City at risk from clean-up: European moves to combat drug money laundering could force business out of London. John Willcock reports

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The Independent Online
THREATS to the City of London as a global financial centre seem to proliferate - the Taurus fiasco and the shift to Frankfurt as Eastern Europe is opened up, to name two.

From next April there will be another threat: tough new European Union directives tackling drug money laundering. The fear is that the UK will enforce much tighter rules than other member countries, forcing financial business to move to the Continent, where policing of the system will be more lax.

There is already a perception in the City that the UK is tougher on enforcing rules generally, to the detriment of London. Insider dealing and investment fund regulation are examples.

London is torn between the need to keep its attractions for internal business and the need to maintain its 'clean' reputation. There is no doubting the seriousness of the danger from money laundering.

Stopping criminals, particularly drug runners, turning their proceeds into honest money is top of the international agenda on tackling organised crime. The Financial Action Task Force (FATF), sponsored by the OECD countries, estimates that global revenues from the illegal drug trade are about dollars 500bn a year. Roughly pounds 22bn of this flows through the EU.

Britain has taken the lead in attacking money laundering with a series of tough new laws, starting with the Drug Trafficking Offences Act in 1987. The UK's National Criminal Intelligence Service estimates that Britain's illegal drug trade earns pounds 2.4bn a year.

Three-quarters of this flows through the financial sector, and moves to tackle it have concentrated on 'choke points' in the banking system, where drug money can most easily be detected.

The FATF identified three choke points that launderers find difficult to avoid and where they are vulnerable to detection. These are the point where cash enters the financial system; cross-border flows of cash; and transfers within and from the financial system.

The thrust of the EU Money Laundering Directive is that banks should know their customer. This means an end to accepting large cash deposits from new customers without a thorough inquiry into the client's background.

Banks and other deposit-taking institutions now have a duty to report suspicious transactions that could be drug-related. All deposits over 15,000 Ecus (pounds 11,400) will have to be reported.

Some countries, including the UK, have already extended this approach to money laundering arising from fraud and terrorism. Information gleaned from such reports can also be useful to the Inland Revenue in tracing tax evasion.

The UK has implemented the EU directive in the Criminal Justice Act 1993, together with the supplementary Money Laundering Regulations 1993, which come into effect on 1 April 1994 to coincide with laws in other member states.

All EU countries should be covered by the directive - which was based on UK legislation - but member states are at widely different stages in preparing to implement the new rules. Progress is monitored by the European Banking Federation.

Sue Thornhill, assistant director of the British Bankers Association, drafted the UK guidelines on implementing the directive. She said the Italians had the most draconian anti-laundering laws at present. They saw them as a key element in combating the Mafia, which notoriously shifts its fortunes around the world through offshore tax havens.

Italy has also required banks to identify all customers, even retrospectively. If any account-holder is not identified by 31 December 1993 his or her account will be frozen.

France and Germany are also well advanced in preparing legislation to implement the directive. France has based its legislation on that of the UK. Spain's lower chamber last week approved a bill that should come into effect in February 1994.

At the other end of the scale, Ireland is furthest away from implementation. Although there is talk of a draft bill, Mrs Thornhill said it was 'nowhere near enactment.'

Two other worries for London are Luxembourg and Liechtenstein. Luxembourg has been prompted to move on disclosure following the BCCI scandal. As one of the regulators of the corrupt bank, it has had to endure much international criticism.

Although new legislation has been produced, Mrs Thornhill said Luxembourg could still not say how many disclosures of suspect transactions had been made to the authorities by banks or how many investigations had ensued. 'Secrecy is still the overriding thing,' she said.

Switzerland has turned away from applying for EU membership but is still keen to be seen as in step with the rest of Europe. Not so its tiny 'offshore' tax haven, Liechtenstein. Robert Maxwell based his secret family trusts there and liquidators have had problems tracking missing pension funds because of the duchy's tight banking secrecy laws.

'Liechtenstein is still taking the business that Switzerland won't touch,' Mrs Thornhill said. Austria, another non-member, is also keen to take such business.

EU laggards on implementation, Portugal, Greece and the Netherlands, all have legislation but figures for suspect transactions are hard to find.

Yet the international action now being taken is a threat to London. Next April a series of EU directives to combat money laundering will come into force, affecting everyone in the UK covered by the Financial Services Act.

Mrs Thornhill concluded: 'The UK may fight EC legislation in its formative stages, but when it is enacted we follow it to the letter and in spirit.

'Yes, we will take a firmer line than other countries but it will be very difficult for customers to move their affairs to other states.'

This is because institutions such as the European Banking Federation and the FATF will be monitoring cross-border movements of banking clients.

But that fails to impress John Gwyer, a fraud specialist with the accountants Coopers & Lybrand. Mr Gwyer believes the UK will be left playing the 'goody goody', and money will flow out into other, less regulated member states.

Whether this is just traditional British distrust of abroad or a legitimate concern will not become clear until figures for disclosures are produced after April 1994.

(Photograph omitted)

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