Finance and Investment Law - Money Laundering Regulations - Essay Example

Finance and Investment Law: Money Laundering Regulations Section 29 November 2005 Finance and Investment Law:Money Laundering Regulations Money laundering is a crime of deceit and skill in order to hide funds obtained from criminal activity. Regulations have been developed to prevent money laundering and capture those involved in the process. These regulations are complex but so is the crime. Money laundering needs to be understood by all those involved in the financial system. Money laundering is defined as a process which a criminal engages in a series of financial transactions that attempt to hide the origin and ownership of property obtained by illegal acts in an attempt to increase assets under the disguise of legal sources. Money laundering transactions generate assets that are a result of some illegal act such as drug deals or tax evasion. If a money launderer is able to achieve this goal then the criminal will be able to keep the property obtained from their illegal activity and have an apparent legal source for their newly acquired wealth. The purpose of laundering money is to disguise the assets obtained from the criminal activity as assets obtained through legal sources in an attempt to avoid imprisonment. Money that is laundered starts out as cash or as assets that are already in the banking system. Money is laundered through companies that handle large amounts of cash and investments like banks and other business firms that handle investments. Businesses that deal across international boundaries that handle "high valued goods" are prime targets for money launders. Some examples of businesses relevant to this situation are accountants, tax advisors, estate agents, and antique dealers. Terrorist, tax evaders, arms dealers, and drug dealers among other criminals involve themselves in money laundering. Overseas accounts and electronic funds transfers can be disguised to look like legitimate company transactions and make money laundering disguise easier for criminals. Money launderers also employ experts to help them launder money. For example, a launderer could simply ask someone for permission to use that person's account for deposits in return for a fee. Another scenario is for the money launderer to approach a business and ask them to set up transactions in which a sum of money is regularly deposited in the company's account. The businesses will then send the money back as a fictitious payment for non-existent goods. Although this method is very popular amongst the criminal underworld, there are other ways of laundering money without a business becoming aware of being involved in a crime. For example, the money launderer could place an order for a robot to be manufactured to a specific standard. The company may ask for a 60% deposit with the understanding that the order won't be put through for three months. Before the three months are up the money launderer cancels the order and gets the deposit refunded minus a penalty. The money launderer will always be willing to pay the penalty because although the criminal will want to get as much back as possible, what the criminal really wants is the money back clean. It is important to bear in mind that money laundering is a process rather than a single act. In an effort to expose and analyze this phenomenon it has become common to use a three-stage model, which encompasses an ideal money-laundering scheme. The three stages are as follows: The Placement Stage, which is when cash is received directly from criminal activity, like from sales of drugs. It is first placed either in a financial institution or used to purchase an asset. At this stage the criminal disposes of the physical cash deposits. The Layering Stage is the stage at which the first attempt at concealment or disguise of the source of the ownership of funds takes place. This stage is called the layering stage because it is where the criminals "layer" financial transactions in an attempt to hid the criminal activity. Integration Stage is the stage at which the money is integrated into the legitimate economic and financial system and is disguised with all other assets in the system. At this point the money launder has achieved the goal of hiding assets under the disguise of legal means. Money launderers try to prevent authorities from tracing the source of their illegal gains by moving their funds around the financial and economic system. The funds are then spent as if they were legitimate money. There are many techniques that a money launderer can use to obtain their goal. Each technique falls into one of three categories. These categories are banking, non-bank institutions, and non-financial businesses. Some techniques under the banking category are large deposits or transfers, accounts under false names, collection accounts, money orders or bank cheques, traveler's cheques, electronic funds transfers, and Internet banking. Techniques that fall under the category of non-banking institutions are exchange offices, under ground banking, and the postal service. Finally, techniques that fall under the category of non-financial businesses are lawyers, accountants, financial advisors, notaries, secretarial companies, trustees, casinos, bookmaking, Internet casinos, and real estate companies. Criminals use all these things in order to hide the true origin of financial assets plus many others. Regulations have to cover all techniques to provide preventative measure and persecution of criminals. Regulations have been set up to minimize and prevent money laundering as well as led to the capture of perpetrators by officials. These regulations are important to maintain the security of financial assets and the banking system. Money Laundering Regulations were developed to prevent money laundering and catch criminals involved in money laundering practices. The law is complex and set out in various different statutes and regulations. It deals with the proceeds of drugs trafficking, terrorist crime and non-terrorist crime, but the thrust of the law for each is similar. Offences are created for those who launder money and those who assist them in any way. It also requires those in the financial community to take preventative measures. The Criminal Justice Act 1993 widened the law by extending the term "criminal conduct" to mean indictable offence committed in the UK. The preventative measures are contained in the Money Laundering Regulations 1993 which implement the EC Money Laundering Directive. The Proceeds of Crime Act of 2002 describes the money laundering offenses within sections 327 to 329. The Terrorist Act of 2000 and Anti-Terrorism Crime and Security Act of 2001 include legislation about laundered funds that is under suspicion of use for terrorist acts. The FSA also has a set of regulations in order to prevent money laundering and catch perpetrators of the crime. Under the Financial Service and Market act of 2000, "financial crime means any offense involving fraud or dishonesty, misconduct or misuse of financial information, and handling the proceeds of crime." (Haynes 11). This act was formed to regulate overseas activity that would be considered and offense in the United Kingdom. Money laundering regulations are amended regularly and should continually be reviewed by persons in the financial community to stay current on regulations for the prevention of money laundering. The Criminal Justice Act of 1988 and the Criminal Justice Act of 1993 along with other specialized acts set up five offenses of money laundering. These five money-laundering offences are as follows: arrangements, concealment, acquisition, failure to disclose, and tipping off. Arrangements are an offense under the Proceeds of Crime Act section 328. Arrangements occurs where a person is involved in an arrangement with another person and the aided knows or suspects that the other person is or has been involved in or has benefited from criminal conduct. If the arrangement helps the criminal to retain or control proceeds directly or indirectly or enables the criminal to use the proceeds or to invest them for his benefit then the assister is guilty of an offense and faces imprisonment. Concealment is an offense under the Proceeds of Crime Act section 327. Concealment is disguising, removing or transferring criminally gained property in order to avoid or help someone else to avoid prosecution. Acquisition is an offense under the Proceeds of Crime Act section 329. Acquisition is the use of or possession of assets that a person knows or has reasonable grounds to suspect to be the proceeds of criminal conduct and have acquired at less than full value. Failure to disclose is an offense under the Proceeds of Crime Act section 330. Failure to disclose is a failure to report the knowledge or suspicion that criminal activity has or is going to take place. Effectively, the duty to report is extended to employees of business institutions where it is the institutions that may become involved in the arrangements and not the employees themselves. The question arises as to whether disclosure is a waiver of professional privilege or a breach of any express or implied duty of confidentiality owed to a customer or client. It is clear that disclosure to the police (although not third parties) will not constitute a waiver of professional privilege nor will it give actionable grounds for a claim for breach of confidentiality. Failure to report is an offense under the Proceeds of Crime Act section 331. This is when a Money Laundering Reporting Officer receives information about money laundering and does not report it to the National Criminal Intelligence Service (NCIS). If the reposting officer has a reasonable excuse for not reporting the information then it is not considered an offense. Tipping off is an offense under the Proceeds of Crime Act section 333. Tipping off constitutes an offence when information or any other matter which might prejudice an investigation is disclosed by someone who knows or suspects that: a police investigation into money laundering has begun or is about to begin, or the police have been informed of suspicious activities, or a disclosure has been made to another employee under internal reporting procedures. There are three defenses to these offenses. The Proceeds of Crime Act makes these offenses a crime that is punishable by imprisonment for up to fourteen years. These defenses are authorized disclosure, intended authorized disclosure, and "the act a person does is done in carrying out a function relating to the enforcement of any provision of the Proceeds of Crime Act." (Rhodes and Palastrand 10). Disclosure is authorized and not an offense when the crime is still taking place and it was unknown. As soon as the laundering becomes known or suspected then the person with the knowledge must disclose the information. Any disclosure is protected and failure to disclose is an offense unless there is a reasonable excuse. If a disclosure is made that will skew or prejudice the case then the person who disclosed the information is guilty of an offense. Any person with information cannot hinder the case in any way or they will be guilt of an offense. Anyone who is guilty of an offense under sections 327 to 329 may receive a sentence of six months in prison or a fine. This can rise to imprisonment for up to fourteen years or a fine. Prejudicing an investigation can lead to a sentence of six months in prison or a fine and can rise to five years imprisonment or a fine. It is required for institutions to check the identity of their customer. Identity checking is required in certain situations. These situations are when business relationships are formed, when a transaction is suspected of money laundering, when a transaction exceeds 15,000, a series of transaction totaling 15,000. The customer, to prove their identity, must provide original documents. More than one document may be and should be required to insure that identity has been proven. Some documents that could be used to prove identity are passports, drivers' license, references, and identification cards. Prof of residence can be obtained by obtaining utility bills, telephone directory, or the electoral roll. Photocopies must be taken of each document and filed in case the information is needed. These documents must be retained for up to five years after the business relationship between the customer and the firm is over. When a person that works within the financial system comes in contact with a potential customer, the financial person must request the customer to provide the information needed to identify the new customer. The financial person can obtain this information directly or indirectly as long as the information is obtained, copied, and kept on file. If the customer is there on behalf of another customer then information must be obtained about both customers in order to insure the identity procedures are met. There must be a person who is designated to receive all reports for money laundering. This person is the Money Laundering Reporting Officer. This person looks over reports of suspected money laundering and decides if it is a valid suspicion. The reporting officer then must report all relevant information that led the reporting officer to the decision that money laundering is taking place to the National Criminal Intelligence Service (NCIS) or relevant person. The Regulations require any person who carries out relevant financial business in a business relationship or a one-off transaction with an applicant for business to maintain certain administrative and training procedures designed to prevent money-laundering occurring. It is a criminal offence not to maintain the necessary procedures although it is a defense if the person concerned took all reasonable steps and exercised all due diligence to avoid committing this offence. This applies to banks and building societies, investment businesses and insurance business. People who know what they are doing but may not know of the penalties are taking a risk if they are caught will clearly assist some criminals in money laundering. People who are not sure what is going on but are prepared to turn a blind eye for the commission they will earn will also help some of the launderers. Many advisers will be representing clients who appear to be running perfectly respectable businesses but are not. Businesses must know their legal obligations and in particular providers of financial services must be aware of the new rules they must obey. Even though you can take effective steps to prevent hackers breaking into your computers, financial crime often involves insiders. For this matter setting up proper procedures to handle issues of money laundering and proper employee training are very important in the financial business. Banks and other financial institutions are required to have a system in place as a check to insure money laundering is not taking place. The bank or other institutions should have a system set up to insure that inquires are made to the identity of a person. There should also be a procedure for making a list of any suspicious transactions. Any large amounts of money that are transferred or deposited into an account with low balances should be put on inquiry with the bank in question. It might be hard to decide what is considered a suspicious transaction. There are no guidelines in the regulations to go by to determine if an activity constitutes suspicion or not. Suspicion is uncertainty or doubt in something. Some grounds for suspicion are as follows: money being transferred into another form at a very fast rate, fund routing involves a country that might have drug traffickers, a business arrangement that does not make sense, offshore accounts, a company with a complex structure, the appearance, actions, or attitude of the customer. All suspicious transactions should be reported to the NCIS. It is a good idea to set up a system to spot suspicious transactions within the business. This will insure a better-kept watch on the situations. Reporting money laundering is a two-step process. The first step is for the employee suspicious of money laundering to report their suspicion to the Money Laundering Reporting Officer. There should be a system of disciplinary action for those employees who do not report suspicious transaction. The next step is for the reporting officer to review the report for ground for suspicion. If there is a question of money laundering then the reporting officer must submit the report to the NCIS. The reporting officer should be able to obtain any information that is needed from the company to decide if there are grounds to suspect and to make a complete and proper report to the NCIS. Employers should make sure that the employees have the training required and are aware of consequences it a situation does occur where there is a failure to report suspicious activity. How can a financial institution deter money launderer from infiltrating their financial institution A company could have a strong system in place and clear policies and procedures to follow involving the detection of money laundering. The financial institution should make sure that they know their customer and have proper customer verification on file for the required amount of time. A business should also know how, when, and where to spot unusual transactions. Make sure all record keeping is accurate, clear, and complete. Make sure there are audit trail to make tracking money easier and that all records are in compliance to the regulations. Make sure all employees are properly educated and trained to spot suspicious transaction. Also follow up or test them periodically on the proper procedure to increase understanding and effectiveness. If there is a strong system of checks and balances then it will be easier to deter money launderers. The Money Laundering Regulations of 2003 imposed some changes to the previous regulations. One change was that if a person does not disclose information about a crime involving money laundering if that person knows or suspects that the crime is taking place then that person is guilt of an offense. This will make those involved in detecting this criminal activity more careful and apt to report the crime. Another change that was made is to train staff in the money laundering regulations. If a company does not train their staff it could mean that they breached the regulations and will have disciplinary action taken against the company. Proper staff training will help increase the chances of catching these criminals before funds are untraceable. Staffs training for money laundering regulations are required in businesses that handle financial investments. The Money laundering Regulations 2003 now include estate agents, casino operators, accountants, tax advisors, and legal services to train their staff in the regulations as well. These businesses handle high amounts of cash and investments as well as banks and other firms so they should also know the regulations. Criminal use these companies as well as any other and adding these companies to the requirements will help cut down on the criminals that use these businesses. The Money Laundering Regulations 2003 are also discontinuing postal concessions. Postal concessions are verifications of a customers identity based completely on the fact that the funds being transferred are coming from a United Kingdom regulated bank. Using postal concessions assume that the regulated bank has the proper verification top the customer's identity. The person transferring the funds could not be the person the account belongs to as well. Stopping postal concessions makes it a requirement of all financial institutions to verify identity with acceptable proof. Previous regulations did not require institutions to verify the identity of customers that opened accounts before April of 1994. Now institutions may have to verify the identity of those customers. This could cause a problem because customers may be unreachable or the customer may not respond to any attempts to get the information needed. Money laundering is a complicated crime to regulate and the legislation is complex in itself. Training and proper understanding of the regulations is needed to properly prevent criminal activity. Continually changing and new regulations makes constant review and learning a necessity for those in financial institutions. The regulations are strong steps to keeping this criminal activity lowered, however, as technology changes and grows so will the crime of money laundering. The regulations will need to grow and change along with advances in technology, the banking system, and the criminal activities. Work Cited Alexander, Richard. "The 2003 Money Laundering Regulations." Journal of Money Laundering Control. Henry Stewart Publications. 2004: Vol. 8, no. 1. Birks, Peter. Laundering and Tracing. Clarendon Press. Oxford: 1995. Cranston, Ross. Principles of Banking Law. Clarendon Press. Oxford: 1997 Haynes, A. "The Wolsber Principle - An Analysis." Journal of Money Laundering Control. Henry Stewart Publications. Winter 2004: Vol. 7, no. 3. Haynes, A. Financial Services Law Guide 3rd Edition. Chapter 5: Money Laundering. Tottel. Ping, He. "New Trends in Money Laundering - From the Real World to Cyber Space." Journal of Money Laundering Control. Henry Stewart Publications. 2004: Vol. 8, no.1. Rhodes, Robert and Palastrand, Serena. "A Guide to Money Laundering Legislation." Journal of Money Laundering Control. Henry Stewart Publications 2004: Vol. 8, no. 1. 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