Money Laundering is commonly referred to as the concept of concealing, relocating or seeking to retain the profits conducted from a crime. The European Communities Directive of March 1990 defines it as “the conversion or transfer of property, knowing that such property is derived from serious crime, for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in committing such an offence or offences to evade the legal consequences of his action, and the concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property, knowing that such property is derived from serious crime.”
Criminals benefit from the proceeds of the crime by usually initiating in complex money laundering schemes which more often than not, finance terrorism and large criminal organisations. However, under UK law money laundering can also encompass the simple ownership of the proceeds of criminal’s own crime. The Proceeds of Crime Act 2002 (PoCA) identifies this to be “wide-ranging and encompasses mere possession of criminal or terrorist property as well as its acquisition, transfer, removal, use, conversion, concealment, or disguise”.
The aim of this research will be to exploit a critical approach as to the methods used by the UK government to prevent money laundering and whether the anti-money laundering developments, such as the Money Laundering Regulations 2007, are in-fact having the desired effect. This study will then focus on previous case law which suggests recent developments have prevented money laundering; however, there are cases to support the argument that loopholes still exist within the UK’s legal system despite measures being in place.
Many organisations in the finance sector, such as banks and accountants, are required to employ anti-laundering safeguards and implement secure systems in respect to money laundering. Reporting obligations are strictly set whereby firms must report suspicious activities to The Serious Organised Crime Agency (SOCA).
Money which is laundered by criminals worldwide is estimated to be the equivalent to 2-5% of the world’s Growth Domestic Product (GDP) – an estimated £20 billion is laundered yearly in the UK alone. 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”.
Subsequently, the UK government has implemented many instruments to prevent a criminal from abusing the UK’s financial system and benefiting from the proceeds of crime. The UK law is of the first which requires any British citizen to provide an obligatory report to the authorities about not just the actual awareness that one is involved in a crime but a suspicion also. This signifies both, a moral and legal obligation for British citizens and indicates the importance of compulsory responsibility within the UK. However, despite this, it must be analysed how these changes have affected professionals within the private sector who have created an act by omission.
Prior to the PoCA 2002, there were separate offences for drug money laundering. These were outlined in the Criminal Justice Act 1988 (CJA) and Drug Trafficking Act 1994 (DTA). Under the DTA and CJA, it was problematic for the Crown as it sometimes had difficulties analysing when charging under the appropriate Act the foundation of the criminal Proceeds. The 2002 Act has significantly amended all key money laundering offences and associated definitions. It will be examined how the PoCA has replaced the parallel offences with single offences to resolve confusion. Nonetheless, there have been many developments ever since. These comprise of the Serious Organised Crime and Police Act (SOCaPA) 2005, Terrorism Act (TA) 2006 and Fraud Act (FA) 2006. Furthermore, independent government bodies, such as the Financial Task Force on Money Laundering (FATF) and the Joint Money Laundering Steering Group (JMLSG), have been created to provide assistance for both, individuals and organisations in ensuring preventative measures are taken to help prevent money laundering.
1.Legislative Developments through Regulatory Authorities and Trade Associations
The law governing money laundering has developed over the years as criminals have increased their knowledge and understanding around the English legal system. This seems to be a continuous circle; as criminals misuse the financial system in one particular sector such as taxation, the law reinforces and leaves the criminals no other alternative but to exploit another sector to toil within.
The UK law has recognised a three tiered legislative structure in response to the threat from criminals involved in money laundering. This contains a collection of primary legislation introduced by Parliament; secondary delegated legislation with regards to the Money Laundering Regulations (MLR) 2007 and a third tier of descriptive guidance information produced by trade associations and regulatory authorities.
The First Money Laundering Directive in 1991 introduced many anti-money laundering requirements to the financial services industry in the UK. This Directive implemented the Forty Recommendations of the Financial Action Task Force (FATF) 1989 which is an international body established by the G-7 Summit, and ensured that money laundering was forbidden and many security measures would have to be considered for financial institutions. This was later amended by the Third Money Laundering Directive introducing further significant changes to the conduct of operation with businesses in relation to money laundering.
The Joint Money Laundering Steering Group is yet, another body set up by the government made up of the leading UK Trade Associations in the Financial Services Industry. Its aim is to promote good practice in preventing money laundering and to give useful support in interpreting the Regulations. This is mainly achieved by the publication of industry guidance. In 2005 the JMLSG proposed a suggestion that would affect the way businesses work and how clients are dealt with. This offered a risk-based approach which would allow businesses to look into those clients who represent a higher risk. Additionally, the government set up the Money Laundering Advisory Committee in (MLAC) 2002 which has a role of developing and overseeing a strategic approach to money laundering prevention for the UK as a whole. It includes members from government, law enforcement, industry, consumer representatives and the professions. This is vital in aiding to prevent money laundering as it allows individuals from within financial and legal sectors to get involved and present the problems involved and how they can be resolved.
Prior to the 2007 Regulations (Money Laundering Regulations 2007), the English law had introduced the Criminal Justice Act (CJA) 1988 and the Drug Trafficking Act (DTOA) 1986 against laundering the proceeds of drug trafficking. The problem with this was that the legislation was intended to focus mainly on the proceeds of drug trafficking rather than money laundering as a general notion. In realising this, the DTOA 1986 was then repealed to the Drugs Trafficking Act 1994 introducing significant changes to money laundering relating to drugs trafficking and bringing an end to loopholes identified by the Home Affairs Committee on Organised Crime. The CJA 1988 was amended by the Criminal Justice (International Co-operation) Act (CJICO) 1990 and introduced more money laundering offences, though this still related only to drugs trafficking. However, since then further legislation has been enacted covering the laundering of proceeds from drug trafficking, terrorism and general crime such as Theft.
The CJICO allowed international courts to work with the UK to share information relating to money laundering. The significance of this was that complex laundering schemes involved criminals from many countries and hence, allowed the authorities within the UK and other countries the opportunity to work together to try to resolve this issue. This Act was further repealed by the Criminal Justice Act 1993 which included additional money laundering offences as the authorities discovered more money laundering offences. It created a separate entity for money laundering on recommendation of the Financial Action Task Force and the Council of Europe Laundering Convention and was significant in that it considered not only drugs trafficking but, took into account offences which money laundering was used to finance the crimes, such as Terrorism. The implications of this Act also allowed criminals to be prosecuted in the UK in relation to laundering offences even though the act itself was conducted overseas. This was important as it allowed the integration of international advice and allowed countries around the world to work hand-in-hand to combat money laundering. Moreover, it also created for the first time, under emergency powers, a law that imposed an obligation to report someone suspected of money laundering to the authorities.
Later developments such as the Serious Organised Crime and Police Act (SOCaPA) 2005, Terrorism Act (TA) 2006, Fraud Act (FA) 2006 and Money Laundering Regulations (MLR) 2007 have introduced many key changes to the current position of the UK’s legislation. These carefully drafted instruments derive from previous legislation such as the Terrorism Act 2000, Proceeds of Crime Act 2002 and the Money Laundering Legislation (MLR) 2003. It is within section 340(11) POCA 2002 that includes the definition of “money laundering any attempt, conspiracy or incitement to commit an offence under ss327-329, POCA as well as aiding, abetting, counselling or procuring an offence under ss327-329, POCA”. Despite recent change, the courts still consider the POCA 2002 and TA 2002 as crucial as they contain the offences which may be committed by individual or businesses. On the other hand the 2007 Regulations “deal with the systems and controls which businesses are required to have and contain offences which may be committed by businesses, as well as the key individuals within them”. Complying with POCA 2002, as outlined by Peter de Verneuil Smith is by no means simple for organisations. In the case of Squirrell Ltd the efforts to comply with POCA 2002 led to the freezing of an innocent customer’s bank account.
Additionally, the MLR 2007 made many crucial changes to accountants and lawyers as opposed to the MLR 2003 which applies only to banks and financial institutions. Now, accountants and lawyers will “take tough action where the risks require it”. Nonetheless, financial institutions are also are at the vanguard of the fight against the money launderers. Financial institutions are affected in a legal sense as they have certain obligations placed on them by legislation and they are also affected financially as they are required to have security systems in-tact to detect money laundering and to make a report of suspicion where applicable. Furthermore, the MLR 2007 provides “more detailed obligations regarding customer due diligence…and for firms to identify not just the customer but the beneficial owner of the customer; it requires firms to vary customer due diligence and monitoring according to the risk of money laundering or terrorist financing; require firms to take enhanced customer due diligence measures in higher risk situations, while allowing firms to take reduced identification measures for specific situations with a lower risk of money laundering; allow firms to rely on certain other firms for undertaking customer identification; and clarify the arrangements for the supervision of firms, including those that will be supervised for the first time”.
This would mean that in order to comply with the Regulations, businesses must ensure preventative measures are in place. This is by no means cost-free and the government will not finance companies for their security measures.
2 Common Law Developments; Landmark decisions & the problems within
As legislation has been amended over the years, it has become much harder for money launderers to conceal their crime without getting caught. Common law has inspired this change; as proceedings have taken place, the courts have realised that the law needs to be amended to exploit loopholes. This vicious circle is an on-going problem as to anti-money laundering developments. Much case law has allowed the introduction and implantation of new measures to prevent criminal access to the financial system. However, there have been cases where suspected criminals have walked away without charge and in some cases opened further doors for other criminals.
Recent decisions have made it considerably more difficult for prosecuting money laundering cases against organised criminals and professional advisors as well as those operational in the financial sector. Where criminals are involved in sophisticated money laundering schemes, prosecutors prefer to allege that they were involved in a conspiracy to money launder rather than indict a series of individual substantive money laundering offences. This is because a conspiracy charge enables the prosecution to present the overall criminality of the conduct, whereas if multiple substantive counts are included, the indictment becomes overloaded and difficult for a jury to take on board.
Previously, sample counts were discouraged because they limited the powers of the Court when sentencing, since a Court cannot punish a defendant for conduct not reflected in a criminal conviction. Until the decision of the House of Lords in Saik, and in Ali, prosecutors frequently assumed that conspirators had entered into an agreement to money launder funds which they knew or suspected were derived from some form of criminal activity. An additional advantage under the old legislation was that a conspiracy charge had the difficulty of establishing whether funds were derived from drug-trafficking or some other form of criminal activity.
However, in the prosecutor’s enthusiasm to use the new legislation, prosecutors overlooked the requirement of the Criminal Law Act 1977,which applied in all cases where offences of conspiracy were charged. Parliament required the prosecution to establish that a conspirator knew or intended that all the facts and circumstances necessary for the commission of the offence existed at the time when the agreement was made. With regards to money laundering legislation, this meant that a person could not be guilty of conspiracy unless they agreed to join the conspiracy, knowing that the levy was the proceeds of a crime, or in the case of unidentified property, intending that they were the proceeds of crime. Mere suspicion was simply not enough.
As Lord Nicholls in Saik briefly explained, “a decision to deal with money suspected to be the proceeds of crime is not the same as a conscious decision to deal with the proceeds of crime”. In even-handedness to the prosecution, the line between knowledge and suspicion is not always that great. Where a person has reasonable grounds for suspicion, his level of awareness comes close to that of knowledge. There is a long line of authority which treats a failure to ask obvious questions as a kind of useful knowledge.
James LJ confirmed in the case of Griffiths that it was “perfectly proper to direct a jury they may find the defendant knew or believed goods to have been stolen because he deliberately shut his eyes to the circumstances”. That said, the effect of the decision in the House of Lords was to make it more difficult for the authorities to prosecute organised criminals for a conspiracy offence. Moreover, the decision allowed two cases to be quashed of convictions for conspiracy to money launder which pre-dated the Saik decision. Four convictions were also quashed in R v El-Kurd & Others. As it stands, the Court of Appeal will uphold a conviction only where essential charges could be brought. However, some prosecuting counsel have had informal discussions on the possibility of deploying the substantive offence in the Proceeds of Crime Act 2002 as a substitute to a conspiracy charge.
In the past, it has been a question of debate whether the term “an arrangement” refers to a single money laundering act or a series of acts which could be indictable upon one count. Therefore, it can be suggested that prosecutors should not seek refuge in section 328 for the following reasons. Firstly, the construction of section 328 is directed towards an act rather than continuing conduct. The conduct prohibited in sub-section (1) is referred to as “the act”. Secondly, if Parliament proposed for the word “arrangement” to mean the same as “agreement”, an express provision would have been made to this effect. Thirdly, as the Court illustrated in Bowman, section 93A of the Criminal Justice Act 1988 as amended, was directed at “some kind of active conduct”. The Court suggested that “each of sections 327-9 speaks of doing an act in precise terms suggestive of a focus on a particular point in time… In s 328 the nature of the act is either entering into an arrangement or the vaguer concept of “becoming concerned in an arrangement”. To enter into an arrangement engages a single act at a single point in time; so it does “become concerned” in an arrangement, although the point at which someone may be said to have “become” concerned may be open to further debate.
Additionally, the courts have been careful when analysing the views of the legal academic community, particularly when they do not agree with the decisions the courts have made in the past. This was demonstrated by Hooper LJ in Ali30 who declined to follow previous court authorities. David Corker stated that “one of the most significant decisions of 2005” is in the judgment of the Court of Appeal in Ali allowing many criminal appeals to be upheld. This indicates that though the law has developed around money laundering, occasionally due to insufficient evidence convictions are quashed, therefore deteriorating what would be seem to be the success of past law enforcement efforts against money launderers. This was further demonstrated in another significant case of R v Preddy, in relation to mortgage fraud.
3 Development of legislation through statutory wording; suspicion
In recent years there has been much debate with the meaning of the word suspicion in relation to money laundering legislation. Where a person handles money knowing or suspecting that the funds have been derived from the proceeds of a criminal activity, he shall be guilty of a substantive money laundering offence. Previously, the courts regarded the word “suspicion” as an ordinary English word, and considered at the Oxford English Dictionary which defined “suspicion” as “an act of suspecting, the imagining of something without evidence or on slender evidence, inkling, mistrust”. Therefore, the rationale of Da Silva considered that “any inkling or fleeting thought that the money being paid into [the defendant’s] account might be the proceeds of criminal conduct will suffice for the offence… to be proved”.
However, the Court of Appeal criticised the direction by the Crown Judge on the jury because the words such as “inkling” or “fleeting thought” were misleading. Previously, the authorities required the suspicion to be “clear” or “firmly grounded”. Per Lord Scott illustrated in Manifest Shipping v Uni-Polaris “In my opinion, in order for there to be blind-eye knowledge, the suspicion must be firmly grounded and targeted on specific facts. The deliberate decision must be a decision to avoid obtaining confirmation of facts in whose existence the individual has good reason to believe. To allow blind-eye knowledge to be constituted by a decision not to enquire into an untargeted or speculative suspicion would be to allow negligence, albeit gross, to be the basis of a finding of privity”. This indicates the importance of the correct context of wording when directing the jury and this has directed the courts into the development of the money laundering legislation.
However, shortly after the decision in Da Silva25, the Court of Appeal accepted the judgment in K Ltd v National Westminster Bank which stipulated that “If that definition is sufficient for criminal cases, so also should it be for civil cases”. Therefore in decisions as such, the Court of Appeal has been willing enough to define the term “suspicion” as something which falls between “a vague feeling of unease”, which seems deficient, and somewhat “firmly grounded and targeted on specific facts”, which puts the burden on the prosecution far above the ground. As it stands, the Court of Appeal has shifted away from setting “an inkling” or “a fleeting thought” as something to follow in later rulings.
Furthermore, there have been incidents where public servants have initiated in money laundering which brings upon a significant concern for taxpayers in the UK. The Money Laundering Regulations 2007 have created further obligations for businesses to meet in day-to-day dealings; however, the question arises whether this holds any weight. In R v Duff the courts convicted Jonathan Duff, a solicitor, of an offence of failing to report a suspicion of money laundering. For solicitors, the most distressing element is that the Duff’s crime merely was an act of omission when he failed to report. This derived from a genuine misunderstanding of his own legal obligations. Duff’s decision was further considered in R v McCartan.
Whilst cases involving proven money laundering in the finance sector will be treated very seriously indeed, prosecutors must analyse the strength of the evidence in a case before starting the criminal process.
Money laundering is an emerging problem currently faced by all countries around the world, and whilst many changes have been introduced to prevent it, it can be seen from the evidence of this research that the rudiments of this misdemeanour remain is more or less still the same. Technology has provided, and will probably continue to provide a more intelligent and sophisticated ways to convert the proceeds of a crime into legal assets. It has been demonstrated that money laundering and its affiliation with organised crime are more often than not connected in one way or another. The massive takings that accumulate from such areas as drug trafficking, domestic fraud, VAT fraud, etc, are usually used to aid operations in progress and to create status and admiration for those in control of the criminal business.
The degree of intelligence and sophistication within organisations is a major concern due to the recent cases involved corrupt public servants and politicians. Though the law has vastly developed over the years, the fight against money laundering continues. An international effort continues through regulatory authorities, such as the introduction of the 40 (+9) Recommendations by the Financial Action Task Force (FATF).
The FATF has acknowledged four significant threats presented by money laundering activities. Firstly, simply failing to prevent laundering from happening makes it a lot easier for criminals to gain access to key information and profit from their illegitimate conduct. Secondly, this failure then allows criminal organisations to finance other criminal activities such as Terrorism. Thirdly, the accessibility of the financial system by launderers creates a risk for all institutions in the finance sector. Finally, the power and wealth of criminals which is derived by laundering can ultimately place the national economies and democratic systems under threat.
Thus, money laundering poses a threat to the UK’s financial development, political integrity and steadiness of our country. The Bahamas is a primary example of dishonest investment resulting in the government being regarded as corrupt and the country’s financial sector on a downfall. The stability of a countries economy relies on well-constructive preventative measures to prevent criminals from cheating the revenue into claiming millions. Loopholes still exist within the English legal system, and though we cannot close them due to innocent traders, other strategies can be introduced to prevent this, as demonstrated in the Bond House Decision.
Money laundering is carried out first and foremost through financial institutions and it is therefore crucial that preventative measures against money launderers are enacted in those sectors. The recent Money Laundering Regulations 2007 has rung alarms in all institutions dealing with finance and has tightened up security. Now, firms such as banks, accountants, solicitors, loan companies, mortgage companies and many more have had to undergo training to prevent money laundering. This does indicate that the government is taking this issue seriously but so are the perpetrators. However, investigations have discovered that money laundering exists within members of a talented criminal class, such as professional money launderers. These comprise of accountants, lawyers, bankers and many other practicing professionals. Most, such as Donald Mackenzie – a bank manager in a £21 million fraud case, are fascinated by enormous amounts of wealth and a celebrity lifestyle. This has been brought to the attention of the authorities and legislation has been enacted so that now no financial institution or professional will be protected from the provisions contained within the UK’s legislation.
In order for this to happen effectively, we must amplify our efforts on identifying the proceeds of crime and preventing criminals from accessing the financial system. Only by using these methods will criminals and money launderers become more doubtful and find money laundering to be a risky activity and ultimately one seen to be not worth the risk. Professor Bill Gilmore (1993) states: “for the first time, to take co-ordinated and effective world-wide action to undermine the financial power of drug trafficking networks and other criminal organisations, is now in sight if not, as yet, fully within our reach”.
However, there must be political assistance in helping the nation to cement together a strong well-constructed international operation, against battle against money laundering.