Chris Ives is an associate director in Kroll’s London investigations and disputes practice
David Kirk is chairman of the fraud advisory panel
You only need to look at offshore ownership of UK property to realise the extent to which the regime is in need of a desperate overhaul. Research by the Financial Times has identified that at least £100bn of UK property is owned through offshore corporate structures, and findings from NGOs such as Transparency International have linked an alarming proportion of this property to corrupt overseas officials. Yet under the UK’s anti-money-laundering (AML) regulations, know your customer (KYC) checks are not required on purchasers of real estate and the beneficial owners of these corporations are not required to be disclosed, opening the door for an influx of illicit funds to wash in the UK property market. This is not an issue confined to any one industry, but simply an example of a loophole in a fragmented system that is being exploited.
Meanwhile, British businesses spend hundreds of millions of pounds each year in AML compliance costs, including determining which of the 20-plus supervisory authorities they must register with. As these firms lodge increasing numbers of Suspicious Activity Reports (SARs) – over 350,000 in the last year alone – under-resourced law enforcement agencies are overwhelmed. At the same time, regulators pursue high-profile prosecutions of firms for lax AML controls, thus ensuring firms decrease their risk appetite and increase their reporting, further overwhelming the system.
The current reporting regime is convoluted, expensive to enforce and perceived as having little noticeable effect on efforts to combat money laundering. It is time the public and private sectors worked together to overhaul this system.
The anti-money-laundering regime put in place by the UK authorities, principally in the Proceeds of Crime Act 2002, and the Money Laundering Regulations 2007, contains clear, strict and enforceable measures to combat the use and concealment of the proceeds of crime. The provisions are backed up by both law enforcement, which seeks to punish those who profit from the laundering of the proceeds of crime, and by professional regulators, such as the Financial Conduct Authority, the Solicitors Regulation Authority and the Financial Reporting Council, which ensure that the regulated community have procedures in place to prevent money laundering. The regulations governing the work of banks, lawyers and accountants in this area are detailed and complex. Regulatory penalties for breaches of the rules by professionals are harsh, and punishment for the money-laundering offences in Part 7 of POCA includes a maximum term of imprisonment of 14 years, and a fine, or both. Breaches of the Money Laundering Regulations are criminal offences.
In June 2015 the fourth EU Anti-Money- Laundering Directive came into force, and all EU countries have until 2017 to implement laws, which are in compliance with the Directive. There is a proper structure of procedures and enforcement both at national level in the UK, and EU-wide.
Anyone buying a house, opening a bank account, conducting any transaction, instructing lawyers and accountants, will find themselves caught up in money-laundering checks, which are required by the regulations to be thorough and inquisitive. It is difficult for them to be more assertive without running the risk of bringing ordinary commerce to a halt, and it is important to maintain a balance between convenience and law enforcement.
The National Crime Agency (NCA) estimates around £100bn is laundered through the UK every year.
It is difficult to be more assertive without the risk of ordinary commerce being brought to a halt
There is a difficult balancing point when imposing AML preventive measures on regulated entities; providing authorities with the information required to detect money laundering while still allowing the free operations of the financial system.
The UK’s money-laundering detection measures are focused entirely on SARs, which provide authorities with only a limited snapshot of activity at one institution at a set point in time. More needs to be done to provide a holistic overview of a person or corporate entity’s activity in the UK. The recent establishment of the Joint Money Laundering Intelligence Taskforce (JMLIT) is a welcome move to improve the sharing of intelligence among financial institutions and law enforcement.
A more comprehensive solution may lie in a move away from a focus on SARs reporting and adopting a wider transactional reporting model, costs of which could be offset by increased detection and recovery of tax evasion monies and the proceeds of crime.
Although it is fair comment that the proceeds of bribes paid to corrupt officials and governors in various jurisdictions can find their way into the UK banking system, and that there is a level of property ownership in the UK and other western countries that might be funded by dirty money, the fault for this cannot be laid solely at the door of the AML regime. Globalisation and the ease of cross-border fund transfers have made detection more difficult, and evasion has been made easier.
Beneficial owners of corporations incorporated in tax havens around the world may not be publicly disclosed, but as part of the KYC regime lawyers are required to identify who the beneficial owner of their client is. EU regulators last year voted to introduce transparency disclosure rules on beneficial ownership, and although such disclosure may not be placed on a public register, it will be available to law enforcement.
We have an AML regime which could be made to work better, but which is in essence sound.
One of the main purposes of KYC and other AML regulations is to prevent illicit funds from entering the legitimate financial sector and it is evident from the government statistics that illicit foreign funds continue to flood into the UK. NCA statistics from 2014 show legal professionals filed around 3,600 SARs, a little over 1% of the total, last year so although legal professionals are required to conduct KYC checks on their clients purchasing UK property it is not necessarily leading to increased reporting of suspicious purchases to law enforcement.
An AML reporting regime focused purely on SARs relies on multiple reporting entities identifying suspicious behaviour. Given each reporting entity assesses their own risk and is free to decide what they consider suspicious, it is difficult for regulators to have a wide enough view of a transaction in the UK to act to detect and act on suspicious activity within the prescribed time periods.
It may be time for the UK to consider moving towards a wider reporting model as implemented in the United States, Australia and Canada where cash transactions and international fund transfers over certain limits are automatically reportable. It is clear the current AML regime imposes huge financial costs on business yet is having little effect.
The balance that has currently been struck between preventing money laundering and preventing any business being done is probably about right. We need to sharpen up enforcement, but we should not become obsessed with the risk posed by the fraudulent transfer of the proceeds of crime.
Methods used by money launderers and crooks will develop, and law enforcement must keep up. Greater emphasis on cross-border intelligence and enforcement would undoubtedly assist.
London is a global financial centre providing a safe banking system, which is a vital part of the UK economy. In order to maintain global dominance, it must be seen as clean and orderly. The fact that it plays such a large part in global financial services business probably means that the amount of undetected dirty money going through the system will be large in proportion to other banking centres, but this must not obscure the fact that good systems are in place.