serious difficulties facing the many UK agencies attempting to recover proceeds of crime.
Governments are increasingly keen to stress their efforts to track terrorist funding and recover the proceeds of organised crime. A timely report from anticorruption pressure group Transparency International UK (TI) – Combating Money Laundering and Recovering Looted Gains – assesses the United Kingdom’s efforts in the area. It finds them lacking.
‘There have been major improvements to the UK anti-money laundering (AML) regime since 2007 but there are still significant gaps. They are serious enough for us to voice concerns that dirty money is still getting through and the situation cannot continue’, TI executive director Chandrashekhar Krishnan says. He points to the need to improve regulation in overseas territories (OTs) such as the Turks and Caicos, now under scrutiny over corruption allegations, including concerns about money laundering. TI says that such territories should either be funded by the United Kingdom to improve regulation or be wound up as financial centres. ‘It is much too dangerous to leave things as they are’, Krishnan warns
Targeting PEPs
TI also calls for stronger due diligence to help catch politically exposed persons (PEPs) who siphon off their country’s wealth. ‘Contrary to what the British Bankers’ Association (BBA) says, we reckon there is still a problem with the Financial Action Task Force (FATF) recommendation on due diligence’, Krishnan argues. ‘BBA says a risk-based approach means they will leave some PEPs unidentified. We say a risk-based approach should identify all PEPs.’ One major challenge facing those agencies with responsibility for recovering assets is that developing countries have not understood how the UK system works, the report suggests. ‘The UK needs to be proactive, for example with road shows to go out and explain this. With 12 agencies involved (see box), there needs to be coordination and the rules need to be clarified’, Krishnan says.
TI also suggests that the government, through the Department for International Development (DFID), should contribute to capacity building in OTs. ‘The international legal community can help with advisory services and by discounting fees, as it is very expensive. There should also be loans available, and governments should help countries meet costs’, Krishnan suggests.
In addition, a database should be available to all participating institutions, with details of legal information country by country relating to PEPs. ‘The Law Society questions why the burden of this should fall on the private sector. We say anti-corruption is for the public good so there is no reason why public funding should not be put in too’, says Krishnan.
Robert Palmer of anti-corruption NGO Global Witness points out that banks spend huge sums on risk models and money laundering databases. ‘There may also be a possibility of some public money for this’, he says.
Diverging opinions
This is one of many points on which TI and the Law Society differ. In its response to the TI report, the Law Society’s Money Laundering Task Force welcomed TI’s project and the specific focus on PEPs. But the task force was concerned that TI had not taken into account the costs to the private sector, and argued that the focus was on a smaller number of large financial institutions. AML obligations also apply to a large number of small to medium-sized businesses, and the task force believes that the cost to these businesses of implementing systems that could trace PEPs would be disproportionate to any benefits.
Other lawyers agree that the TI recommendations would add a further layer of bureaucracy to a regime that is already heavily regulated. ‘Transparency International does a good job, but regulators have made a huge effort, and we need to take care before proposing another layer of regulation. It’s a matter of proportionality’, says Louise Delahunty, a business crime specialist at Simmons & Simmons.
Delahunty believes that the United Kingdom is seen as a world leader in the battle against money laundering. ‘Both the government and FATF encourage a risk-based approach because it allows flexibility. Financial institutions are already spending huge sums of money to ensure that they have proper systems in place.’
The role of lawyers in combating money laundering remains controversial. Robert Palmer of Global Witness would like to see greater awareness among lawyers of the rules on dealing with the proceeds of corruption. ‘The Law Society produces briefing documents’, he says. ‘But lawyers are forced to behave like pseudo banks. Money goes into client accounts and they then may need to distribute money not directly related to their legal work.’
The Law Society task force notes that many countries do not have lists of PEPs and it may cost a lot to compile them. The Serious Organised Crime Agency (SOCA) and DFID are working on an analysis of the footprint of PEPs in the United Kingdom, which the Law Society believes will give a better picture of how PEPs are trying to exploit the regulated sector.
Steven Revell, coordinator of the IBA’s Anti-Money Laundering Legislation Implementation Group (AMLLIG), argues that making lawyers act as police is a flawed approach. ‘The FATF has the concept of the lawyer as gatekeeper, but TI proposals go further’, he says. ‘They are in danger of turning everyone into a policeman.’
One of the difficulties in policing PEPs is the wide range of people that potentially fall into this category. For companies required to carry out due diligence and for lawyers who need to report suspicious transactions, there is the constant concern that they could be caught out. Monty Raphael of Peters & Peters and senior adviser to the AMLLIG suggests that when the FATF came up with the idea of focusing on PEPs almost a decade ago, no one had thought it through. ‘The ideas are good, but very difficult to implement’, he says. ‘There is a heavy regulatory burden, but it has to be judged against what is effective.’
Despite these concerns, governments now see money laundering as high priority, as the April G20 meeting illustrated. The TI report further highlights serious barriers to development in poor countries. ‘One of the most interesting recommendations in the TI report is where PEPs are not allowed to have a business relationship abroad. This should be taken into account’, Palmer says.
‘If people are not allowed to hold an account in their own country, this should be a red flag’, he argues, while conceding that this might throw up human rights issues. ‘Due diligence is all about red flags – signs that something is wrong. Banks need to do due diligence better and requirements need to force them to do so. Better domestic and international coordination is needed’, he says.
The US and UK role as financial centres makes their response to all this very important, Palmer believes. ‘If one country with a big financial market takes the lead, it will prompt international action.’
Lawyers working on money laundering cases in the United Kingdom note that although the regulations appear tight, banks have done little in practice to halt the inflow of funds from PEPs. They highlight the volumes of money from African regimes in particular that flow through London, representing a serious failure.
While the government believes that the United Kingdom has made real progress in tackling money laundering by PEPs, it has welcomed the TI report. ‘Two- and-a-half years ago the Proceeds of Corruption Unit was set up within the Metropolitan Police to recover stolen assets’, a DFID spokesperson says. ‘Working with SOCA and the Crown Prosecution Service (CPS), successes have included £20 million returned to Nigeria (through both criminal and civil processes) with £80 million of Nigerian money frozen and £61 million of Brazilian money frozen in UK accounts. This record stands comparison with other efforts internationally, but is only a start. There is more to do. We will consider the findings of the report, to inform our efforts to maintain an effective and proportionate architecture for anti-money laundering and asset recovery.’
In 2007, the FATF gave the United Kingdom one of the highest overall compliance ratings for its money laundering systems, the DFID spokesperson notes. ‘We are always looking to improve the regime and since that evaluation have done so. For example, in December 2007, updated money laundering regulations were introduced.’
Where trusts and shell companies are concerned, ‘we expect firms dealing with potentially higher risks to adopt more stringent customer due diligence checks’, the spokesperson explains. ‘As for the overseas territories, in addition to a current review, the Foreign Office is helping them to develop their capabilities and resources.’
As the government steps up its efforts to recover assets, it is important to remember the fate of previous attempts. The Asset Recovery Agency was set up under the Proceeds of Crime Act of 2002. The intention was that the agency would recover substantial sums, stem the flow of funds for crime and become self financing by 2005–2006. By 2007, National Audit Office (NAO) figures showed that the agency had cost £65 million but only recovered £23 million. This was partly because of the complexity of the cases and the length of time that each was taking to resolve. Shortly before the NAO report was published, the agency’s casework was transferred to SOCA. There has been much talk of the Serious Fraud Office also being rolled into SOCA and it may be that the creation of one ‘super agency’ is the way forward for properly coordinated efforts in the area
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