Tomorrow, without knowing it, you could commit a crime

As a new Treasury crackdown on money laundering takes effect, businesses of all sorts and all sizes face prosecution, possibly prison, if they handle 'dirty' cash - even unwittingly. Clayton Hirst reports
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The Independent Online

Hundreds of British businesses will open for trade tomorrow morning without realising that they are committing a serious crime that could lead to a prison sentence. The Government is cracking down on money laundering: the high-street banks have already been fined millions of pounds for lapses in procedure, and, unbeknown to many companies, the Government is now training its sights on the little guys.

Hundreds of British businesses will open for trade tomorrow morning without realising that they are committing a serious crime that could lead to a prison sentence. The Government is cracking down on money laundering: the high-street banks have already been fined millions of pounds for lapses in procedure, and, unbeknown to many companies, the Government is now training its sights on the little guys.

The laundering of money from the proceeds of drugs deals, theft and extortion is a £25bn-a-year business in the UK. Today it is virtually impossible to deposit a suitcase of cash at the bank without stringent checks, so criminals have turned their attentions to the businesses where they know their cash is welcome: car traders, antique dealers, jewellers, auction houses and estate agents.

Dealing in cash is a way of life for many of these businesses. But from tomorrow the Treasury will force the companies to think twice before accepting notes. Under new rules, any suspicion an employee has that money may come from the proceeds of crime will have to be reported to the National Criminal Intelligence Service.

What's more, companies - including law firms, accountancy practices and solicitors - will be required to set up strict procedures for reporting suspected cases (see below). Failure to comply could land employees behind bars for up to five years.

"Money laundering is a serious crime and must be treated as such," says Ruth Kelly, financial secretary to the Treasury. "The Government expects a high level of due diligence from those conducting business from the regulated sector. The five-year penalty for an offence ... is a maximum penalty; it's the job of the court to impose the sentences as it sees fit.

"The proceeds [of money laundering] allow criminals to profit from crime and fund future crime and terrorist activity, " she adds. We should never forget that only by applying strong anti-money laundering measurers can we maintain the reputation of the UK financial system."

No law-abiding citizen would disagree with this statement. However, there are concerns that the Treasury's new regulations go too far, placing a heavy burden on small businesses.

Many companies simply have no idea that the new rules exist. "Awareness is extremely low," says a spokes- man for the Federation of Small Businesses (FSB). Similarly, the CBI is worried that, "the rules are disproportionate to the problem". Both groups plan to raise the issue with the Treasury in the next few weeks as their members get to grips with the reforms.

Meanwhile, the small businesses that are aware of the new regulations have found it difficult to obtain even basic information on exactly what they must do to comply with them. There is no guidance on the Treasury website. Instead, visitors are deluged with "draft statutory instruments", "minutes to advisory committee meetings" and "proposed revisions to the guidelines".

"This means nothing to the car trader or antique dealer," says the FSB spokesman.

There is little doubt that the new rules will make it harder for criminals to launder money though small traders. Police programmes, such as Operation Payback, which used specially trained sniffer dogs to detect large sums of money as they passed through railway stations, have been successful in seizing criminal money. But because the new regulations have been in the pipeline for well over a year, the sophisticated criminals may have already found new homes for their dirty money.

"Money laundering is only limited by individuals' ability to think laterally," says Cliff Knuckey, managing director of Risc Global, an anti-money laundering consultancy. "The criminals are already one step ahead of the game. When banks, building societies and stockbrokers were targeted with new rules in 1994, there was a visible shift to the lawyers and accountants. The criminals are moving again."

Mr Knuckey, a former detective inspector who set up Scotland Yard's Money Laundering Investigation Team, believes that criminals are now targeting "cash intensive businesses" to clean their money. Their favourites are gymnasiums, restaurants, nightclubs and minicab firms.

Take the gym, for example. A criminal buys a business with clean money and invests in exercise equipment to maintain its appearance as a legitimate gym. The owner then boosts the gym's membership with "phantom customers" - names plucked out of the phone book. The criminal's dirty money is used to pay the membership fees of the fictitious members into the business. And each year the criminal takes cash out of the business by paying himself a handsome dividend. The gym has cleaned the dirty money.

Further up the food chain, criminals with more money to launder use elaborate export scams. One involves trading Rolex watches. The criminal visits expensive jewellery shops, buying a single watch for around £7,000. This is, importantly, below the £10,000 threshold where identification is required before making a purchase. When the criminal has amassed, say, 50 watches, he packages them up and sells them to a criminal contact in Russia, a country which is not covered by EU laws on money laundering. The consignment, though, is not listed as Rolex watches but as cheaper models and an invoice is made out for just a few thousand pounds. The Rolex watches are then sold in Russia and the proceeds wired back to the UK.

Once dirty money has been cleaned, it often ends up invested in property. "This is the criminals' favourite investment. When a new enterprise comes on to the horizon, the criminal can just liquidate two or three properties and invest," says Mr Knuckey. By the time the money ends up in bricks and mortar, it is hard for the solicitor or estate agent to spot any evidence of laundering.

Andrew Clark, a partner at accountants PricewaterhouseCoopers, says: "The money launderer doesn't worry too much about the cost of commission and fees. The criminal may, therefore, seem like the greatest customer. People in services firms need to use their judgement. They don't need solid proof. But people who are wilfully blind will find themselves at the wrong end of the regulations."

One area where even the most vigilant employee will find it difficult to spot money laundering is identity crime. Cash purchases over £10,000 require proof of identity and, as a result, there are more and more cases of people's personal details - bank account, address, national insurance number - being "stolen". It is hard for even the most savvy car dealer, antique trader or auctioneer to spot professionally faked papers, so, as Mr Knuckey says: "ID has become a very valuable commodity in the criminal community." The Government has been slow to react and the maximum sentence for possessing fake documents is still just two years.

As the new rules kick in, there is a danger that criminals are already one step ahead of the law. The unwitting losers could be honest people trying to run small businesses across the country.

What companies must do to comply

The new Treasury regulations are aimed at preventing criminals from using legitimate businesses as a way of "cleaning" dirty money. More than a year in the making, the rules will concentrate on cash transactions over €15,000 (£10,000).

With laws already in place to force banks to clamp down on money laundering, the rules will cover: lawyers, accountants, car dealers, estate agents, jewellers, auctioneers, casinos and antique dealers.

Companies dealing in large cash sums must register with Customs & Excise or face a financial penalty. And they will be required to ask for proof of identity and residence from anyone wanting to make a large cash payment.

The companies must also appoint a Money Laundering Reporting Officer (MLRO), whose job it will be to notify the National Criminal Intelligence Service of possible cases. There is no minimum value for a suspected crime and in theory an accountant would have to report a case where a client made £50 without paying tax.

Company employees must also be trained to spot possible cases of money laundering, and internal procedures must be set up to pass on suspected incidents to the MLRO.

The regulations state that all "tip-offs" of suspected cases to the authorities must be done in confidence.

But failure to pass on suspected cases of money laundering could see company employees spending up to five years behind bars.