Money laundering: a tough business to clean up - Task forces, laws, but few convictions

The Government has this week welcomed the Institute of Chartered Accountants' launch of a Fraud Advisory Panel designed to combat the problem by combining the expertise of people in a range of sectors. But opinion is divided over both the extent of corporate fraud and the success of previous efforts to deal with it. Here, two practitioners assess the review of offshore financial centres and the scale of the international money laundering with which they are often tainted.

There are no accurate figures, but a fair estimate is that billions of pounds of illegal funds are laundered through the UK each year. That money includes the proceeds of drug-dealing, financial fraud, illegal gambling, prostitution, extortion, illegitimate transactions and so on.

During the period 1993-1995 there were 39 prosecutions in the UK for drug-related money-laundering offences. Of those, 13 went to trial and there were 11 convictions.

In 1993, the UK introduced wide-reaching anti-money laundering legislation under the auspices of the Criminal Justice Act 1993. The aim of the new law and accompanying regulations was to make it more difficult for criminals to launder money by:

covering non-drug related offences;

tightening the internal controls within organisations covered by the Act (ranging from banks to solicitors) so that attempts to launder funds could be prevented.

The measures lay down requirements for financial and non-financial organisations to put in place procedures to identify customers and clients, ensure records of transactions are kept, train staff and ensure the supervision of the reporting or disclosure of suspicious transactions to the National Criminal Intelligence Service (NCIS).

In 1996, NCIS dealt with 16,125 disclosures, an increase of 17.7 per cent on the previous year's total of 13,170. Those disclosures were made by organisations including banks, building societies, accountants, solicitors, bureaux de change and insurance companies.

World-wide efforts against money-laundering are co-ordinated by the Financial Action Task Force on money laundering (FATF), In its 1996-1997 annual report there is praise for the British system, which is described as: "an impressive and comprehensive one, which has been subject to consistent review and improvement. The active system of supervisors' co-operation, education and training in the financial sector are complemented by strong and effective penal legislation."

Since 1993 in the UK there have been only three prosecutions and convictions under the new law.

Although figures are not available for many countries, Australia has confirmed that in 1995, about US$2.8bn was laundered through the country. FATF say of the Australian anti-money laundering system: "Australia can pride itself on a well-balanced, comprehensive and in many ways exemplary system."

The US is continually reviewing its money-laundering laws and is active in prosecuting in both drug and non-drug cases. In 1996, 2,000 people were accused of money-laundering, compared with 360 in 1991. Of those 2,000, 40 per cent were also charged with white-collar offences such as bank, securities and wire fraud.

The much more active use of money-laundering charges is partly due to the heavy penalties attached to the offences and the use by prosecutors of that threat to obtain plea bargains. Nevertheless, the fact is that, despite criticism, the US authorities are much more ready to charge people with money-laundering, especially in non-drug related cases. In that way, they are using their anti-money laundering legislation as an effective tool in their efforts to fight crime.

Even in the US, however, the US Financial Crimes Enforcement Network (FinCEN,) created by the US Treasury in 1990 to focus on financial crime, estimates that US$100bn of drug-related money flows through the country each year. On top of that should be added the billions obtained from fraud and other illegal activities.

Therefore, despite efforts by FATF members (of which there are 40, including the UK and US), the flow of dirty money through member countries has not dried up, or even reduced. On the contrary, it has probably increased, and will continue to do so. Indeed, the effect of tightening up the operation of banks and financial institutions has been to drive money-launderers to non-bank and non-financial sources through which to cleanse their money, including professionals such as lawyers and accountants, bureaux de change, remittance services and underground banking systems.

Money launderers not only target the major international financial centres, but also countries that have weak or non-existent legislation against money-laundering, many of which thrive on the income generated from dirty money and so have little incentive to do much more than pay lip service to calls from other countries to enact laws cracking down on the problem.

But what of the effectiveness of the much-admired UK legislation? The number of prosecutions and convictions for money-laundering generally has been low, and is hardly a significant deterrent. However, the low rate is not an indication of lack of effort on the part of law enforcement authorities. The problem is as complicated as it is international, and is the result of a combination of factors:

Poor resourcing of the police and other authorities;

A lack of good, up-to-date intelligence;

Difficulty in identifying the original offence which was committed and which resulted in the need to launder its proceeds;

Lack of information about the identity of the person or organisation transferring money and the identity of its ultimate recipient or beneficiary - an issue being addressed by SWIFT (Society for Worldwide Interbank Financial Telecommunications), which is increasing the amount of information required to be added to inter-bank money transfers describing the originator and recipient of money.

The failure (deliberately in some cases) of some organisations to report suspicious transactions. This is something that should be addressed by strengthening the obligations to report and the sanctions for failing to do so;

Insufficiently draconian forfeiture laws. The FATF 1996-1997 annual report states: "It has been said that certain criminals and criminal organisations do not mind convictions or prison sentences provided they are able to retain their ill-gotten gains. An effective confiscation system, both domestically and internationally, is therefore a very important deterrent to criminal activity, as well as being cost effective." The report urges the extension of forfeiture and confiscation laws to non-drug related offences and to allow civil (as opposed to conviction-based) forfeiture and the power to confiscate funds in the hands of third parties and the assets of fugitives from justice;

Lack of effective international co-operation.

At a recent speech at an international symposium on economic crime, Detective Inspector Gordon Hutchins of the Money Laundering Investigation Team with the South East Regional Crime Squad said: "It can be said that the drug money laundering legislation which saw its commencement in the UK in 1986, for the precise purpose of eradicating the perceived threat of money laundering, whilst assisting with the nature of and course of financial investigations, has done little to detract or deter the ardent launderer from his exploits. Often the failure to instigate prosecution proceedings lies in the very nature of the launderers' professional status, ie, solicitors, accountants, financial advisers, bank employees, company formation and management agents, nominee directors, all knowledgeable exponents of their subject and masters in the art of secrecy.

"The net profit of money laundering legislation therefore must also be weighed against the by-product of the intended outcome of our investigations, that of disruption, and not merely the results concerning the removal of benefit and assets. However, the statistics show that we must face up to the fact that our legislation is simply just not producing the results for which it was originally intended. We must also recognise the implications these results have in promoting our standing in the world-wide co-operative whose objectives have been set to target the money launderer. How can we claim to dictate the pace, or join in the criticism against less forthcoming jurisdictions in the fight against global laundering, when we ourselves are achieving such pitiful results?"

The intention is not to suggest that the fight against money launderers has been lost or is a hopeless one, despite the increasing threat from the Internet and unregulated electronic funds transfer and banking. Rather, it is to focus on the matters that require more attention in order to strengthen the resources available to fight financial crime. As DI Hutchins said, if the flow cannot be stopped, the next best goal must be to disrupt it and improve the powers of the police and others to confiscate the proceeds of crime.

Alistair Walters is speaking at a seminar on fraud and money laundering at the London Chamber of Commerce next Thursday (12 February).