Legislation and Regulation for Money Laundering

Legislation and Regulation for Money Laundering Finance and Investment Law – Money Laundering Current Legislative and Regulatory Arrangements Money laundering is a menace. Tainted funds from drugs traffic and terrorism are the prime causes of the recent round of energetic legislation designed to make life more difficult for the launderers. The European Directive on Money Laundering has been followed in the UK by primary and delegated legislation. The aim is to deter laundering by well-focused use of the criminal law and, at the same time, to obstruct it by compelling banks and other persons and institutions in the financial services industry to ask more questions, keep more records and divulge more information. The money laundering legislation does not bear directly on the civil law, but, it will profoundly alter professional practices and is bound to filter back into the setting of standards which determine the incidence of civil liability. The huge profits of the drugs industry are gained ultimately from thousands of users who will never so much as contemplate recourse to the civil law. It is different in the case of theft, fraud and corruption. There the victims and their insurers have economic power, and the sums at stake are often large enough to justify a restitutionary campaign in the courts. Tracing is a weapon against laundering. It allows value held in one form at one place to be located later in other assets in another place. It lengthens the victims reach. Successful civil campaigns have been waged. The most notorious is the insurers recovery of assets derived from the Brinks Mat robbery. Often the defendants are not the principal rogues but others to whom the money has come or through whom it has passed. To the victim of a massive fraud, a bank or firm of lawyers or accountants will seem the most promising defendant, if the facts will only support a claim against them. This aggressive opportunism on the part of victims is a factor to be borne in mind as the law settles the conditions of the various restitutionary and restitution related liabilities which can be brought into play. In one recent case the plaintiff had been cheated of millions of dollars in Amsterdam. A sophisticated laundering operation had passed the money through many accounts in different names in different parts of the world. The plaintiff nonetheless traced a large part of it to a legitimate property development in London, and the development company had to make restitution. The same problems encountered in restitutionary campaigns after fraud are also met in more innocent contexts, as where money is paid away by mistake or on a basis which fails. Even in cases of the less disreputable kind the fact that the law will allow the value of one asset to be traced into another can confer great advantages. It will sometimes allow a plaintiff to extend a priority against an insolvent by enabling him to claim it, not against the asset with which he originally parted but against another to which its value can be traced. And it will sometimes allow a plaintiff to leapfrog the immediate recipient and claim against a third party who received, in different assets, value which proceeded from him. For all its utility tracing is one of the least perfectly understood areas of the law of restitution. It is caught on the horns of a dilemma. The longer its reach and therefore the greater its potency against fraud, the more difficult it is to describe exactly how it works; an d the more one insists on the need for an accurate and intelligible account of how it works, the greater the danger of shortening its reach. But there is no real doubt as to how this dilemma must be resolved. The law cannot tolerate figures which are beyond rational description. If there turn out to be limits to what can intelligibly be done by tracing, other weapons will have to be invoked. The law of tracing and claims contingent on tracing will soon settle down. Less stable in the medium term may be the law relating to or affected by restitutionary defenses. The introduction of the defense of change of position is already transforming the law of restitution. In one bound it has put the English law of unjust enrichment in closer touch with German law, and it may yet indirectly effect a civilian transformation of our approach to the cause of action itself. Festina lente may be the order of the day. The down to earth English approach may in fact be preferable. It is a great virtue of the English law of unjust enrichment that it talks in terms of very familiar reasons for restitution and does not go in for the metaphysics of causa and the absence thereof. Canada has succumbed to the temptation to start looking for sufficient juridical cause. The danger of that language is all the greater when it is not underpinned by mature civilian doctrine: it does not tell us why or wh en restitutionary rights arise but merely conceals the absence of an intelligible answer to those questions. Whatever larger changes it may portend, the new defense indubitably provides a new strategy for reconciling the interest in restitution with the interest in the security of receipts. As it takes over the protection of the latter it encourages a liberalization of the restrictive attitudes to the grounds of restitution. Those restrictions were previously the blunt instruments for the protection of that interest. The new focus on change of position also entails more attention to other defenses in its immediate vicinity. In this paper, bona fide purchase, ministerial receipt and passing on assert their independence. Counter-restitution impossible also declines to be absorbed into change of position but appears to be destined to have little future as an absolute defense. The Society of Public Teachers of Law once again stands in debt to those who gave up their time to attend these seminars and, especially, to the judges who were kind enough to take the chair. Lord Justice Millett chaired the seminar on tracing and Lord Goff chaired the seminar on defenses. We are most grateful both for their generous surrender of free time, if indeed a judge can these days be said to command any of that valuable commodity, and for the learning and wisdom with which they brought order to the discussion (United Kingdom Model Agreement, May 2003). Case Example In AGOSI v. United Kingdom the Court was faced with the question whether the imposition of a confiscation necessarily implies that the owners of the confiscated property should have been afforded the same rights as those granted to everyone in the determination of a criminal charge. The German company AGOSI had suffered a considerable economic loss when the UKs Customs Excise department had seized and eventually forfeited golden Krugerrands to a value of  £120,000 that had been illegally imported into the United Kingdom. Defendants X and Y were caught by UK Customs Excise officers as they attempted to smuggle into the United Kingdom on 2 August 1975 the golden Krugerrands they had bought on the same day from AGOSI in Germany (M2 Presswire, March 1, 2004). Because the cheque presented by them for payment had been drawn without provision, the sale contract was ab initio null and void and AGOSI had retained ownership of the Krugerrands. AGOSI initiated several procedures in the Unit ed Kingdom for restitution of the confiscated Krugerrands but was unsuccessful. AGOSI therefore took the case to the European Court of Human Rights, complaining that the confiscation amounted to a procedure for the determination of a criminal charge in which it had been denied the fair trial rights laid down in Article 6 of the European Convention. The Court responded that: The fact that measures consequential upon an act for which third parties were prosecuted affected in adverse manner the property rights of AGOSI cannot itself lead to the conclusion that, during the course of the procedures complained of, any criminal charge, for the purposes of Article 6, could be considered as having been brought against the applicant company. As a general statement this is undoubtedly true. The mere fact that persons own property that is being confiscated does in itself not necessarily imply that a criminal charge is being brought against them. When, for example, instrumentalities of an offence are being confiscated, that does not necessarily imply that a criminal charge should be brought against the owners who may very well have not been implicated in the offence in any way. Confiscation of proceeds from crime as a matter of fact often implies that the person who is being prosecuted is not the real owner. Nine years after AGOSI, the European Court of Human Rights arrived at a similar decision in Air Canada v. United Kingdom, which again involved a seizure by the UK Customs Excise, this time of an aircraft on board which drugs had been found on several occasions, including a few days earlier. The aircraft was only seized temporarily for a few hours until Air Canada paid a sum of  £50,000. 116 The European Court agreed with the English Court of Appeal that the case did not concern an in personam procedure but an in rem procedure and therefore did not require that mens rea of the owner or the possessor was established. This, as well as the fact that non-payment of the sum could not give rise to criminal prosecutions, unlike some out-of-court settlements (transactions) and that the procedure did not involve the intervention of criminal courts at any stage, induced the Court to reach the conclusion that the action of the UKs Customs Excise department did not amount to a criminal charge in the sense of Article 6 of the European Convention on Human Rights. It is submitted that this decision is flawed. The case law of the European Court of Human Rights regarding the applicability of Article 6 to confiscation procedures should be seen in close connection to its case law regarding the right to property, entrenched in Article 1 of the First Protocol to the European Convention on Human Rights. In AGOSI the Court held that an import prohibition on golden coins constituted a law necessary to control the use of property and that the seizure and confiscation of the Krugerrands were consequently measures taken in accordance with this prohibition and were therefore governed by the second paragraph of Article 1 of the First Protocol. The Court ruled in the same sense in Air Canada. The text of Article 1, however, prompts the question whether confiscation of proceeds from crime should not be considered a deprivation of property under the first paragraph of this provision: 1. Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided by law and by general principles of international law. 2. The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties. This question was answered in the negative in Raimondo v. Italy, which concerned seizure and confiscation of real estate that was derived from mafia practices. It was held that although it involves deprivation of possessions, confiscation of property does not necessarily come within the scope of the second sentence of the first paragraph of Article 1 of Protocol No. 120 The Court referred to its prior judgments in AGOSI and Handyside, in which the Court seemed to have considered confiscation as a preventive measure. This was undoubtedly the case in Handyside where the Court held that the seizure, confiscation and destruction of obscene publications constitute a law necessary to control the use of property and were thus governed by the second paragraph of Article 1 of the First Protocol. These measures effectively prevented further distribution of the publication. It is, however, submitted that the confiscation of the illegally imported Krugerrands in AGOSI did not constitute a preventive measure as it did not pertain to the use of the property but only to certain economic-political goals that were set by the British Parliament. The (possession of) property was not unlawful per se at most; the confiscation dealt with derivative contraband, but not with per se contraband. An even more flagrant example is that of M v. Italy, a case decided by the European Commission of Human Rights, in which it was accepted that the confiscation of proceeds from crime under the Italian anti-mafia laws pursuant to a reversal of burden of proof did not fall foul of Article 6 of the Convention nor of Article 1 of Protocol No. 1 as these confiscation measures were preventive and hence did not amount to a criminal penalty. Although all these cases differed from the earlier mentioned case of Welch v. UK (in which the Court did accept the criminal nature of the confiscation of drug trafficking proceeds) 124 in that the imposition of these confiscations did not require that the person was found guilty of a criminal offence, it is submitted that the punitive character of these confiscations could and should have been deduced from the possibility that the owner might avoid confiscation by demonstrating his innocence – a possibility which was explicitly acknowledged by the European Commission and the Court of Human Rights. In this perspective, it is useful to refer to the line of reasoning adopted by the American Supreme Court which explicitly deduced the punitive nature of in rem confiscations from the fact that confiscation is excluded in case owners can demonstrate exceptional innocence. It inevitably follows from this line of reasoning that the confiscation in AGOSI amounted to a penalty, as it wa s at least in part based on guilt of the owner. In Air Canada the punitive nature of the seizure of the aircraft as an instrument of crime was even more blatant, as it was not the aircraft as such that constituted the contraband, but the drugs that had been found on it on earlier occasions. It should be equally clear that the confiscation of assets belonging to a mafia member and presumably derived from an illegal origin, though termed preventive, is in fact nothing else but a criminal penalty. Given the absence of a formal international legislator, it is not surprising that the influence of soft law has been especially notable on the international level. The contribution of international soft law instruments to the fight against money laundering is impressive. One of the earliest international initiatives undertaken in the field of money laundering was the Recommendation No. R (80) 10 adopted by the Committee of Ministers of the Council of Europe on 27 June 1980 entitled Measures against the transfer and safeguarding of the funds of criminal origin. The first international instrument to address the issue of money laundering specifically was the Basle Statement of Principles of 12 December 1988, issued by the Basle Committee on Banking Regulations and Supervisory Practices. The Basle Committee, which comprises the authorities charged with banking supervision of twelve western countries, thought it necessary to take action against money laundering lest public confidence, and hence the stability of banks, should be undermined by adverse publicity as a result of inadvertent association by banks with criminals. Regardless of the fact that the primary function of banking supervision is to maintain overall the financial stability of the banking system rather than to ensure that individual financial transactions are legitimate, the supervisors thought that they could not stay indifferent to the use made of banks by criminals. Money Laundering Regulations 2003 The new regulations replace the Money Laundering Regulations 1993 and 2001 and require any person who carries a relevant business to maintain certain anti money-laundering administrative and training procedures. In particular, the activity of dealing in goods by way of business whenever a transaction involves accepting a cash payment of 15,000 or more, will mean that the business needs to comply with the Regulations. Furthermore, records of identification evidence must be kept for at least five years following the end of the business relationship. Failure to maintain the necessary procedures is a criminal offence carrying a maximum penalty of two years` imprisonment and a fine. Research commissioned by BT and GB Group, has found two thirds (67 per cent) of top UK businesses are currently not compliant with new money laundering legislation that came into force on March 1, 2004, leaving their directors open to legal action and a possible two-year jail sentence. The Money Laundering Regulations 2003 require all UK businesses to prove the identity of their customers when handling cash transactions for goods of euro15,000 or more, and also to have adequate record-keeping procedures in place to demonstrate necessary checks have been undertaken. Furthermore, 40 per cent of companies that have implemented what they regard to be acceptable identity authentication processes feel they could still be victims of money laundering, and over half (53 per cent) of those with solutions in place fear that money laundering activity will increase over the next couple of years (The Daily Mail February 23, 2004). The new extended money laundering regulations make it a legal requirement for companies to have robust systems for customer validation and record keeping in place. However, research clearly highlights that organizations are confused about how to achieve compliance, and that there is a worrying lack of confidence in identity verification systems that are already in place. To help companies address this problem, BT has developed an online authentication service, called URU, in partnership with GB Group (Haynes, 2004). URU helps businesses protect themselves against the growing problem of identity fraud, and by helping them work towards achieving compliance with money laundering legislation it may even help keep directors out of jail. URU enables companies subscribing to the service to decide instantly whether to accept the identity claimed by an individual. It does this by asking a series of questions and comparing the information gathered to that held in the most comprehensive data se ts available in the UK, producing match or no match reports. The result is a faster, cheaper, secure and more convenient way to fight identity fraud. URU also provides businesses with an independent audit, thereby helping companies demonstrate compliance with the Money Laundering Regulations 2003. Other findings from the research include: A quarter of all respondents have no identity-checking process in place at all and have no plans to introduce one. Of those with defined and documented identity-checking processes in place, businesses remain confused about some of the basic terms of the legislation: o 34 per cent are unable to state the threshold value level of goods at which a money laundering check should be triggered o 10 per cent do not regularly ask for key identification documents such as a passport or drivers license. A quarter is unclear that directors are now personally liable for any breaches. There are marked variations in levels of compliance across different market sectors. Compliance is highest amongst financial services companies, with 62 per cent of stockbrokers and 55 per cent of Independent Financial Advisers (IFAs) already compliant, compared to only three per cent of car dealers and 23 per cent of luxury good companies (Dale, 2001). More than one in four companies feel that the cost of compliance will mean certain transactions will have to be refused, and 13 per cent see it as a cost that will have to be passed on to customers. The different levels of understanding about the requirements of the Money Laundering Regulations are a problem not only for businesses that need to comply, but also for the regulators aiming to crack down on this serious crime. It is in the interests of both parties to stem the rise of money laundering as a crime. Our URU system, which is designed specifically to help companies make large numbers of identity checks quickly and cost effectively, also helps organizations to meet the requirements of the regulations. Surveyors, estate agents, accountants, lawyers, licensed conveyancers and sellers of high value goods will now have had exactly a year to get to grips with the Money Laundering Regulations 2003 (Money Management; July 1, 2004). They are all caught within the range of business activities included in the regulations, and have had to set up internal compliance regimes. These involve regulation by the relevant authorities, training to ensure staff are alert to possible money laundering, the appointment of a money laundering reporting officer, identification procedures to check the details of all clients within the regulated sector and records of all identification checks to be kept for six years. Conclusion The objective standard for the suspicion of money laundering essentially provides the rationale for the know your client/know your business requirements. Failure to report a suspicion of money laundering is judged on the standard of whether a reasonable IFA would have been suspicious in all the circumstances. So what should make an IFA suspicious? The following are examples and should not be taken as an exhaustive list of circumstances that may give rise to suspicion. The important element is understanding what suspicion actually means. At the most basic level an IFA should be cautious of a client introduced through a third party or intermediary based in a country where drug production and trafficking, or terrorism is prevalent. This is not to say that suspicion should automatically arise in this context. It is perhaps only the background against which the reasonable IFA may later find grounds for suspicion. A transaction may have the requisite quality of suspicion where, without logical explanation, funds are routed in and out of the jurisdiction or between different accounts or institutions, or a transaction leads to financial loss. The settlement or payment following any transaction may also be suspicious if a client requests an unusual form of settlement. The term unusual will depend on the usual circumstances, but a request for payments in cash, or to a third party, or through a series of payments from an account may be suspicious. Recognizing a warning signal is the first step to complying with anti money laundering laws. If an unusual or unpredictable circumstance does arise which gives an IFA cause for concern, then the next step is to ask more questions. The answers to those questions will either allay fears or provide a foundation for reasonable suspicion. Bear in mind that although drugs and terrorism are examples of the crimes where money laundering cash is likely to be an is sue, the new laws relate to any proceeds, however small, from any crime, however petty it may seem. In particular, the new laws cover proceeds from tax evasion and benefit fraud. Various regulatory bodies have issued guidance to assist with the interpretation of the new laws. The guidance is also important to note because a court will take account of the guidance issued in a particular industry when applying the objective test as to whether someone knew or suspected money laundering. Bibliography Money laundering regulations. M2 Presswire; March 1, 2004. New laundering clampdown. The Daily Mail (London, England); February 23, 2004. Taken to the cleaners. Money Management; July 1, 2004. Haynes, A., Recent Developments in Money Laundering Legislation in the United Kingdom, JIBI (2004), 58–63. Dale, R., Reflections on the BCCI Affair: A United Kingdom Perspective, Intl Law (2001), 949–62. United Kingdom Model Agreement Concerning Mutual Assistance in Relation to Drug Trafficking (May 2003), reprinted in Mitchell, Hinton and Taylor, Confiscation.