Finance: Euro pirates sail in

The euro may be good news for fraudsters, but are the police ready for them?
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The Independent Culture
Criminals could end up as the unintended beneficiaries of the euro, if concerns being voiced in financial and legal circles are to be believed. With a single currency valid across 11 legal jurisdictions from this month, advisers in the financial services sector are urging banks and businesses to take seriously the possibility of a series of peaks in fraudulent activity.

Yet a counter-lobby of professional observers is quick to label the pessimists as scare-mongers. In their view, the central risk is not one of fraud against businesses. Instead, they believe the real issue is the potential suitability of the euro as a hard international currency for criminals operating at the money laundering and counterfeiting end of the black market. For police across the Continent, both prospects are a cause of very real concern.

For the three years from January 1999 to 2002, companies within the euro- zone will have the option of trading either in euros or in their own national currency. Gartner Group, a firm of American analysts, claims it is precisely this period of overlap that exposes companies to the risk of opportunist fraud. While businesses implement a radical overhaul of their IT systems and accounting procedures, discrepancies cropping up are likely to be treated as software errors or mistakes by staff, opening the way for both one-off insider fraud and more systematic theft.

But though the maths of euro conversion are more complex than other foreign currency exchanges, in terms of security risk it is little different from what the banks are already doing. Mark Tantam, the partner in charge of Deloitte & Touche's Fraud Management Service, argues that complex fraud techniques are being talked up at the expense of other hazards.

"The obvious fraud risks are where someone takes advantage of mistakes, and with year 2000 and the euro coming up, people are almost expecting a problem," says Tantam. "If the system goes down and data is wiped, they may blame a glitch in their software rather than suspect there is a deliberate attempt to cover up a fraud or remove the evidence, which makes the euro a perfect cover for the theft, sale or illegal use of company assets such as sensitive data."

Where experts agree the scare stories are unlikely to prove exaggerated is in the areas of money laundering and counterfeiting. When the euro makes its debut in cash form in January 2002, 13 billion unfamiliar euro banknotes will enter the tills and pockets of a confused euro-populace during the peak busy period of the January sales. Mistakes and minor swindles in day-to-day transactions are almost inevitable, but so too is a more organised attempt by criminals to get dirty money and forged notes into the legitimate banking system.

There are several ways this might be done. Banks, like solicitors and other service providers, have a duty to report unknown clients who seek advice or banking services involving sums of money that cannot be legitimately accounted for. Anyone trying to set up an account with a large number of small-denomination notes would be asked to explain where the money came from. But with high demand in January 2002 for conversion of cash savings into euros, vigilance may lapse. Two factors, the unfamiliarity of the currency and the increased workload for banks, increase the likelihood that forgers will try to feed counterfeits into the system undetected.

With its largest note set at 500 euros (over pounds 300), the new currency's greatest asset to criminals could be its transportability. Money launderers require high-denomination notes for transporting large sums of dirty money in easily concealed physical quantities. Alan Davis, a solicitor specialising in European law and the euro with law firm Wilde Sapte, argues both this factor and the attractions of the euro as an international hard currency could put it ahead of the current market leader, the $100 bill, as the black market currency of choice.

"You only have to look at Russia, where the dollar circulates as a parallel currency," says Davis. "The euro will become increasingly used as a similar parallel currency around the world. Money laundering is much more serious, and will be much more of an issue in 10 years' time, than the possibility of computer fraud during transition."

There is a limit to how much the authorities can do. The design of the new notes is being kept quiet to give forgers as little time as possible to come up with a high-quality counterfeit. At the same time, the Money Laundering Directive of 1991 is being extended to increase the number of suspicious transactions reported, but it is a moot point whether the resources will be there to back the move up. At the moment, suspicious transaction reports in the UK are passed to the National Criminal Intelligence Service before being investigated by local police forces. According to one City lawyer, they lack the experts and time to follow the complex trail of transactions.

There were 14,148 such reports in 1997, but between 1993 and 1996 only 25 convictions for money laundering. Detective superintendent Ken Farrow, head of the City's fraud squad, says: "Resources have been drained away. The City and the Met are the only two forces with a substantial commitment to commercial crime. It is very difficult outside the capital to get adequate resources to do the investigation."

There are similar concerns at EU level. Despite the EU's efforts to improve communication between national intelligence bodies, Philip Martinius, a lawyer with the German law firm Beiten Burkhardt Mittl & Wegener, warns of the difficulties in putting an effective system in place: "Europol have not yet been vested with competence covering this area and they can collect data but they can't send their own policemen into the states and arrest somebody. So, of course, it will be difficult to pursue criminals on a European level."

The sensitivity of governments is likely to hinder any attempt to give a Europe-wide force real power, particularly as international organisations' agents are immune from prosecution by host states.

It seems the difference in pace between the harmonisation of legal jurisdictions and economic integration could assist criminals in making the most of the single currency.

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