The Current Anti-Money Laundering Regime in the United Kingdom - Essay Example

Money Laundering A thesis submitted to For the degree of Master of Law By Candi s 2009 FACULTY OF LAW Copyright Declaration I certify that, except where cited in the text, this work is the result of research carried out by the author of this study. _____________________________________________ Name and Signature of Author August 2009 This write - up is for a dissertation on Money Laundering. Biographical Sketch Acknowledgements Contents Chapter 1 – Introduction and Justification 1 1.1 The Aims and Objectives of the Dissertation 2 1.2 Overview: A Discussion about the Content of the Dissertation 3 1.3 An Overview of the Chapter Structure of the Dissertation 5 1.4 Abstract for the Reminder of the Dissertation 7 Chapter 2 – The Balancing Act – Effectiveness versus Managed Compliance Costs 9 Chapter 3 – Risk Based Approach – The FSA’s Two-Stage Policy 10 Chapter 4 – Critique of the FSA’s Risk – Based Approach 11 Chapter 5 - Comparative European Perspective 12 Chapter 6 – Recommendations for Reform 13 Chapter 7 –Conclusions, Recommendations and Suggestion for Further Work 14 Appendix A – 15 Appendix B – 16 Bibliography/ References 18 List of Figures Figure 1: 49 List of Tables Table 1: 111 Table 2: 116 (This page intentionally left blank) Chapter 1 – Introduction Money laundering refers to the processes used for hiding and disguising the true origins and ownership of funds, mostly for avoiding criminal penalties, conviction, prosecution or confiscation of funds acquired illegally or intended to be used for unlawful or morally repugnant purposes1. Criminals and terrorist organisations have a need for hiding funds acquired illegally through morally repugnant means and terrorist organisations need to launder money to hide their sources of finance to ensure that their operatives receive funding without raising suspicion. Money represents the lifeblood of a criminal or a terrorist organisation and it is for this reason that most countries and global institutions have an interest in detecting and preventing money laundering2. Researchers suggest that the estimated aggregate funds processed by money laundering activities from around the world range from US$ 590 billion to US$ 1.5 trillion3. However, approaches to regulation, implementation and enforcement of anti-money laundering legislation differ despite a consensus for global cooperation and affect the anti-money laundering efforts as nations try to balance regulation, cost of enforcement and rights4 . The major financial centres from around the world have presented a need for greatest vigilance and effort directed towards prevention and prosecution of those involved in money laundering because global flows of dirty money are either generated in affluent economies or flow through these centres. Thus, it makes sense to try to examine the nature, emphasis and implementation of the anti-money laundering regulation and efforts in London and the UK within a broader regional and global context involving other major financial centres from around the world. It is with the previously mentioned objectives of interest to all those with an interest in the topic of discussion that this dissertation attempts to examine critically the prevailing anti-money laundering regime in the UK. 1.1 The Aims and Objectives of the Dissertation The following are the important aims and objectives of the dissertation: To present an in-depth study the current anti-money laundering regime in the United Kingdom and the evolution of this anti-money laundering regime. To try to examine the anti-money laundering approach in the United Kingdom from the perspectives of domestic concerns, rights, expenses incurred for enforcement and development of European and international law and regulation. To present an examination of the processes for money laundering, their evolution and the manner in which the United Kingdom anti-money laundering regime acts to effectively prevent and deter money laundering. To try to present suggestions for improvements in effectiveness of the anti-money laundering regime in the United Kingdom, reduction in financial burden for regulation and enforcement and improved protection of individual and corporate rights under the anti-money laundering regime. 1.2 Overview: A Discussion about the Content of the Dissertation In the present day and age, anti – money laws and regulations used in the war against drugs and global terrorism have consequences for banks, financial institutions and the individual5 . They affect liberties, profits and the conduct of business in banks and financial institutions. Thus, it is important to design and implement the previously mentioned laws and regulations in a manner that results in effective control of money laundering at reasonable costs without undue problems for the innocent persons. However, to understand thoroughly anti-money laundering efforts it is necessary to conduct an in-depth study of an anti-money laundering regime of excellence and to compare this with other prevailing standards. The City of London in the United Kingdom is a noted financial centre that competes with other such financial centres in the United States of America, Europe and the Far East. It is clear that the thought and effort spent in designing the anti-money laundering regime in the United Kingdom, despite any criticisms or shortcomings, is worthy of a critical examination and comparison. Regional influences and global cooperation in anti-money laundering activities have shaped the anti-money laundering regime in the United Kingdom, but the nation has to decide what is right for balancing competing requirements related to effectiveness, promotion of business, protection of liberties and costs to the taxpayer and financial institutions. Thus, this dissertation presents an examination of the anti-money laundering approach in the United Kingdom, its historical evolution, its criticism, perceived shortcomings, effectiveness in the face of evolving processes for money laundering, comparison with other anti-money launderings and suggestions for any improvements in the light of the effort made to study all of the previously mentioned. 1.3 An Overview of the Chapter Structure of the Dissertation This dissertation consists of seven chapters. Chapter 1 is the introduction, which introduces the topic of the study, the emphasis and the structure of the dissertation. The chapter that follows presents a discussion about the two competing principles that are significant for the anti-money laundering regime in the United Kingdom and elsewhere: effectiveness in terms of control of money laundering and management of costs of compliance with the regime. It is important to optimise costs associated with achieving an acceptable level of control over money laundering activities because implementation of an anti-money laundering regime requires expenditure of public funds together with costs that are incurred by all actors in the banking and financial system. It is likely to be unfair to burden banks and other actors in the industry with high costs of compliance that will have an impact on their profits and an acceptable level of control is aspired to because it is difficult to achieve total control in the real world. Chapter 3 presents a discussion about the risk-based approach and the two-stage policy that is the basis of the approach used by the Financial Services Authority (FSA) for control of money laundering in the United Kingdom. The Financial Services Authority, as the UK regulatory body charged with the task of tackling the phenomena in the domestic context6, has, since 1997 adopted an explicitly risk-based approach to targeting money-laundering practices, working with the intelligence support presented by the Serious Organised Crime Agency. The FSA focuses its regulatory efforts upon specific business practices and identification of risks associated with particular sectors, markets and firms to target businesses and practices that present the highest risks. The following chapter, chapter four presents a critique of the anti-money laundering regime in the United Kingdom based on views presented by researchers and commentators from within and outside of the United Kingdom. A discussion about European influences on the anti-money laundering regime in the United Kingdom in the face of evolving European, global processes and threats is in chapter 5. As a member of the European Union, the United Kingdom must have due regard for European Union directives. Chapter 6 presents a discussion about what learned observers and researchers have presented for improving the system. The final chapter for the dissertation, chapter 7, presents the conclusions and recommendations from the study, together with suggestions for further work. 1.4 Abstract for the Reminder of the Dissertation A risk-based approach to anti-money laundering that attempts to focus regulatory activities on practices deemed risky within sectors, markets and funds has been the thrust of the regulation effort in the United Kingdom7 . Identification of products and services associated with the financial sectors that present risks together with enhanced efforts directed towards identification of those involved in transactions have strengthened the anti-money laundering efforts, but increased costs substantially. Thus, balancing effectiveness with costs has received considerable attention and the literature review presents perspectives related to the previous together with a legal deterrence and other issues related to money laundering from published literature. An appraisal of the role and nature of anti-money laundering efforts, including the role and nature of the Financial Services Authority (FSA) and the intelligence led effort of the Serious Organised Crime Agency are important. Evolution of the anti-money laundering regime together with a discussion of the legislation and recommendations of government bodies highlights in depth study of the UK anti-money laundering efforts. Comparisons of threats and countermeasures for other major European financial centres together with influences from global institutions and European directives present perspectives for improvements and these are included in this dissertation. Chapter 2 – The Balancing Act – Effectiveness versus Managed Compliance Costs Chapter 3 – Risk Based Approach – the FSA’s Two-Stage Policy Chapter 4 – Critique of the FSA’s Risk – Based Approach Chapter 5 - Comparative European Perspective Chapter 6 – Recommendations for Reform Chapter 7 – Conclusion, Recommendations and Suggestions for Further Work Appendix A – Appendix B – (This page intentionally left blank) Bibliography/ References A. V. M. Leong, “Anti-money laundering measures in the United Kingdom: a review of recent legislation and FSAs risk-based approach” (2007) Company Lawyer 28(2) 35-42 Commonwealth Secretariat, ‘Combating Money Laundering and Terrorist Financing: A Model of Best Practice for the Financial Sector, the Professions and Other Designated Businesses’; Published by Commonwealth Secretariat, (2006). D Demetis and I Angell The risk based approach to AML: representation, paradox, and the third Directive (2007) Journal of Money Laundering and Control 10(4) 412-428. FSA, Financial Risk Outlook 2006 (London 2006) accessed 27/03/09 FSA, Financial Services Authority - An Outline (London 1997). J. Harvey “Compliance and Reporting Issues Arising for Financial Institutions from Money Laundering Regulations: A Preliminary Cost Benefit Study” (2004) 7(4) Journal of Money Laundering Control 333 Jae-myong Koh, ‘Suppressing terrorist financing and money laundering’; Published by Springer, (2006). Kris Hinterseer, ‘Criminal finance: the political economy of money laundering in a comparative legal context’; Published by Kluwer Law International, (2002). M. Gill and G. Taylor, “The Risk-based Approach to Tackling Money Laundering: Matching Risk to Products” (2003) 24 Company Lawyer 210-213 Mark Pieth, Gemma Aiolfi, Inc NetLibrary, ‘A Comparative Guide to Anti-money Laundering: A Critical Analysis of Systems in Singapore, Switzerland, the UK and the USA’; Published by Edward Elgar, (2004). Mary Michelle Gallant, ‘Money laundering and the proceeds of crime: economic crime and civil remedies’; Published by Edward Elgar Publishing, (2005). Paul Allan Schott, World Bank, ‘Reference guide to anti-money laundering and combating the financing of terrorism’; International Monetary Fund; Published by World Bank Publications, (2006). Peter Lilley, ‘Dirty Dealing: The Untold Truth about Global Money Laundering, International Crime and Terrorism’ (Second Ed.); Published by Kogan Page Publishers, (2003). Peter Reuter, Edwin M. Truman, ‘Chasing dirty money: the fight against money laundering’; Published by Peterson Institute, (2004). PricewaterhouseCoopers Global Technology Centre, Anti-Money Laundering: New Rules, New Challenges, New Solutions (PricewaterhouseCoopers LLP, UK, October 2002). R. C. H. Alexander, ‘Insider dealing and money laundering in the EU: law and regulation ‘; Published by Ashgate Publishing, Ltd., (2007). Ross and M. Hannan, “Money Laundering Regulation and Risk-based Decision Making” (2007) 10 Journal of Money Laundering Control 106-115 Ryder, N., ‘The Financial Services Authority and Money Laundering: a game of cat and mouse’ (2008) CLJ 635 Valsamis Mitsilegas, ‘Money laundering counter-measures in the European Union: a new paradigm of security governance versus fundamental legal principles’; Published by Kluwer Law International, (2003). William C. Gilmore, ‘Dirty money: the evolution of money laundering counter-measures’; Published by Council of Europe, (1999). Z/Yen Ltd, Anti-Money Laundering Requirements: Costs, Benefits and Perceptions (Corporation of London, June 2005) Read More