Money_Laundering

Money Laundering As the world turns to globalization, and financial transactions ease business dealings at a touch of a key, criminals too have identified the potentials and advantages of using the same processes in financing their activities. What more, terrorist organizations use money laundering techniques, to avoid international sanctions on their assets, thus, helping to finance more of their criminal pursuit. This is, however, not an exclusive domain of terrorists. Other individuals such as those involved in serious criminal conduct, illegal arms sales, smugglers and drug traffickers also enjoy the proceeds of money laundering without paying taxes on their ill-gotten funds. The goal for money laundering, therefore, is to turn dirty money clean, and move it in circulation. At most, the ease of global financial transaction has given criminals the speed, convenience and anonymity to money launderers. Despite controlling legislations existing; new ones created as soon as new financial crime or events unfold; passing through the loopholes of existing laws, the practice appears to be on the rise. Indeed, the pressure to control, contain, if at all possible, eradicate money laundering has taken on a different sense of urgency. The Core Guidance of Money Laundering Regulations 2007 describes the activity as “the process by which criminally obtained money or other assets (criminal property) are exchanged for clean money or assets with no obvious link to their criminal origins.” In simpler terms, it can be defined as “…the acts concerned with concealing, disguising or transferring out of the jurisdiction funds derived from drug trafficking, terrorism or criminal conduct.” A more precise definition can be found in Black’s Law Dictionary where it states that it is the “investment or other transfer of money flowing from racketeering, drug transactions, and other illegal sources into legitimate channels so that its original source cannot be traced.” Criminals launder their ill-gotten wealth for reasons as greed, increasing profits, avoiding prosecution, tax evasion and avoiding seizure of said illicit wealth. In the UK, the Bank of England, the precursor to the current regulatory body, the Financial Services Authority, was established in 1694, as a private company to produce a considerable sum of loan for the Government. With its close ties providing financing for the government from the outset, it had, in its history, been granted monopoly of issuing bank notes with the Bank of England Act 1844 . It was nationalized through the Bank of England Act 1946 , which also gave it a more regulatory role: “to request information from and make recommendations to bankers.” Thus began a more formalized regulatory process in the UK. However, in 1973, the first serious banking crisis of recent history hit globally. The Bank of England had to bail out secondary lenders, and lost “an estimated £100M.” It was “another year before the full effect worked its way through the stock market which fell nearly 60% in 1974.” A few years later, smarting upon the last crisis, the Banking Act 1979 was introduced for the Bank of England to authorize institutions to qualify to take deposits. It also set up the “deposit protection scheme” which guaranteed a 75% pay-back from client deposit accounts in case of a crisis such as bank insolvencies. This Act established the first legal framework of banking regulation in the UK. The Johnson Matthey rescue in 1984, or subsequent sale for a nominal fee of £1 to the Bank of England , where it was found that the size of the loans to the banks’ few or limited number of borrowers exceeded the level of the bank’s capital, averted a worse banking crisis. The Banking Act of 1987 followed on the heels of the Johnson Matthey near-insolvency. It was upon the recommendation of the committee which handled Johnson Matthey, to implement a new act, designed to prevent another Johnson Matthey from happening. The Act increased the Bank of England’s regulatory powers to veto bank take-overs and changes in control; also, it formed the Board of Banking Supervision which formalized banking regulations in the UK. Further bank collapses such as the BCCI and Barings bank brought about changes in the Banking Act of 1987. The Bank of England Act 1998 gave the institution the independence in creating monetary policy, but the Financial Services Authority (FSA) assumed the responsibility for banking regulation. The FSA is the regulatory body for all UK financial institutions. The Banking Act 2009 formalized the process to deal with failing banks. The First Banking Directive implemented by the 1979 Act was introduced to require members to formally authorize credit institutions, and also set the minimum conditions on which member states effect minimum conditions. As globalization rapidly became the norm of business and banking, the Basle Committee was established. However, the Committee could only pass recommendations, and these recommendations do not carry legal weight. The Concordat of 1975 standardized the responsibilities between different national regulators. The 1983 Agreement concentrated on consolidating supervisory powers; it established the percentage of deposit that has to be kept for liquidity. The Capital Accord 1988 was intended to firm up the capital position of international banks. The Basle Committee set up the “minimum standards” in 1992 for supervision of international banking groups. Due to banking failures, bankruptcies and economic crises, changes in legislations or regulations are brought out as means to correct or aid in recovery and revive the economy. The statutes, however, are only better than the last crisis. Amendments, additions, revisions and improvements are direct consequences running in the aftermath of the most recent banking or economic crisis. With the frequency of bankruptcies and economies failing, laws have to keep up and correct existing regulations. In addition, it has to anticipate and cover areas where future crisis might start by learning from the past crises, or study trends, obviously, learned from the same, and/or potential weak aspects. From 1973, the oil crisis brought on by the oil embargo of the members of the OAPEC, the Second Banking Crisis of 1973 – 1975, the Stock Market Crash of 1974, Black Monday 1983, again Black Monday in 1987, the Barings Bank Collapse in 1995, the October 1997 Mini-Crash, and in more recent years, the September 11 Terrorist Attack which resulted in Black Monday in the US, the Stock Market Crashes of 2002, 2004 and 2008, the Financial Crisis of 2007 – 2010, and the Flash Crash in May, 2010, were all precursors to significant changes in existing statutes. The business contexture has changed dramatically in the last 10 years. New world order was forced upon the western world with the September 11 attack, in particular. With this new world order, the “focus of finance regulations has been more on the examination of the purpose of funds” (to finance terrorism) than on the more usual search of uncovering the illegality of the source of such funds. Evidently, new rules, regulations, statutes or amendments are introduced as corrections and answers to recover from the most recent crisis, the more pressing issue is that from the September 11 event, the need for new and tighter application of banking and financial policies have to be implemented. These policies have to be designed to either thwart or uncover dirty money, and the intended destination (ergo, “purpose”) . As money laundering allows criminal organizations to profit from their earnings, it is a practice that law enforcement, for ethical and practical reasons, wishes to eradicate. Furthermore, money laundering undermines the financial institutions which are “contaminated” by association to this practice, thus compromising the confidence in the banking sector and integrity of the free market. As a result of the need to keep the banking and financial systems clean, and the problems posed by international money laundering of terrorists, globally, countries have warranted legislation of policies which authorize financial authorities to “know their clients” by having checks upon initial contact with the client. This would involve identification of any person seeking to open an account or making a deposit. Once on-board, a continuous monitoring of new and existing clients would be in place, watching for any suspicious or unusual transactions. Along with “due diligence”, a system of internal reporting procedures (assigning a money laundering reporting officer) and the training of staff about the machinations of money laundering are set out in the Money Laundering Regulations of 1993 . In the process of monitoring clients and clients’ accounts, the problem of privacy and its invasion arises. That is, however, a topic for another paper altogether. However, there are circumstances where in the bank or authorized institution is required by law to “report” suspected cases of “money laundering.” Although there is the duty of the bank to protect client privacy, there also exists the obligation of the bank to be accountable to uphold the laws of the land (jurisdiction). Whereas the duty of confidentiality has endured alongside the banking system from its infancy in the Middle Ages with goldsmiths being required by their clients to maintain secrecy in their business dealings, there is also the responsibility of the authorized institution to protect its own interest and the government it is serving under. Citing the case of Tournier v National and Provincial and Union Bank Ltd 1924 where it was held that the “bank had a legal as well as a moral duty of confidentiality …could not, therefore disclose details of an account to a third party.” From the Tournier case, Banks L J formulated the 4 exceptions as regards the duty of confidentiality between banks and clients. Of the four, “Compulsion of Law” is the most important. Under compulsion of law, disclosure is necessary and duty of confidentiality is unenforceable if it runs contrary to a legal duty. This relationship begins as soon as the client opens an account and continues even after its termination. It is therefore not as easy as to divulge client personal data, as there are conditions to be met before the bank would open its books about the client concerned. Companies Act 2006 ss 1035 – 1039 lists situations where Department of Trade and Industry Inspectors can obtain court orders to access bank accounts in the name of investigation. Likewise, out of court, the Director of Serious Fraud Office (SFO) can issue an order to obtain information necessary in an investigation. It is also empowered by the Criminal Justice Act 1987 to gather information and documents pertinent to an investigation of serious or complex fraud. A different issue of the same problem arises when the individual involved in this question of confidentiality involves a professional such as a lawyer, or accountant. A more delicate approach should be taken when dealing with Legal Professional Privilege. Such was the case in Pang Yiu Hung, Robert v Commissioner of Police and Another (2003) where a barrister was arrested by HK’s Organised Crime and Triad Bureau for allegedly contravening s 25A (1) a of the Organised and Serious Crime Ordinance (OSCO). This case was significant in that it “upholds legal professional privilege as a ground for not disclosing suspicious transactions and considers what information is covered…” It was found, per Hartman J, that “the arrest was unlawful…the ‘suspicion’…was not reasonable.” Due to recent “upsurge” of terrorism activities, however, more attention has been put on the combat against money laundering as it is the “detection and prevention of such processes” which is “recognized as a key aspect of the battle.” In addition, the threat to national security or danger to innocent lives is graver, though this is not to minimize the threat from other forms of criminal activities involved in money laundering. The Terrorism Act of 2000 and Proceeds of Crime Act 2002 stipulate the responsibility of the banks in reporting suspicious clients to the National Criminal Intelligence Service. With the Anti-Terrorism, Crime and Security Act 2001, when certain accounts are being used or frozen accounts are being activated by banned individuals or groups, the Treasury needs to be informed. Evidently, all these 3 statutes - the responsibility – to identify, monitor and disclose falls on the bank. It is now compelled to categorize clients and report suspicious accounts or clients to the Treasury. Another instrument to ease the access to documents and materials acquired or made in the course of a trade, business or profession, the Police and Criminal Evidence Act 1984 authorizes a member of the Police force to apply under Schedule 1. In 1989, the members of G7 met in Paris and set out to “identify money laundering as a significant international problem.” It has then founded the Financial Action Task Force (FATF) which was mandated to “develop policies to combat money laundering and terrorist financing.” It operates from the Office of Economic Cooperation and Development (OECD) headquarters in Paris and has issued a set of forty recommendations that concern legal requirements, financial and banking controls, and external affairs and issues an annual report that provides an overview of progress and problems in international anti-money laundering. The US and the EU signed the Terrorist Finance Tracking Programme (TFTP) on 28 June 2010 giving US authorities access to the European based company SWIFT to trace and investigate terrorist funds. This paves the way for a free exchange of information between members about suspicious accounts used for terrorism. In Hong Kong, the Joint Financial Intelligence Unit (JFIU) is the central authority for reporting money laundering and other white collar crimes. It works in conjunction with the Hong Kong Police Force, the Office of Customs and Excise Service and the Independent Commission Against Corruption. The Drug Trafficking (Recovery of Proceeds) Ordinance (DTROP) , the Organized and Serious Crimes Ordinance (OSCO) , the United Nations (Anti-Terrorism Measures) Ordinance (UNATMO) and the United Nations Sanctions (Afghanistan) Regulation under the United Nations Sanctions Ordinance (UNSO) are the major legislations on money laundering and terrorist financing in effect in Hong Kong. Where DTROP deals with drug trafficking offences, OSCO extends money laundering on top of and updates the offences stated in DTROP. UNATMO policies are pointed specifically at money laundering, UNSO targets sources of funding for terrorists or terrorist accounts. Hong Kong, being a first world territory, follows the international monetary laws and agreements as set by the stronger players in the world scene, such as the US, UK, Germany, France, Japan. It is worth pointing out that the policies existing in the UK regarding the fight against money laundering and terrorist financing are also the content of the basic policies written in Hong Kong. Recommendations by JFIU in practicing “due diligence” for example, is basically the same, such as client identification, record keeping (monitoring, in the UK), following procedures for disclosures, and education and training for staff , though in different terminology. The difference with the UK could be that Hong Kong in spite of being well aware of the threat of terrorism is still a relatively safe place; that criminals practicing money laundering would be more drug traffickers, smugglers than terrorists. Conclusion The pace at which crisis after crisis, legislations being amended, created and passed, demonstrate clearly the state of the current economic climate. Written with the best intention in mind, to fine tune regulations, to correct previous statutes, to find out crises causes – policies are issued to minimize the effect of the failings and yet, help revive, if not revive the economy. As regards money laundering, legislations were passed in the hope of putting stumbling block, effectively obstructing money launderers to “clean” dirty money, making it difficult to for dirty money to enter banks or authorized institutions, be “laundered” and put back into circulation. Dirty money should not get into circulation. Hence, failing the money launderers. Reaching this stage late in the process effectively legalizes it. As mentioned earlier, newly created policies are only better than the last crisis. Current legislations are effective as of yet, until the criminals find a loophole that will cause another crisis. Then the whole cycle will start again. The research showed that money laundering is the process by which criminals attempt to conceal the proceeds from their illegal activities to make them appear legitimate. The research also showed that although the practice is by no means new, it has become increasingly common in many parts of the world as a result of the same innovations in technology that have fueled the globalization process. The ease with which enormous sums of money can be transferred electronically between financial institutions makes combating this crime even more difficult, and the various policies, regulations and laws designed to address these issues continue to be refined to meet these needs. In the final analysis, it would be reasonable to suggest that although the criminals still appear to be winning this war, the tide is turning and the laws are starting to have a bite. Whether money launderers will simply find alternatives to their existing practices remains to be seen, but history has shown time and again that this is their modus operandi and regulators will ignore this tendency at their own risk. “The only way you’re going to hurt the drug industry and organized crime is at the money source; money is always in action, invested for the next load; the money is the key; if you stop the money, you stop the drug dealing in this country because without the money, you can’t put an operation together. You’re never going to dry up the demand, and you’re never going to dry up the supply; you’ve got to dry up the operations.” – Former convicted money launderer Bibliography Books Bachus A, From Drugs to Terorism: The Focus Shifts in the International Fight against Money Laundering after September 11, 2001 21 ( Int’l & Company Law Arizona 2004) Birks P, Laundering and Tracing Oxford: Oxford University 1995 Black’s Law Dictionary (West Publishing Co. St. Paul, MN: 1990) Reid M, The Secondary Banking Crisis, 1973-1975: Its Causes and Course. (2nd edn Macmillan, London 1982) (Hindsight, London 2003) Articles Brown A N, ‘Money Laundering’ Edinburg Law Review (2010) Electronic Sources BBC News, What Was the Last Nationalisation' 18 February 2010 http://news.bbc.co.uk/go/pr/fr/-/2/hi/uk_news/magazine/7250668.stm accessed 30 September 2010 Duggleby V Upheaval triggers monetary memories http://news.bbc.co.uk/2/hi/business/6996053.stm accessed 30 September 2010 Elliott G, ‘Legal Professional Privilege – Issues for Lawyers and Clients’ 2010 http://www.internationallawoffice.com/newsletters/detail.aspx' accessed 06 October 2010 Royal Canadian Mounted Police, ‘Money Laundering’ (2008) http://www.rcmp-grc.gc.ca/poc-pdc/launder-blanchir-eng.htm accessed 06 October 2010 Royal Canadian Mounted Police, ‘Proceeds of Crime Program’ (2009) http://www.rcmp-grc.gc.ca/poc-pdc/pro-crim-eng.htm accessed 06 October 2010 Teh K and Lam G, ‘Press Release: A New Measure by the Law Society of Hong Kong to Fulfill International Obligations to Combat Money Laundering’ (2008) Law Society of Hong Kong www.anti-moneylaundering.org/asiapacific/Hong_Kong.aspx accessed 28 September 2010 TABLES OF CASES Pang Yiu Hung Robert v Commissioner of Police and Another (2003) 2 HKLRD 125 Tournier v National and Provincial and Union Bank Ltd 1924   TABLE OF STATUTES 1983 Agreement Anti-Terrorism, Crime and Security Act 2001 Bank of England 1998 Bank of England Act 1844 Bank of England Act 1946 Banking Act 1979 Banking Act 1987 Banking Act 2009 BASLE Committee Capital Accord 1988Organization of Arab Petroleum Exporting Countries (OAPEC) Companies Act 2006 ss 1035 – 1039 Concordat 1975 Criminal Justice Act 1987 SFO S2 Criminal Justice Act 1993 Drug Trafficking (Recovery of Proceeds) Ordinance (DTROP) Cap. 405 First Banking Directive 1979 Joint Financial Intelligence Unit (JFIU) 1989 Money Laundering Regulations 2003 Money Laundering Regulations 2007, Core Guidance 1.10 Organised and Serious Crime Ordinance (OSCO) Cap. 455 Police and Criminal Evidence Act 1984 Proceeds of Crime Act 2002 Terrorism Act 2000 Terrorist Finance Tracking Programme 2010 United Nations (Anti-Terrorism Measures) Ordinance (UNATMO) Cap.575 United Nations Sanctions (Afghanistan) Regulation under the United Nations Sanctions Ordinance (UNSO) Cap. 537