certain fact: questions of wilful blindness are for the jury and not for the judge.

The Judge had, however, in essence described wilful blindness. He said: "Knowing or believing are words of ordinary usage in the English language. A person may be said to know the money is stolen when she is told by someone with first-hand knowledge, such as the thief, that such is the case. Belief of course is something short of knowledge. It may be said to be the state of mind of a person who says to himself 'I cannot say I know for certain that this money is stolen, but there can be no other reasonable conclusion in the light of all the circumstances, in the light of all that I have heard and seen'."

In the Court of Appeal, Forsyth's case was summarised as follows: "The prosecution had to prove that the appellant actually knew or actually believed that the money she handled in Geneva was stolen. The words 'knowing' or 'believing' cover the state of mind of those who are subjectively sure of the unlawful provenance of the goods. While an accused's belief that goods are stolen may be inferred by the jury from all the circumstances of the transaction, the word 'belief' does not import an objective test nor is belief the same as 'shutting one's eyes to the obvious'."

In R v Griffiths [1974] 60 CAR 14, Lord Justice James said: "To direct the jury that the offence is committed if the defendant, suspecting the goods were stolen, deliberately shut his eyes to the circumstances as an alternative to knowing or believing the goods were stolen is a misdirection. To direct the jury that, in common sense and in law, they may find that the defendant knew or believed the goods to be stolen because he deliberately closed his eyes to the circumstances is a perfectly proper direction."

In Forsyth, the Court of Appeal found: "Between suspicion and actual belief there may be a range of awareness. In the present case, to say that mere suspicion is not enough could have been taken by the jury to imply that great suspicion, coupled with an inability to believe that the money was stolen, was equivalent to belief which it plainly is not. If the judge thought that the jury might find difficulty with the concept of 'belief', it seems to us that he ought to have made it clear to them that they had to be satisfied that the appellant actually believed that the money was stolen ... On this crucial issue the judge's direction could have led the jury to find the appellant guilty without finding that she actually believed the money was stolen. Accordingly we think he misdirected them."

It is argued here that that is not correct. Wilful blindness is much simpler than the Court of Appeal considered. It is where a person deliberately or recklessly turns a blind eye to a particular set of circumstances because he does not want to know the truth. The test to be used is that of the reasonable man: would a reasonable person, faced with the circumstances before him, have reached a specific conclusion? It is often expressed colloquially as someone not asking questions because he does not want to know the answer.

Taken from that perspective, the Court of Appeal's finding that the jury had to find as a fact that the defendant "actually believed the money was stolen" is incorrect. That is the whole point of wilful blindness, i.e., to say that the evidence so obviously leads to a particular conclusion that the defendant must have known, etc., it unless he deliberately chose not to.

Forsyth was a strange case. At the time it was widely portrayed as a money laundering case but in fact it was not. Rather, it was a case of handling stolen goods: the actual money and other instruments that were stolen, not their proceeds. Forsyth was poor law when the decision was made. Fortunately, good sense has since prevailed and in 2011, in Roberts v Frohlich and Spanner [2011] EWHC 257 (Ch), the judge said: "However irrational the directors' optimism it cannot have survived these reverses save by wilful blindness — a deliberate decision not to enquire or consider lest an unpalatable truth be exposed." That, unfortunately, is in a civil case in the Chancery Division at first instance and therefore of limited value as a precedent in relation to money laundering cases in the criminal courts.

As a result of this confusion, any draft law should make it clear what wilful blindness is and how it will be applied. Then prosecutors will have no excuse for avoiding it and judges no excuse for misdirecting a jury or themselves. Similarly, any draft law should spell out the differences between knowledge and suspicion. The question of belief should be consigned to history.

It is important, as a footnote to this section, to draw a distinction between "reasonable cause for suspicion" and "cause for reasonable suspicion". The first is correct, the second is not. The reason for this is that "reasonable cause for suspicion" is the way in which the tests outlined above are created; "cause for reasonable suspicion" qualifies "suspicion". This introduces an element of uncertainty, leaving the amount of suspicion to be decided at trial. This is undesirable. At least one country has got into trouble by introducing the wrong version into draft legislation, although it did not find its way into a final law. Even so, some commentators incorrectly insist on referring to "reasonable suspicion".

Part 2 of this article is here: Part 2
Part 3 of this article is here: Part 3
Part 4 of this article is here: Part 4
Part 5 of this article is here: Part 5