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To catch a thief

by: By Claire Pagan, money laundering officer at Skipton Building Society
  • 20/10/2003
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Money laundering is not restricted to the movies and under recent legislation it is everybody's responsibility to be on guard

For most people money laundering conjures up images of Hollywood gangsters emptying sacks of cash from their latest sting, before splitting it up to run through their ‘legit’ operations.

Although criminally-generated money does have to be laundered, the Hollywood image belies the sophistication and creativity shown by the criminal fraternity.

Money laundering is the term used for the various ways criminals hide, move or legitimise the proceeds of their crime. As it is this money that allows them to carry out further criminal activities, tackling a person’s ability to launder money is fundamental to tackling crime overall.

The money laundering process is described as taking place in three stages. There is ‘placement’ where the dirty money is placed in the financial system, for instance, by being deposited into a bank or building society account. Then comes ‘layering’ where the money is moved around the financial system using a series of transactions, to make it harder for any investigations to trace the origin of the funds. Following this comes ‘integration’ which creates a legitimate explanation for the source of the funds, allowing the money to be considered clean and free to be used.

New legislation

The importance of tackling money laundering to aid the war on crime was underlined in February this year, when the Proceeds of Crime Act 2002 (POCA) came into force. Adding to previous legislation, its purpose was to significantly tighten the UK law on money laundering, notably in three ways.

First, the laundering of funds from drugs and non-drugs offences are now treated in the same way when previously they were regarded as different sources of dirty money.

Second, the revised Act also focuses on those who are suspected of laundering for others, whereas previous legislation concentrated on criminals who laundered the proceeds of their own crimes. This means offences of handling stolen goods under the Theft Act 1986 can now also be categorised as money laundering under the POCA.

Finally, the POCA is wider ranging than previous legislation and regulations and covers all areas of the financial services industry, including mortgage brokers. Previously, the offence of failing to report a case of money laundering was only applicable where it could be proven that the person had suspicions or full knowledge of it. The new offence introduces an ‘objective negligence’ test whereby an offence will be committed not only where there is knowledge or suspicion of money laundering, but also where it is considered that the average person would reasonably have been suspicious, being aware of the same facts.

John Gibson, money laundering reporting officer at Skipton Building Society, says: “The expansion of the regulations to say that, even if you were not suspicious of a money launderer, but could reasonably have been expected to be so, has great ramifications for all involved in the finance industry. The maximum penalty for this offence is five years in prison. Everyone from the staff on the counter of a branch, to the executives in the boardroom, are responsible for being vigilant and can be held accountable for failure to do so. And in the eyes of the law, the size of an organisation has no bearing on its duties to adhere to Money Laundering Regulations (MLR) – a one-person broker service is as responsible for its actions in this area as a national bank.”

Since 1994, when the government first introduced MLR, financial institutions have been required to have procedures in place to guard against money laundering. Customer identity verification is a vital part of these procedures. The identification process is not meant to prove that a customer is not a criminal, nor that they have benefited from criminal conduct. It is simply to confirm that a person of that name lives at the address given, and that the applicant is that person, or that a company (or other legal entity) exists for a legitimate purpose at a known address and represents legitimate owners whose identity can be verified.

Under discussion

A recent discussion paper from the FSA: Reducing money laundering risk, illustrated the increasing regulatory attention being given to ‘know your customer’ (KYC) – the ethos behind anti-money laundering.

The paper goes into some of the practicalities of KYC that affect lenders and brokers alike. The ability to ‘know’ a customer is key to creating and cementing relationships, but the paper does recognise there may be issues in this, and poses the question: ‘How much information is enough?’.

The quality of information held also has to be considered. How should the information and identification given by a customer be verified? How can the information be kept up to date? What systems are required and what will it cost to acquire, maintain and store this information?

However, anyone using customer confidentiality or data protection as an excuse for incomplete records will not be covered. The paper states: ‘We do not consider that data protection considerations constrain the effective use by firms of KYC information to meet legal or regulatory requirements.’

Knowing your customer includes having an understanding of their habits, and anti-money laundering rules have included an increased focus on account monitoring. The reasons for this include the fact that new technology has increased the opportunity to open and conduct bank accounts over the telephone or internet, making relationships between firms and customers remote. This inevitably makes detecting unusual activity more difficult.

Although some larger firms have invested in automated monitoring systems, many individual brokers and smaller lenders still rely on the vigilance of themselves or their staff to flag up suspicious transactions.

That is not to say that anything out of the ordinary for a customer means they have automatically entered a life of crime. Many will, of course, have unusual circumstances that are not necessarily suspicious, and the key is back to what we know about our customer.

Property layering

But it is not just the use of traditional bank or building society accounts that needs to be monitored. In 2002 purchasing property in the UK, especially a commercial property, was the most popular method of money laundering, according to the National Criminal Intelligence Service. Buying a property in the UK is a comparatively easy and efficient way to launder money. Large amounts can be moved in one transaction.

A common method of laundering money (particularly ‘layering’) is to invest in property with a view to selling it quickly. This often incurs penalties for the early redemption of the mortgage, but criminals are often prepared to pay this price for what they see as a less risky method of getting clean funds. Sometimes in these circumstances a corrupt financial professional may also be coerced or bribed into helping the criminal.

Another option open to the money launderer, and one which is particularly used with cash from drug trafficking, is to divide it up among a large number of ‘smurfs’. These are ‘regular’ people of suitable appearance who open accounts and deposit small amounts of cash, which is subsequently transferred into the drug trafficker’s account. In one case in the United States, the equivalent of $29m was laundered by smurfs in $600 chunks – that is nearly 50,000 separate smurfing transactions, according to the Reporting Officers’ Reference Guide.

Introduced business presents an additional challenge for financial institutions when it comes to anti-money laundering as there will be no personal contact with the customer at the start of the business relationship. In this case, the golden rule is to ‘know the introducer’, as it is the broker who must be relied upon to carry out the identification and KYC procedures as rigorously as the financial institution itself would. Depending on the nature of the relationship, the broker may also be relied upon to keep some of the information up to date.

The bottom line is that money launderers will always try to exploit the services offered by financial professionals, who either knowingly or unwittingly can become involved in this crime. As the regulatory attention to this involvement, and the penalties for doing so, increase, so must people’s vigilance.

key points

In 2002 buying property was the most popular method of money laundering in the UK.

The Proceeds of Crime Act 2002 has tightened up the laws on money laundering.

Intermediaries and lenders have an obligation to know their clients and can be held liable if they are not reasonably suspicious.


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