Pre-launch risk and compliance review

All products and services should be subject to a full compliance and risk management review before introduction to the market, for example, a consideration of how money launderers might use a new investment product and what steps can be taken to remove or reduce that risk. Assuming that the risk cannot be completely removed, there should be a consideration of what action might be taken in the event that the product were in fact to be used.

Funding future crime including terrorism

While it is true that there is a range of secondary offences relating to assisting a person to commit an offence (aiding and abetting, conspiracy, etc.) the conduct of providing the working capital to commit an offence is rarely a discrete offence.

Those who finance crime benefit from it by taking a return on their investment. Some argue, therefore, not all planned offences are completed, however, and not all support for future crime is monetary. For these reason the concept of "providing material support" which is, in some countries, applied to the funding of terrorism, should be applied more widely to the body of criminal law. In doing so, it would include providing a safe house, food, clothing, telecommunications and transport in addition to money per se. This would also extend to support after the commission of a crime and so bring within the enforcement net the family and friends of criminals who help them to "lie low" or to escape across borders.

Security of information where a report is made

In the case of HSBC v Shah [2009] 6 EG 100, HSBC's Private Banking unit in the UK filed a suspicious transaction report in relation to the accounts of Shah. Shah alleged that the bank did not act in good faith and sued for US$300 million in damages. The case worked its way through the English legal system to the Court of Appeal, which agreed with the Judge at first instance on most of his grounds for dismissal. But the Court of Appeal decided that an outstanding question had not been resolved - that of concealing the identity of those involved in the flow of information and the ultimate decision making process. The case was heard, in the High Court (first instance) and the decision handed down in early July 2011. It is bad law and steps must be taken to overturn it as urgently as possible.

The decision said that the bank must release to Shah details of the information that passed within the bank and the decision making process. Further, those details should obscure but not redact details of the persons involved. The Judge ordered that a system of identifying persons by department and then by a number (e.g. Compliance 12) should be adopted. This order is deeply flawed for two reasons.

First, it presumes that the party against which such an order is sought is large enough to have many people in each relevant department. The learned Judge failed to consider the scope of counter-money laundering laws. The vast majority of affected businesses are not large: in many cases, they are very small businesses. In a business with, say, 20 people, the Judge's formula will tend to identify individuals. This will have an immediate and direct effect on the large number of funds and foreign private banking operations that maintain a small presence in London. It will also have a considerable and potentially dangerous impact on representative offices which are, generally, small. That directly conflicts with another of the Judge's findings.

Secondly, the Judge found that individuals within organisations upon which a duty to make reports is placed should have anonymity: he accepted the argument that there is a public interest immunity. His decision, therefore, for all practical purposes flies in the face of that acceptance of the principle of anonymity.

Any properly drawn law should make provision for an investigation as to the bona fides of a report – but under no circumstances should the target have locus standi to make such an application nor access to any information which would reveal or tend to reveal the internal risk-management or compliance processes of a financial institution nor the identity of any person involved at any stage of that process. It follows, then, that there should be a committee of inquiry based within the FIU to assess the bona fides of a report if a defendant challenges it, and that the costs of that challenge, if unsuccessful should be met by the defendant.

However, the defendant should not be present at or take any part in the inquiry (save as to filing one set of written submissions as part of his petition) which should focus entirely on the information available to and the processes undertaken by the financial institution. If there is a finding that the financial institution acted in bad faith, then that finding should be conclusive evidence against the financial institution in a civil action brought by the defendant against the financial institution.

Asset freezing/seizing/confiscation/forfeiture

Governments do not want money laundering to stop. They like launderers to continue to hide funds in businesses which are bound to report them. That enables the state to freeze, seize and confiscate the proceeds of crime. In this way, governments enlist not just the financial sector but everyone who has dealings with a criminal and the assets he has generated. That decreases the costs of policing and provides warm leads for investigators.

This is why the correct term is "counter-money laundering" not "anti-money laundering". If a financial institution rejects a customer because of a suspicion, then the opportunity to seize, freeze and confiscate any related assets is lost.

If, however, the assets are held by the reporting entity and are the subject of a report, then they can be attacked. Governments can generate substantial sums of money from confiscating the proceeds of crime, especially supposedly victimless crime such as drugs or arms trafficking. In this way, the proceeds of crime can be converted into financial support for law enforcement or be a contribution to the general revenue account.

There is a wide range of approaches to how asset freezing/seizing is activated. The simplest (in principle, given that administratively and in terms of its drafting it is not simple at all) is that set out in the UK's Proceeds of Crime Act 2002. Under that Act, any account or asset referred to in an STR must be held, and not dealt with, for a period of time, which therefore amounts to an automatic freeze. If no objection to the release of the assets is received before that time expires, then the reporting entity is free to deal with the asset, unless new circumstances have come to light.

In several countries, cash exceeding a certain value may be seized if a person is found with it in his possession. This practice is dubious because it implies guilt even without charge, much less conviction. It has nevertheless been given legal status by legislation and has not been subject to serious challenge either as an infringement of human rights or as contrary to any constitutional right. The reasons for such a lack of challenge appear to be, first, that the assets may be regarded as evidence (although the laws providing for the seizure do not say this is so), and secondly that the person from whom the cash is seized has the right to make an application to the court for its return if he can prove, on the balance of probabilities, its provenance and his right to hold it.

Of more serious concern to human rights lawyers in Europe particularly is the question of confiscation of assets after acquittal. Several countries have, in revisions of laws made since 2000, made specific provision that, if a person is found not guilty of laundering, that acquittal does not automatically preclude an application for confiscation. While at first sight this might appear to be illogical, it in fact makes a great deal of sense when seen in context.

Although the process is conducted in the criminal court, the burden of proof in relation to such assets is not that which must be satisfied for a conviction, it is the burden of proof that would be applicable if the case were to be heard in a civil court, i.e., on the balance of probabilities. Although the state may fail to discharge the burden of proof of "beyond all reasonable doubt" it may nevertheless meet the standard of "more likely than not".

Therefore, a properly drawn law should include a provision for confiscation even if a defendant is acquitted. Even more contentious is whether property (other than cash, see above) should be subject to confiscation even if no charges are brought or if charges are withdrawn. Two matters arise: first, what would be the correct venue if no criminal charges are contemplated, and secondly, where does this leave the presumption of innocence?

This author sees the problem not in terms of law but in terms of its application. If an asset is seized as evidence in an investigation then, in principle, there should be no objection to it being ultimately confiscated, e.g., an engagement ring that the fiancé patently could not afford or arrange credit for, even when it is the hands (or rather on the finger) of the fiancée.

It is, however, sensible to consider that, in countries where there has been corruption in law enforcement and in the judiciary, such a policy would provide an ideal opportunity for extortion where any asset could be seized and returned only if a payment were to be made. The author suggests, therefore, that it would not be desirable to include such a provision in a law intended to be adopted as a global standard.

Finally, what is the difference between "confiscated" and "forfeited" property? In practical terms, nothing, but in legal terms, "confiscation" means taking full control, but not legal ownership of, the assets. The term is in fact nearer to "seized" than to "forfeit". If an asset is forfeit, then all rights in it are transferred to the state, subject to such third-party rights as statute allows.

Third-party rights in frozen, seized, confiscated or forfeited property

One of the most serious omissions in counter-money laundering laws is an aspect of the rights of the owner of assets which are frozen, seized or confiscated.

For example, an employee embezzles a substantial sum of money from a small business. The business notices that the money has gone out of its account overnight and asks its bank to try to get it back. The bank properly files an SAR and specifies the account to which the money was sent. The FIU notifies the receiving bank, which confirms that the funds are in the account and the account is frozen. As a result, the small business cannot get its money back because it is now evidence in a possible criminal trial. Because it cannot prove that it is certain to receive a full refund, it cannot use that money as security for a loan from its own bank. As a small business, there are few forms of finance available to it. If the case against the former employee proceeds slowly, as many fraud and money laundering cases do, it may be months or years before that money is unlocked and returned under the standardised asset release provisions which are set out in most laws around the world.

The only course of action available to the small business is to commence litigation for an order to release the funds. To do that, it will have to prove where the money is, but neither its own bank nor the prosecutors are allowed to give it that information until the details are revealed in open court. In the former case, it is because of the possibility that it will be accused of tipping off; in the latter, it is because of the standard operating policies applicable in police investigations. Indeed, the small business may not even have been notified that the funds have been found and frozen.

What tends to happen, and this author adopted this tactic within a matter of weeks of the UK's Proceeds of Crime Act 2002 being brought into force, is that the victim grabs either the money or the assets purchased with it. Assets are formally transferred to the loser and then a report made. The first time this author used this tactic, the money embezzled in the case had, in part, been used to purchase a car. The embezzler delivered the car, documents and keys and signed a transfer document.

When the police insisted that the car was evidence and insisted they be allowed to take it away, the simple question of, "how are you going to get it into court and put it on the judge's bench?" was met with the response, "we'll use a photograph". The police were taken to the office car park to photograph the car. Legally, they were right to be annoyed as it is at least arguable that the car was the proceeds of crime and that now it (as distinct from the stolen money) was in the company's hands it could, therefore, be construed, prima facie, as money laundering. A dilemma of this type should not arise, much less if it is a reporting institution that adopts such a technique, but it could be argued that they failed to file an SAR with sufficient alacrity.

While the question of an illegal transfer to the owner could be addressed by making an application under civil law for the delivery up of the asset, the danger here would be that delay in filing an SAR may be construed against the owner.

Police and other agencies are often anxious to get their hands on the assets because they frequently tend to be required to meet targets, and a missed opportunity may be difficult to make up. This can therefore give rise to a direct conflict of interest which is in fact counter-productive; the race between the victim and investigators reduces the possibility of cooperation and increases cost for both. In fact, they should be able to cooperate more fully.

The result of any such failure to protect the victim of crime against the consequences of loss must be dealt with in any properly drawn law. It must provide for victims to be informed of the status of asset recovery and a procedure should be set out for the rapid and inexpensive return of stolen money even before trial. Further, it must provide for the exchange of information between victim and state investigators so that each may benefit from the work done by the other. Where such cooperation takes place, the assets should, if possible, be returned direct to the victim but should count towards departmental targets.

The cooperation should extend to the use of mutual legal assistance treaties/memoranda of understanding to gather information on the location of assets and even to secure, government to government, the preliminary freezing of assets which should be held pending an urgent application in a relevant court from the victim for the return of funds. Information from state investigation should be made available to the victim in support of his case which, it has to be remembered, has to be proved only on the balance of probabilities. In this way, the state can secure the evidence it needs for its case and the victim's business will be affected as little as possible.

In the case of third parties who hold an interest in the property as security, it is important that they are able to realise their security as soon as it falls into default. For example, the holders of a residential mortgage should be able to repossess the property even though it has been seized in criminal proceedings. If it is needed for evidence, then a court is able to order that detailed reports and photographs will be sufficient for proof at trial. There is therefore no good reason for a property to stand empty for months or even years until a case comes to trial, by which time the arrears will have continued to accrue and the property will have become dilapidated.

Further, where a third party holds a right other than security, e.g., as co-owner with no suspicion as to involvement, then that third party should not be prejudiced by the seizing, freezing or forfeiture of that property. These rights should not be available in the event that they came into the possession of the rights holder in circumstances which would or might reasonably have been known or suspected to have arisen from the proceeds of criminal conduct.

Any properly drawn law should not only preserve the rights of bona fide holders of third-party rights, but should also provide for them to be able to enforce those rights without delay where the right of enforcement arises.

Property used in the commission of an offence

The law concerning property used in the commission of an offence is piecemeal, even within jurisdictions. Across the world it is a mess of different approaches and different legal standards. Although technically unrelated to counter-money laundering law, it is probably helpful to amalgamate laws which relate to dealing with such assets with those which apply to dealing with the proceeds of criminal conduct and with assets that are, or may be related to, the commission of a future crime.

"Pro tem" administrative orders

The system should provide for a form of order which could be brought into play in some circumstances, in some countries, albeit one which might not be widely used. These might be called "pro tem" orders. They would be administrative orders made by a senior office in the FIU but executed and enforced as court orders. Once executed, the target might apply to discharge the order upon the target's proof on a balance of probabilities that he is entitled to the asset; if he loses, it is confiscated. Targets must therefore be sure of their ground before making an application. From an enforcement point of view, the target's application would be a short cut to a final confiscation hearing.

Experience in the U.S., where a similar approach is used in relation to seizures of substantial amounts of cash, has been that in more than half of cases no application is made for the return of the money. The money is deemed forfeit after a period. Such an approach could be extended to other assets, with official notice published in a newspaper of record (or on a web site specially dedicated to the purpose). The forfeit period should be sufficient to enable the notice to come to the attention of the owner and for the owner to make an application. It is suggested that this should be 42 days. Where, however, there is a register of third-party interests, for example a land registry or a register of asset finance (e.g.. for motor vehicles), then the FIU should search that register and notify rights holders promptly upon the making of the order.

The perpetual nature of money laundering

Counter-money laundering laws universally include money laundering as a predicate offence If there are lists of predicate offences, it is expressly included; if there is "all crimes" then, by reason of its serious penalties, it is included by default.

Given that money laundering is, inter alia, having possession, custody or control of the proceeds of criminal conduct or any asset which in whole or in part represents it, it follows that money is never, ever, clean (despite the often-expressed opinions of some commentators) and can always (in law, if not in practice) be traced. Given that yesterday's laundering is a predicate offence for today's laundering, the original predicate offence become irrelevant. Even if there is a statute of limitations on the original offence, that does not matter.

Singapore has a long-stop date before which any predicate offence cannot be used as a basis for a money laundering conviction. Most countries do not.

Further, this is not a matter of retrospective application: the offence of laundering takes place on the day it occurs. That the predicate offence may have taken place prior to the passing of the relevant law does not affect the laundering. Even if this argument is disputed, then that dispute is overcome by the proposed clarification that there is no need to prove the specific criminal conduct or, even, offence.

Accordingly, the wealth of known crime figures and their families which has been built up over several decades is not safe. In the U.S., the families of known organised crime figures display extraordinary wealth with impunity. So it is in many other countries, but less obviously in the absence of extensive "celebrity" media coverage. Even in the UK, where legislation has been enacted to try to deal with figures behind serious and organised crime, no money laundering prosecution has been brought on the basis of visible wealth exceeding visible means of support.

Any properly drawn law will need to make clear that the perpetual nature of the offence means that any argument that a statute of limitations applies is otiose.

Being concerned in an arrangement

Giving advice or providing assistance on the creation of a scheme for money laundering or the financing of a future crime is a complex issue. First, the adviser must know or have reason to suspect that the advice or assistance is connected to laundering or the funding of future crime (for convenience, in the remainder of this section, reference is made only to laundering but should be read as including the funding of future crime).

Being concerned in an arrangement is a very wide-ranging topic. It includes company formation, setting up a trust, even taking money into the firm's clients' account for the payment for, e.g., a property. It can also include providing office services, courier services even a post office box. In short, if any person provides any assistance, whether in the course of business or not, which is used in a money laundering scheme, then, prima facie, the offence is committed subject to the necessary mens rea being established.

"Know or have reason to suspect"

The most often-asked question in relation to money laundering or terrorist financing is: "how do I know if I am suspicious?" There is no satisfactory answer. It is certainly something more than a feeling that something is not quite right; but it is far short of being in possession of evidence. Perhaps the closest one can get to a definitive answer is: "If you know certain conduct is against the law, or you think it is so serious that it should be, then if you think proceeds may have arisen from that conduct, you are suspicious."

[as to suspicion in financial crime, see the advanced e-learning course "Understanding Suspicion in Financial Crime at https://learning.financialcrimeriskandcompliancetraining.com where the answer to the question is revealed. ]

There are wider issues, however. Background knowledge about one's environment will play a part. It may be general local knowledge that a particular group sells drugs in nightclubs. If one of them is customer at a financial institution, then any member of staff who is aware of that fact must make a report. Similarly, if newspaper reports provide information about alleged offences, and even more importantly convictions, then anyone who has had dealings with the defendants should make a report. Indeed, a recent case in the U.S. specifically related to a securities house that did not pay attention to media reports relating to some of its clients. Again, this is an area where a government-produced due diligence list would be of considerable national and international benefit, particularly to smaller businesses which have foreign clients or customers.

Duty to make an SAR

The duty to make an SAR should not be limited to the regulated sector. If the purpose of counter-money laundering laws is to make outcasts of those who benefit from criminal conduct or those who help others so to benefit, then that intention is defeated by excluding the majority of the population from the range of those who must make reports. This is the approach adopted by laws across much of the world, although there is a difference in most cases as to where the non-regulated person would file his report (generally to the local police rather than to the FIU).

Financial sanctions

The application of financial sanctions, including travel bans and asset freezes, under a range of supranational and national policies, is something that all businesses find challenging. At the one end of the "helpful" scale is the U.S.'s Office of Foreign Assets Control. Information is available, instantly, in a variety of ways and in a variety of formats, both for the entire list and for updates only. At the other end of the scale are those countries that, sometimes a month after a UN Resolution is passed, distribute a memorandum informing financial institutions that they should look at the annexe to the resolution. In the middle is the UK Treasury, which distributes its updates in pdf format. These cannot be exported for data-matching purposes, leaving only the download of a full list regarding that day's date as an option. The United Nations comes in for special criticism for making it exceptionally difficult and time-consuming to find out who has been added to any list except the 1267 Al Qaeda list.

While any properly drawn law must provide for financial institutions to have regard to those named on lists which apply to that institution, governments and supranational bodies must make this information readily available, immediately and in an easy-to-integrate format.

Summary

Counter-money laundering laws and anti-terrorist financing laws are not consistent across the world, although there is no technical reason why this should be so. It is in the interests of global society that there are as few inconsistencies in drafting and in implementation as possible. This reduces the opportunities for criminals to pick their way from country to country using the gaps between legislation.

Some weaknesses are due to pressure brought to bear by special interest groups such as lawyers and financial services businesses. The interests of society as a whole extend beyond the interests of special interest groups and, provided all countries are treating all groups in the same way, no competitive advantage is lost or gained as a result of the application of a tight, effective and properly enforced regime.

Other weaknesses are due to political will or the lack of it and this is especially so in relation to determining predicate crime. A common, global approach will remove this argument and lead to a much simplified system for financial services businesses to employ.

The regulated sector has grown apace but some of the tools that would, obviously, be used by money launderers have not been included because of drafting that is too focussed and prescriptive. This can be avoided in future by relating to the activity rather than the business type. Furthermore, some specific facilities used by money launderers have been entirely omitted from the regulated sector. Finally, the non-financial regulated sector is subject to requirements that encourage migration to that sector from the more regulated sector and this must be addressed.

The regulated sector has to bear huge costs of risk management and compliance. Governments have sought to pass on the cost of intelligence gathering to the private sector but have offered no support. This is an unsatisfactory state of affairs, especially as in some cases governments actually hamper the analysis of data by financial institutions by failing to make available government data and statistics; they should instead provide data and analytical information so as to reduce the burden on financial institutions. Ideally, this data should be available internationally, and without doubt it should be free and in a format that financial institutions can readily use in their own data systems.

Part 1 of this article is here: 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
This page isPart 5