Author And In Collaboration with ADR Arbitration Chambers
Kinita Shibchurn
Mr S.K.Joy Ramphul
Money laundering and an effective AML/CFT framework to combat financial crime
INTRODUCTION
Money laundering is generally defined as “transferring illegally obtained money or investments through an outside party to conceal the true source.” This activity may prevent law enforcement from uncovering or confiscating the proceeds of crime, or using the proceeds as evidence in a criminal prosecution. Such processing may involve concealing the beneficial owner of either the actual criminal proceeds or of other property that might be subject to confiscation.
Money Laundering is the process used to disguise the origin of ill-gotten money to make it seem as though such funds were obtained from legitimate sources or businesses. Simply put, Money Laundering is the process of washing ‘Dirty Money’ in order to make it look ‘Clean’.
The activities of launderers do not only impact on the criminal justice systems, but they also have the capacity to destabilize financial institutions and financial systems. In addition, Money laundering also undermines the integrity of the Private sector, democracy and the rule of law and leads to reputational damages.
Let us take into consideration an important fact on ‘how money is laundered’ in simple terms; how are profits generated in the financial system?
In the initial – or placement stage of money laundering, the launderer introduces his illegal profits into the financial system. This might be done by breaking up large amounts of cash into less conspicuous smaller sums that are then deposited directly into a bank account, or by purchasing a series of monetary instruments (cheques, money orders, etc.) that are then collected and deposited into accounts at another location. After the funds have entered the financial system, the second – or layering stage takes place. In this phase, the launderer engages in a series of conversions or movements of the funds to distance them from their source. The funds might be channeled through the purchase and sales of investment instruments, or the launderer might simply wire the funds through a series of accounts at various banks across the globe. This use of widely scattered accounts for laundering is especially established in those jurisdictions that do not co-operate in anti-money laundering investigations. In some instances, the launderer might disguise the transfers as payments for goods or services, thus giving them a legitimate appearance. Having successfully processed his criminal profits through the first two phases the launderer then moves them to the third stage – integration – in which the funds re-enter the legitimate economy. The launderer might choose to invest the funds into real estate, luxury assets, or business ventures.
Money laundering is a truly global phenomenon; helped by the International financial community which is a 24hrs a day business. As a 1993 UN Report noted: The basic characteristics of the laundering of the proceeds of crime, which to a large extent also mark the operations of organised and transnational crime, are its global nature, the flexibility and adaptability of its operations, the use of the latest technological means and professional assistance, the cleverness of its operators and the vast resources at their disposal. In addition, a characteristic that should not be overlooked is the constant pursuit of profits and the expansion into new areas of criminal activity. Despite the considerable body of work in this area, there remains a need for further research into the operation, regulation and supervision of TCSPs; the challenges caused by the illegal use of TCSPs; and the ineffective implementation of the international AML/CFT requirements relating to TCSPs. It is also stated that, money which is laundered by criminals worldwide is estimated to be the equivalent to 2-5% of the world’s Growth Domestic Product (GDP) . Whilst smaller criminal organisations deal in diminutive amounts of cash, the more serious criminals have a propensity to locate a safer place for the proceeds of their crime in another country, quite possibly a self-governing state, where there is less suspicion and more security for themselves. This safeguard arrangement is a renowned precaution for criminals to distance the proceeds of their crime from the crime itself.
As J D Mclean has outlined:
“From the point of view of the criminal, it is no use making a large profit out of criminal activity if that profit cannot be put to use…putting the proceeds to use is not as simple as it may sound. Although a proportion of the proceeds of crime will be kept as capital for further criminal ventures, the sophisticated offender will wish to use the rest for other purposes…If this is done without running an unacceptable risk of detection, the money which represents the proceeds of the original crime must be “laundered”; put in an estate in which it appears to have an entirely respectable provenance”.
UK’s APPROACH IN RESPONSE TO MONEY LAUNDERING PROBLEM
The Hard Law
The 4MLD improves corporate transparency by attempting to set up central registers detailing data on beneficial ownership and control of corporate and legal entities in order to improve the current system. In the UK, Proceeds of Crime Act 2002 is the major financial crime statute.
The Soft Law
The FCA encourages its consumer protection goal through the FCA Systems and Control Sourcebook (SYSC) and the guidelines of the Joint Money Laundering Steering Group (JMLSG) to be used by the financial industry to detect and combat money laundering. Furthermore, the guidance identifies certain persons within the financial by placing them under reporting duties to help the FCA and law agencies in combatting money laundering.
CHALLENGES
The FCA recognises the importance of having an effective mechanism for registering suspects of money laundering as being part of an efficient money laundering prevention technique. Furthermore, financial services firms must guarantee they are certain of the source of the client’s riches with which they are dealing.
It is clear from available reports that the volume of money laundering suspicions presented to authorities in the UK is not proportionate to the size of firms under the FCA regulatory regime. There is evidence that the quality of suspects of money laundering in the UK is not as comprehensive and efficient as it might be. This could be because financial services companies do not fully comprehend their reporting responsibilities and appreciate them. The collaboration of financial companies is needed in order for the FCA to fulfil its statutory responsibilities of protecting clients and securing the resilience of the financial services industry in the UK. This collaboration can be achieved through prompt disclosure of money laundering suspicions to the FCA.
According to National Crime Agency, it was evident that the suspicious activity report submitted by some firms was imprecise and lacked the necessary details. The evidence points to the fact that firms are struggling with developing detailed reports. Companies would not want to lose their clients by placing them under investigations by the FCA. As such, this will influence FCA’s attempts to reduce the incidence of money laundering.
Politically Exposed Persons (PEPS)
With regard to PEPs, the range of people caught within the definition is hard to identify. The study conducted by UK regulators highlights the challenge with the UK anti-money laundering efforts and PEPs. The regulators noted the challenges faced by financial institutions compliance with money laundering in relation to PEPs’ operations by suggesting that around 75% of financial companies did not efficiently manage their risk of money laundering. The regulator also stated that more than 50% of financial services companies concealed severe complaints and suspicions about customer’s operations. In addition, 65% of banks have not implemented EDD measures to identify their clients.
It is not all a gloomy report, though. The FCA used regulatory hammer on companies in some instances. For example, for failing to comply with the Money Laundering Regulations, the FCA fined Standard Chartered £7.6m. Standard Chartered has neglected to carry out money laundering controls for some of its corporate customers linked to PEPs.
This provides evidence that money laundering provisions are being enforced by the FCA in certain cases.
Effective classification of a PEP is necessary for the FCA to be able to meet its regulatory objectives of protecting customers and making the UK financial architecture resilient.
Courts pronouncements on suspicious reports
POCA specifies the offence of arrangements. Arrangements relate to participation in an arrangement where the launderer is aware or helps in the process of acquiring or disposing of criminal property. In Meer Care and Desai case, the defendant was found guilty for failing to report money laundering suspicions relating to dishonest assistance for breach of trust (A.G of Zambia v Meer Care and Desai, 2006). The court held that the defendant ought to report the suspicion as it was highly likely and clear that money laundering could result from the breach of trust. In a decided case, the court held that a solicitor who failed to follow the guidelines of the Solicitor Regulation Authority (SRA) with respect to reporting suspicions of money laundering was careless but not dishonest (AG of Zambia v Meer Care and Desai, 2008). It has been held that a vague feeling is not sufficient, the suspicion by the defendant ought to be based on reasonable grounds. These cases point to the fact that the courts do not follow a strict approach or clear parameters when reaching decisions on reporting of suspicious transactions relating to money laundering offence. Therefore, this can create confusion as individuals may not be clear on what to do impacting on the ability and efforts of the FCA in promoting its regulatory objectives. If it is not possible to predict the result of a suspicious situation with any degree of certainty, it will influence the FCA’s capacity to initiate action against certain individuals. Moreover, while interpreting certain elements of money laundering regulations, the judiciary use unnecessary technicalities. In the case of R v Amir, it was held that property would be classified as criminal where the property was criminal property at the time of commission of the offence. The court found the defendant not guilty because at the time the property came into possession of the defendant it was not criminal property.
THE UK SUSPICIOUS ACTIVITY REPORTING REGIME
According to the recent National Crime Agency SARs study, the amount of suspicious activity reports (SARs) obtained by the UK Financial Intelligence Unit moved up to nearly half a million a year, putting increased demand on the unit in terms of quantity and complexity.
The rise in the amount of SARs submitted by the private sector should not mask the inadequacy of the UK’s financial crime prevention system. Transparency International stated: “The NCA report states that less the one per cent of the more than £100 billion in illicit funds estimated to pass through the UK each year is stopped as a result of SARs, this echoes the recent FATF UK review that found the system of reviewing SARs being unfit for purpose.”
Banks have a general sentiment of being trapped in an ocean of heavy and frequent regulations coupled with an increasing cost of compliance and impressively high cost of ownership caused by complex system implementations. However, as per The Financial Times, banks have agreed to pay £6.5m over the next year to improve the regime for reporting suspicious activity, which can be a red flag for money-laundering. The so-called SARs regime was one area that global standard-setters have highlighted as needing improvement.
Defensive reporting
Enforcement organisations acknowledge that they are struggling with a substantial amount of low-quality SARs generated by banks and other financial institutions (on average 2000 SARs per working day are obtained). Majority of the SARs are irrelevant, with little practical impact, or merely bad quality , meaning that vital resources are being diverted.
However, blaming banks and financial institutions alone would be incorrect. The way in which the failure to report money laundering offences in sections 330-332 of POCA are currently drafted triggers high volume of defensive reporting.
DEVISING AN EFFECTIVE AML/CFT FRAMEWORK; THE KEY AREAS
Clearly, an effective AML/CFT regime requires significant collaboration and cooperation from the country’s stakeholders in the public sector. Also crucial to the success of the regime, however, are relevant stakeholders from the private sector, namely the financial institutions and designated nonfinancial businesses and professions (DNFBPs) subject to compliance obligations. These should also be included in the collaborative process.
The primary responsibilities of any AML/CFT supervisor are:
- Monitor AML/CFT compliance in the banking industry
- Enforce AML/CFT regulations set out by policy makers
- Ensure a level playing field to promote fair competition in the financial sector
- Work with the industry to build an effective AML/CFT regime
Safe-guarding the Banks in Financial Systems
A country’s AML/CFT regime needs to start with its banks. Because of their crucial role in the financial system, any banks not having effective AML/CFT programs are the ones most likely to be exposed to ML/TF risks, and hence can most easily be exploited by domestic and international criminals. In order to protect the integrity of its financial system, therefore, the UK must have an effective AML/CFT regime that satisfies international standards. The FATF recommendations do provide sufficient flexibility to accommodate different sets of national domestic conditions and can also allow access-expanding innovations like branchless banking. It is also noteworthy that, if these citizens do find themselves discouraged from using the formal banking system, they will find alternative systems that, by definition, are subject to no controls.
A Political Will: Importance of cooperation and collaboration
In order to have a successful AML/CFT regime, UK government must have the political will to undertake all the necessary steps to establish and implement it, and having done so, the government must then demonstrate a clear commitment to the process it has put in place. This means that the government must pass and enforce appropriate laws and regulations, must dedicate the necessary resources to the task, must grant suitable powers to relevant agencies, and must prosecute cases and obtain convictions. Without such political commitment from the highest governmental levels, there is little chance for success for any AML/CFT regime. Indeed, without it, there is little incentive for officials to develop an effective AML/CFT supervisory system. That is because other stakeholders are unlikely to commit themselves either to contribute or participate effectively in the process. Money laundering and terrorist financing are complex crimes and, for this reason, multiple national agencies must be involved in the various aspects of preventing, detecting, and prosecuting them. The specific agencies involved may vary from country to country, but the collaboration of the following areas is needed for an effective, overall AML/CFT regime:
- Legislature
- Executive Branch or Ministries
- Judiciary
- Law Enforcement, including police, customs, and so forth
- FIU
- Supervisors of banks, including the central bank, of other financial institutions, and of DNFBPs. Where there are different national agencies involved, there are likely to be different objectives and priorities. It is important, nevertheless, to establish a unified set of objectives and priorities for the overall regime, and to have collaboration and coordination among the various public sector constituencies.
Even so, while collaboration among the relevant public sector constituencies is necessary, it is not sufficient to assure effectiveness for a country’s regime. There must also be collaboration with those private sector stakeholders (such as banks, other financial institutions, and DNFBPs) that are required to comply with the country’s AML/CFT obligations. This group has specialized perspectives on the regime’s objectives, as well as on the practicability of the timeframes for achieving them. In addition, the regime will be more effective overall, and the level of compliance will be higher, if the concerns of the private sector are addressed.
Organisation’s approaches to an effective framework
Supervision by the Bank Supervisor
Supervision of AML/CFT compliance in banks by the bank supervisor is probably the most common organizational model, and it produces a number of benefits.
First, supervisory bodies are usually both highly skilled and knowledgeable about assessing risks in banks, as well as about the policies and procedures to manage those risks. Second, ML/FT risks are monitored like other types of compliance risks for which bank supervisors are responsible. Third, supervisors are knowledgeable about how banks operate and about the products and services they offer. Fourth, supervisors understand the differences between the ways small local banks and large international banks operate. This international dimension to the supervisor’s responsibilities is particularly useful in cross-border supervision. Finally, most bank supervisors have at least some experience in enterprise-wide, consolidated supervision. Many banking institutions are part of large financial organizations, and these include securities firms, insurance companies, and other types of financial entities. Such organizations often adopt an enterprise-wide approach to AML/CFT compliance, just as they do to risks in consolidated credit, market, or general operations. This approach requires a consolidated understanding of the entire organization’s risk exposure for ML/TF across all activities, business lines, and legal entities. Such a centralized function often includes the ability for the organization to comprehend the enterprise-wide, indeed worldwide, exposure of a given customer, particularly one considered to be high risk. It is a complex undertaking, but bank supervisors are well equipped to understand the capabilities and limitations of such a system.
This model does have some disadvantages. Bank supervisors, because of prudential concerns, may not give AML/CFT the same priority as governments do, or may not have sufficient resources to do so. In consequence, compliance issues may get neither the quantity nor quality of attention that is necessary. As well, supervising compliance with the AML/CFT regime is not a traditional prudential supervisory responsibility. It is a new concept to some extent, not only for bank staff, but also for the supervisory body, which must learn new skills. This situation may initially be reflected in staff difficulties.
Supervision by the FIU or Other Entity
As an alternate to the bank supervisory model, AML/CFT compliance supervision may be conducted by the FIU or another governmental agency. Under this model, it is the FIU (or alternative), not the bank supervisory body, which must be authorized, first, to have access to all relevant bank information and, second, to conduct examinations. Such authority is needed to enable the FIU or governmental supervisor to determine a bank’s compliance with its AML/CFT obligations. This model has a number of benefits. First, because collection of information and analysis are the core of its duties, the FIU has expertise in certain AML/CFT matters. Second, AML and CFT are its only responsibilities. Third, the FIU has direct access to suspicious transactions reports (STRs) and related information. According to FATF Recommendation 26, the FIU should have timely access, directly or indirectly, to the financial, administrative, and law-enforcement information required for it to undertake its functions properly, and these include the analysis of STRs. This model also presents several drawbacks. If the FIU is the supervisor, it may well be inexperienced both in financial inspections and in bank supervisory matters. As well, the FIU is not likely to be sufficiently well equipped to undertake AML/CFT supervision on an enterprise-wide basis. On the other hand, if a body other than the FIU is the supervisor, that body may well not have access to STR information.
Examinations are likely to become more limited in scope and expertise, and multiple regulators and different approaches to compliance supervision may generate some confusion for banks.
The ML/FT Risk Assessment Process from the Bank Perspective
Bank’s Risk Assessment Process
As part of its risk management, and as the first step of any ML/FT risk assessment, a bank should understand the main criminal threats to which it might be exposed, for example, drug trafficking, arms smuggling, and corruption. Only banks with effective analyses of the risks involved are sufficiently well equipped to take the appropriate actions to mitigate them. A reasonably designed risk-based approach will provide a framework for identifying the degree of potential money laundering risks associated with specific customers and transactions, and allow an institution to focus on those customers and transactions that potentially pose the greatest risk of money laundering. Having analysed the money laundering or terrorist financing risk, bank management should then communicate those risks to all business lines, to other management, to the board of directors, and to all appropriate staff. To communicate the risk effectively, the assessment should, wherever possible, be written in language that can be easily understood by those who will use it, including the bank’s supervisors.
The benefits of an effective AML/ CFT regime (Framework)
An effective AML regime is a deterrent to criminal activities in and of itself. Such a regime makes it more difficult for criminals to benefit from their acts. In this regard, confiscation and forfeiture of money laundering proceeds are crucial to the success of any AML program. Forfeiture of money laundering proceeds eliminates those profits altogether, thereby reducing the incentive to commit criminal acts. Thus, it should go without saying that the broader the scope of predicate offenses for money laundering, the greater the potential benefit.
This will also influence the public confidence in financial institutions, and hence their stability, is enhanced by sound banking practices that reduce financial risks to their operations. These risks include the potential that either individuals or financial institutions will experience loss as a result of fraud from direct criminal activity, lax internal controls, or violations of laws and regulations. Money laundering has a direct negative effect on economic growth by diverting resources to less productive activities. Laundered illegal funds follow a different path through the economy than legal funds. Rather than being placed in productive channels for further investment, laundered funds are often placed into “sterile” investments to preserve their value or make them more easily transferable. Such investments include real estate, art, jewellery, antiques or high-value consumption assets such as luxury automobiles. Such investments do not generate additional productivity for the broader economy.
CONCLUSION
Current regulations and regulations do not help the SARs process. As seen throughout this thesis, the legal obligation to report suspicious activity leads to a tendency for compliance experts to “over-report”. For a more flexible and proactive anti-money laundering effort, higher public-private involvement and partnership is required. Greater use of technological tools to improve identification of the qualities separating a useful report from a less valuable one, should be made.
The focus on taking a risk-based approach (after implementation of MLR 2017) is driving the need for experts to gain a profound knowledge of potential risk exposure a relationship presents, creating additional demand for solid investigative skills.
Furthermore, because of the proliferation of digital channels now being used to create accounts, onboarding customers also poses growing issues. Remote onboarding being more prevalent has resulted into a rise in volume of new accounts created fraudulently.
With so many challenges facing the AML industry, the use of technology plays a vital role in assisting business tackle financial crime. Technology can assist with data sharing, with many calling for a single utility in the AML regime that gathers and collects the common information businesses need to conduct due diligence. Maybe the UK can learn from the Nordic countries, where banks are exploring the possibility of setting up a KYC utility together with setting up a joint venture to achieve this. The Nordic utility will focus on creating “an effective, common, safe and cost0effective infrastructure platform to share confidential credentials with customers”. This will assist in decreasing the time taken to carry out KYC checks and embed new clients by offering a centralized common resource they can all draw on.
There are significant difficulties facing the compliance sector. Money launderers are becoming more advanced and technology is being adopted as rapidly as it is released- unhindered by laws and regulations, they leave business on the back foot indefinitely. From past reports we noticed that even though many organisations and laws are created, it is not enough to challenge this problem. So by formulating such framework, we are sure to fight money laundering and terrorism financing in a better way and with more ability. These do affect a country’s economy and with the implementation of the proposed framework, money laundering can be minimized to a least number if not stop completely. We cannot afford to lose sight of the ultimate objective. Money laundering has a real-life human impact, and we must do all can to stem it.