Introduction
The report presents the extent to which the United Kingdom’s private banking sector is vulnerable to money laundering threats. It has been observed that the United Kingdom (UK) is the major leader in European world and finance and therefore, it is the major attraction for the money launderers in respect with its reputation, size, and sophistication in financial markets. Even though, the statistics reveal that narcotics are still considered as the main source of illegal proceeds for money laundering, smuggling of people and goods, and other offenses like financial fraud have become increasingly important. The United Kingdom’s strategies and priorities towards AML was committed to identifying and interdicting the flow of illicit funds across and within its borders, and to the disruption and dismantling of the money laundering and terrorist finance networks that move such funds. This was made clear in the government’s Anti -Money Laundering Strategy, published in October 2004. The government’s policies for AML/CFT were underpinned by three key objectives: to deter, through the establishment of enforceable safeguards and supervision; to detect, using the financial intelligence generated by money laundering controls to identify and target criminals and terrorist financiers; and to disrupt, maximizing the use of available penalties such as prosecutions or asset seizures. In spite of the various steps taken by the Authorities there have been substantial attempts to launder money in the recent past. And hence there is a pertinent need to asses and analyze the effectiveness of the United Kingdom’s controls in meeting the threats and identify areas for improvement.
Concept of money laundering
In the recent times, money laundering is considered as one of the major problems and it is very difficult to have a grip on it. In simple words, it can be realized that in money laundering the criminal income is converted into assets which cannot be market out to the primary crime. In addition to this, it can be observed that money laundering has been further divided into three phases, firstly, the placement of the fund that are resulting from the crime, in order to cover up their origins, the layering of those funds has to be done along with the incorporation of the funds into the majority of the economy[1]. There are many forms of unlawful activities that demands cash. For instance, drug dealing involves a large amount of cash in minute denominations. The money launderer is responsible for removing the cash from where it was obtained and put the cash at a safe place where the money cannot be traced or detected.
Furthermore, the next stage is to cover the basis of funds, this is done by formulating difficult layers of financial transactions. In the transactions, offshore bank accounts are involved, along with this, companies registered with nominee shareholders are also taken into account, and there are complex dealing in shares, futures, and commodities. In the final stage of money laundering, the funds are integrated into normal economy so that the funds come into sight as justifiable. This combination is mainly accomplished by the conversion of money into apparently legal business earnings by means of commercial and financial operations. Moreover, it can be noticed that terrorist financing mainly incorporates money laundering. Furthermore, weakening to distinguish among terrorist financing and money laundering in AMLR is almost certainly counterproductive for two reasons, firstly, the act of layering, placing and combining does not essentially apply with terrorist financing. Moreover, this can be a fact that the basis of terrorist financing is not essentially illegal, therefore, it is not required to camouflage the placement, and furthermore, it does not have to be integrated into the normal economy as it is being used for unlawful purposes. In order to protect the secrecy of the source, the process of layering is carried out, but this layering does not has much significance than in money laundering. Secondly, in order to finance even large terrorist actions, the amounts needed, can be comparatively small.
Case of HSBC, RBS, and Coutts
The banking system mainly refers to the network of business and personal bank accounts that help in depositing and lending money to the consumers. The high street banks provide services to the common public, there are five big banks in UK, such as, HSBC, Lloyds TSB, Leicester, Alliance, and Natwest. The banks look for the best way to invest money by means of knowledge in different bond markets, stock market, and exchange rates. The Bank of England is accountable for monetary policy in the UK. The aim of UK banking system is to facilitate confidence and security in the economy. Over the last decade, there have been certain investigations by the U.S. Senate Permanent Subcommittee to strengthen the working of financial sector in UK and US. The purpose of AML is to explicitly investigate about the money launderers, corrupt officials, terrorists, tax evaders, and other organized crime that has been happening in the financial institutions[2].
AML is focused to identify and understand the illegal proceeds related with organized crime, financial fraud and drug trafficking. According to the investigation done by the Subcommittee, it was observed that there were a number of poorly managed and corrupt foreign banks that used the UK and US bank accounts for their wrongdoing. There were stronger AML laws as part of the Patriot Act of 2002 enacted by congress, responding to the investigation done after the money laundering vulnerabilities exposed by the 9/11 terrorist attack, moreover, the laws included stronger provisions to fight the mistreatment of correspondent services[3].
In addition to this, the regulators of Federal bank followed with stronger regulations and examination to keep safety against money laundering activities by the means of correspondent accounts. Therefore, the AML control strengthen over time by regularly monitoring account activities and making wire transfers on any suspicious activity. With AML in effect, the banks also took measures to make sure that they don’t provide services to such banks. On the other hand, to the notice, the money laundering risks associated with correspondent banking still persists, this is because the correspondent accounts help in providing a gateway in the UK financial system, and as a result, the wrongdoers can easily enter through that way.
In order to examine the current money laundering and terrorist financing, the case of HSBC has been taken into account where the threats are associated with correspondent banking. It is well known that HSBC is considered as one of the largest financial institution in the world with having more than 89 million customers, over $2.5 trillion in assets, along with 300,000 employees, and according to the statistics, having $22 billion profits as recorded in 2011. According to the investigation done on HSBC, it was revealed that HSBC operates in many jurisdictions with weak AML controls, having high risk financial activities, with high risk clients that include Middle East, Asia, and Africa[5]. In many of these countries, the correspondent accounts are provided by HSBC affiliates to foreign financial institutions. It has been observed that HSBC affiliates and foreign financial institutions that countenance considerable AML challenges often operate under weaker AML requirements.
In December, 2012, according to BBC, HSBC was fined with $1.9bn to US authorities making a settlement regarding the poorly managed money laundering controls. This news was originally reported in July when the US senate heard the subcommittee report highlighting the problems with the operations of American banks. In addition to this, the subcommittee also disclosed that the bank was also being used by the Russian gangsters and Mexican drug cartels to launder money. Therefore, HSBC apologized and admitted the wrongdoing and came to a settlement by paying fine. Moreover, according to the bank officials, they have spent $290m for improving its money laundering systems with the help of Financial Services Authority in the UK[6]. As a result, with the help of the improvement system, the HSBC of today is a fundamentally different organization and is working towards strengthening its anti money laundering activities. On the other hand, HSBC is not the only bank that has been caught up in this type of disgrace; moreover, $340m penalty has been paid by Standard Chartered to settle money-laundering charges, furthermore, it will also pay $300m in fines for violating US sanctions against Libya, Iran, Burma, and Sudan. There are several other banks that have been caught up in such scandals such as Coutts, RBS, Lloyds, ING, Credit Suisse, and Barclays. The other bank Coutts has also been fined with £8.75million for systematic and serious failures while handling money from foreign despots and suspected criminals[7]. The bank was highly criticized for an unacceptable risk of handling the proceeds of crime and as a result, the fine was imposed by Financial Services Authority for the bank’s money laundering offence. In the above cases, the reporters claim that the private bankers have not paid attention and did not conduct proper check on the customers by monitoring their accounts and as a result, they ultimately failed to make out serious criminal allegations against those customers. Moreover, in the case of RBS, there are allegations of embezzlement of state funds and secure business along with personal associations with individuals wanted by law authorities. On the other hand, the report by FSA reveals that the bankers at Coutts were enthusiastic to succeed new business and secure a bigger bonus. Hence, Coutts failed to take considerable measures that would help in establishing and maintaining effective controls and AML systems that were associated with high risk customers, mainly including the politically exposed persons that are vulnerable to corruption[8].
The FSA’s investigation acknowledged that Coutts did not implement with vigorous controls when they were starting their relationships with high risk customers. In addition, they did not even apply suitable monitoring over and over again of those high risk relationships. It was found by the FSA that the AML team of Coutts was not effective and failed to provide an suitable altitude of analysis and challenge.
Vulnerability of UK private banks in relation to Money Laundering
Role played by the European Union in fortifying the AML regime
The awareness of the effectiveness of Money Laundering led the EU to take steps in order to combat money laundering. Hence, in furtherance of the same goal it designed European Union Anti-Money Laundering and Financing of Terrorism Directives with a view to shelter the financial system and other susceptible professions from the threat of being abused for laundering money and funding Terrorism. Now it is vital to highlight some of the few elements of the Directives it has enacted[9].
The first Directive (91/308/EEC)[10] was focused more on the precautionary processes like customer/client identification, record-keeping and essential methods of reporting suspicious transactions with a view to ensure the protection of the EU single market. It included points such as: Due diligence checks must be carried out by all credit and financial institutions before entering into any business relationship or before conducting any transaction over a certain threshold. All collated identification documents, evidence and existing records collected as part of the due diligence checks must be kept for at least five years by credit and financial institutions. There must be close international co-operation and harmonization between credit and financial institutions and their supervisory authorities and the establishment of a mandatory central system of reporting. The confidentiality rules regarding customer information should be toned down in relation to disclosing suspected money laundering offenses to the authorities[10]. Special protection should be afforded to credit and financial institutions, their employees and their directors who have to breach confidentiality rules in order to make the disclosure.
The second Directive 2001/97/EC of 4 Dec 2001 modernized and polished the provisions created by the First Directive with a view to fill the openings in the legislation highlighted by the 40 recommendations, suggested by the Financial Action Task Force(FATF). The second directive cleared the confusion about which Member State’s Authorities should obtain suspicious activities reports where credit or financial institutions had had branches in various jurisdictions. It also widened the definition of money laundering while also expanding predicate offences. Moreover, it added the authority to identify, trace, freeze, seize and confiscate any property and proceeds linked to criminal activities.
The third Directive 2006/70/EC of 1 August 2006 emphasized on: Enhanced Customer Due Diligence steps for Politically Exposed Persons as well as their immediate relatives and close associates; and Simplified customer due diligence measures for low-risk transactions involving public authorities or public bodies if their identity and activities are publicly available, transparent and certain and on-going monitoring of such transactions. The Fourth Directive of 5 February 2013 while taking into account the amendments to the FATF requirements pays special attention to the vigilance required from lawyers under EU law. Its second draft textconsists of a new regulation on information on the payer accompanying transfers of funds to “improve traceability of payments and ensure that the EU framework remains fully compliant with international standards.”
Role played by the FATF
Now the further section of the paper will provide a brief summary of the recommendations suggested and reviewed and amended time and again by the FATF for its members.
-The criminalization of money laundering on similar terms to those suggested in the 1988 UN convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances and the 2000 UN Convention against Transnational Organized Crime, as well as for extended sanctions (civil and regulatory) to be applied to legal persons who fail to adhere to the Directive;
-That countries adopting the recommendations should establish a national center for obtaining information about suspected money laundering transactions (a Financial Intelligence Unit or FIU) and guarantee that there are designated law enforcement authorities that have responsibility and resources necessary to investigate such transactions;
-The adoption of measures such as tracing in order to confiscate property and proceeds from money laundering. The recommendations also call for steps that prevent the State from recovering such property to be voidable[11];
-That client due diligence should be completed by all financial institutions and non-financial businesses and professions, including lawyers, and records to be kept for five years. The recommendations also call for ‘special attention’ to be paid to all complex and unusually large transactions and to those transactions involving new or developing technologies;
-Requirement for all financial institutions and non-financial businesses and professions to report suspicious transactions to the Financial Intelligence Unit (FIU) and for protection to be offered to such informants[12];
-Development of Platforms by Financial institutions, such as internal policies, in order to combat money laundering and terrorist financing and make sure that all subsidiaries adhere to the recommendations;
-That all shell banks should be discontinued and all financial institutions should report all domestic and international currency transactions above a certain amount;
-That there should be enhanced regulation, supervision and guidance offered to financial institutions and non-financial businesses and professions, in their compliance with the recommendations; and
-Emphasis on improved effectiveness regarding international co-operation, mutual legal assistance including possible extradition and information sharing amongst jurisdictions.
Wolfsberg
The Wolfsberg group includes twelve global banks that align their actions with an intention to develop financial services industry standards and contribute in curtailing the money laundering and counter-terrorist financing policies. The group was formulated in the year 2000, at the Chateau Wolfsberg in north-eastern Switzerland and was assigned a duty to work on drafting anti-money laundering guidelines for private banking. The Anti-Money Laundering Principles by the group for Private Banks was first time published in October 2000. Since its formation the group has made an active contribution in providing guidance to the banks with regard to a number of areas of banking activity in terms of money laundering prevention[13]. The group has been taking active steps and initiatives to curtail and reduce the activities of money laundering. It is quite clear that the banks are the major target for the supply of money from criminal activities and such groups helped in reducing the possibilities of such actions.
Legal and Regulatory Framework by UK in relation to money laundering
Money laundering is the process of hiding illegitimate sources of money. There are many regulatory and sophisticated rules in regards to the same. The government authorities of UK define the amount of money to be laundered domestically and internationally. Money laundering and terrorists funding legislation in the United Kingdom is governed by four Acts of primary legislation: –
- Terrorism Acts, 2000
- Anti-terrorism, Crime and Security Act, 2001
- Proceeds of Crime Act, 2002
- Serious Organized Crime and Police Act, 2005[14]
- Money laundering regulations, 2007
The regulation in regards to money laundering system is there in order to protect the financial system of United Kingdom. This kind of regulations are also important from business point of view, as this helps in keeping an eye on the system in which money is laundered. A proper guidance can also be provided by groups viz- Joint Money Laundering Steering Group, the Law Society and the Consultative Committee of Accountancy Bodies’ (CCAB). The definition has a wider scope in UK. Penalty of maximum of 14 years is associated with money laundering offences.
The money laundering regulation, 2007 was previously used to known as money laundering regulation, 2003. This provides the secondary regulation. This act involves the provisions that if any of solicitors, accountants, tax advisers and insolvency practitioner finds their clients or any other, for whom they have been doing business with, are involved in the case of tax artifice, can now report this to the authorities. Under any circumstances the authorities are required not to disclose the name of solicitors, accountants, tax advisers and insolvency practitioner. This is termed as legal professional privilege.
It is to be noted that it is not mandatory for the banking institutions to report in a routine about the deposits being made over and above a stipulated amount. However, they can report the suspicions incase if they face any. The prime legislation of Anti-Money Laundering of UK is contained in proceeds of crime act, 2002. This also includes provisions for reporting about the suspicion to the authorities in case of tax evasion by the businesses including banking, investment, money transmission, certain professions, etc. In any case the same is not reported to the authorities the same person can be held to imprisonment of five years. UK money laundering is different from as that of other countries. The system of UK does not only define the proceeds of serious crime, or any stipulated monetary limits. The legislation of UK anti money laundering system involves assets of any description and not only involves money. Any person who is found to be involved in taking some benefit in the form of money or assets also considered to be committing an offense under money laundering offense under UK legislation. The same also applies on to a person who evades any such liability as referred by the lawyers in lieu of taking an advantage in liable to pay the same amount which is equivalent to the liability evaded[15].
Overview of the Steps taken By UK to fortify the AML regulations
The UK government is trying to put in best in order to fight against anti money laundering. Their whole sole motive behind the same is to protect the citizens from the fraudulent activities so as to prevent from harm which can be caused to them through crime and by terrorism. It is been observed that some of the legitimate businesses are involved in causing harm to the citizens by the use of lending money. This borrowed money by the businesses is seemed to be used in criminal and terrorists activities. Since such activity requires use of finance. UK is one of the participants who are involved in the development of standards meant towards the step of protecting public[16]. There is a body formed for the same purpose known as Financial Action Task Force (FATF). The standards formed in here come under Money Laundering Regulations 2007, the Proceeds of Crime Act 2002 and the Terrorism Act 2000 in UK. There are various steps taken the treasury which is formed by UK are as follows:
- Financial Action Task Force (FATF).- as already been discussed UK is an active participant towards the development of standards. FATF was formed in 1989 in order to cover the issues of money laundering and terrorist activities. This formation has helped in forming compliance in regards to the same. This is also responsible for finding improvement and new upcoming threats, stopping development of weapons and tackling mass destruction. UK is amongst the founding member of FATF[17].
- Implementing EU directives: EU legislation came into being in order to protect the system from the activities related to money laundering and financing of terrorism activities. Commission Directive 2006/70/EC of 1 August 2006 laid down measures for Directive 2005/60/EC. This commission also released a draft in order to prevent money laundering and terrorist financing.
- Money Laundering Regulation, 2007: After few amendments Money Laundering Regulation, 2003 is now known as Money Laundering Regulation, 2007. This act provided the provisions that if any of solicitors, accountants, tax advisers and insolvency practitioner finds their clients or any other, for whom they have been doing business with are involved in the case of tax artifice, can now report this to the authorities. Under any circumstances the authorities are required not to disclose the name of solicitors, accountants, tax advisers and insolvency practitioner. This is termed as legal professional privilege.
- Strategy on terrorist finance: UK’s Money Laundering Regulations 2007 and Financial Action Task Force (FATF) helped in tuning these efforts. This step was substantially important in order to take actions against the members who act as donors and helpers which in turn increases the capacity of the terrorist to perform terrorist activities[18].
Deficiencies in UK Rules and Laws
There are number of deficiencies found in the system of UK Rules and Laws as they are found to contain certain ambiguities. Also, some of the laws are found to be poorly implemented. There are found to be many differences in between the interpretation and application of law. It is also been claimed that training provided to the community for enforcing law is not sufficient. The industry providing financial service is claiming about the rise in cost in regards to anti money laundering regulations. They are being viewed as proving more problems as compared to its benefits. The legislation does not provide an objective understanding in regards to remove crime. This has regarded as complete failure when we talk about avoiding terrorist financing. Some of the deficiencies present in the system are:
Firstly, many of the digital banks did not fall under a specific regulatory statue. Thereby it is not expected out of them to adhere to the rules and regulations meant for the same. Sometimes it may be found that transaction may not involve large sum of money. Now the question comes here whether to monitor such transactions or not. Secondly, the legislation has found to be against Data Protection Act. The legislation requires banks to report about the customers on whom they are suspicious about. This step however requires leaking of data to the institutions. Hence, data privacy is one of the biggest issues coming forward[19].
Thirdly, there are lots of issues in regards to measure the extent of scale of money laundering. Although efforts were made by the FATF (Financial Action Task Force) in order to correct the problems, however it failed. This problem arose on the basis that in every country there are different definitions used in context of money laundering. Fourthly, it is impossible to find the reliable figure in regards to costs and benefit behind the implementation of Anti Money Laundering Regulations. This problem prevents to calculate the impact of legislation.
Fifthly, many organizations like banks, does not differentiate between the cost spend on anti-fraud and AML operations and thus they do not allocate costs to each operation separately. The regulation does not provide any provision to differentiate. UK once has also been criticized for lacking in procedure to invest about the companies involved in foreign bribery.
Due to the flaws present in the Anti Money Laundering legislation it has been viewed to be a reason for causing harm on economic development. Such regulations are coming in the way of capital formation from the other nations. Also this is being considered as the way of taking/diverting the capital away[20].
It is to be concluded that the main purpose behind any law is to curb the ill effects, the law system should try as much as possible that it should take the system in the way they are meant to be so as to take maximum benefit out of fit.
Discussion
From the above facts and cases, it can be analyzed that as far as the risk of private banking sector is concerned from the politically exposed persons, it becomes very complex for them to keep a check on the senior officials and the government ministers along with the state owned enterprises and entities as well as their associates. Therefore, it is extremely recommended to them to make greater use of the software programs and global institutions that help in accessing appropriate databases to recognize and keep a check on their relations with the persons that help them in fulfilling these kinds of requirements[21]. In addition to this, this will also help the financial institutions to perform their due diligence fundamentals in an effective way. The present money laundering laws and legislation seems to be effective as far as the entire scheme of law is concerned. This is because firstly, there are disclosure compulsions for the Regulated Sector under ss.330/331 of POCA[22]. Furthermore, the Supervisory Bodies are not limited to suspicious conduct by those they supervise and have disclosure obligations under r.24 of MLRs 2007. Thirdly, other POCA offences are valid to all organizations and individuals in the UK. Regrettably, it is a fact that this regulatory framework cannot be completely relied upon, this is because there is no agency or government department that is willing to take the responsibility for ‘policing’ fulfillment by businesses and Supervisory Authorities in the regulated sector. At all times, the preference is to get away from a case back to the local police. Therefore, the single technique to restore to health of this is the engagement of a national law enforcement agency for enforcing obedience, and making its work progress on the basis of witness reports from the businesses and individuals supported by recommendations from local law enforcement agencies.
Conclusion
Altogether, it has been observed that the United Kingdom has an effective legal mechanism that helps in the purpose of fighting money laundering, because the crime of money laundering is considered to be high in encircling the major essentials of the Vienna and Palermo Conventions. Moreover, the Proceeds of Crime Act, 2002 fortified it further with the help of powerful unit called the Financial Intelligence Unit. In a view of the fact that the United Kingdom is a leading player in private banking and investment, it can be noticed that the Money Laundering Regulations (MLR 2007) helps in ensuring and enabling the of all types of ‘Financial Institutions’ in accordance with the FATF recommendations. In the case of customer due diligence, though there were a few shortages as there was no specific regulation or law checking and controlling the process of verification and identification in recognizing the beneficial owner of the accounts. On the other hand the financial services Authority FSA were sufficiently prepared to be in charge of, scrutinize, and assure the observance of the financial institutions it synchronized. In addition, the Financial Services Authorities (FSA) teams, in retort to the FATF’s statement, have recently focused on regular visits to comparatively less significant Firms, and Banks etc for ensuring its compliance. The requisites were working and successful as far as the phase of controlling records and reporting of suspected activities is concerned. Despite the fact that the Joint Money laundering Steering group has again delivered extensive guiding principles on the genuine accomplishment which have also been permitted by the HM Treasury. It can be noticed that the major problem of vulnerability of the financial sector and the private banking sector mainly lies in the proper and authentic execution and completion as well as in making sure that the requirements are met completely. There for it is essential and significant for the banks and firms to plan and implement various procedures and policies which directly help in following with the regulations and the laws that have been anticipated to be followed by them. These policies should grip some of the essential elements such as ongoing monitoring, customer due diligence methods, responsibilities and obligations of the money laundering reporting officer; Know your Business; manage of compliance; report requirements; right treatment and management of court orders, record keeping; tipping off; risk assessment and management and facilitating awareness and training to the employees.
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