Money Laundering (ML) Essay

Conventions, acts, and legislations around money laundering but not limited to:

1. Vienna and Palermo conventions, against Illicit Traffic in Narcotic Drugs in 1998 and Psychotropic Substances and against Transnational Organized Crime 2001 respectively[1]
2. European AML/CFT directives
3. Third Money Laundering Directive
4. The Second European Directive
5. Proceeds of Crime Act 2002 (PoCA)
6. Serious Organised Crime and Police Act 2005 (SOCPA)
7. Money Laundering Regulations 2007 (MLR)
8. Financial Action Task Force (FATF)
9. European Fifth Money Laundering Directive
10. The Money Laundering and Terrorist Financing Regulations 2019

All of the above-mentioned conventions, legislations, and acts have either identified gaps or introduced robust guidance regularly over the years, making it a requirement to reasonably identify and report an offence of Money Laundering (ML). ML is a process to disguise illegally obtained money from its criminal origins.[2]

The three main elements to ML are as follows: [3]

1. Placement – introducing ill-gotten gains into a financial system
2. Layering – moving money within the financial system by multiple transactions
3. Integration – using this money to invest within the economy e.g. buying real estate

A regulated sector can be defined as a body that oversees the compliance of the entities to which they grant licenses to operate within a particular jurisdiction. There are various regulators within the UK such as the FCA and PRA that implement government legislation and also ensure adherence by periodic operational checks and enforcing reporting requirements. Within a regulated sector, the objective test of knowledge or suspicion can be defined by considering and understanding the relevant circumstances whereby there is a reasonable ground to suspect ML which then can further be supported by evidence which is not a prerequisite.Considering PoCA section 330 and 331, which makes it a statutory requirement to report suspicion of ML by way of a serious activity report ( SAR) to the

National Crime Agency(NCA)[4]. SOCPA further introduced a defence to a failure to report whereby the intelligence may be considered of limited value[5]. Further measures were introduced to prevent the transaction from going ahead after the initial report to NCA. After a report is made, a 7-day grace period is afforded to NCA to conduct their investigation. If no further contact is received, the reporting party can presume no further action. If the NCA contacts within 7 days, this allows NCA another 30 days to carry out their investigation which can then be further extended up to 6 months with a court order. Failing to adhere to the guidelines further constitutes an offence of tipping off.

Whereas, the principle of wilful blindness, a variant to the objective test in the US does have a subjective element whereby an individual is deliberately turning a blind eye to the suspicion and/or knowledge of ML. Consider an individual who suspected the fact, realised its probability but refrained from taking any further steps to confirm their suspicions to confirm or deny knowledge.[6]

My employer in the UK, a regulated entity by the FCA and authorised for electronics lending activity is required to adhere to the above-mentioned guidelines. Failure to disclose can result in the risk of fines and maximum imprisonment of 5 years for senior management. My company is required to implement a risk-based approach to govern the ongoing monitoring of transactions for its entire portfolio. This includes completing customer due-diligence(CDD), enhanced due-diligence(EDD) alongside know your customer and business(KYC/KYB) checks including the source of funds and wealth.

A case study to consider, Standard Chartered Bank was fined by the FCA a total of £102.1 million in 2019 for failing to adhere to Money Laundering Regulations(MLR) of 2007. FCA's website states "Standard Chartered was required to establish and maintain appropriate and risk-sensitive policies and procedures to reduce the risk that may be used to launder the proceeds of crime, evade financial sanctions or finance terrorism”[7] and reported particular shortcomings for evaluating the relevant risks within its AML policies to identify and escalate suspicious transactions. Even though the fine was imposed on its UK business, FCA also considered breaches in their business based in the UAE. Following the fine, US law agencies also announced an investigation. This shows the previously known issue of overcoming ML based on jurisdiction has now improved due to the robust governance and increased co-operation between law enforcement agencies worldwide.

b)

The three main methods used by terrorists to move money or transfer value are through the use of the financial systems, physical movement of money, using, for instance, cash couriers, and through the international trade systems which are supplemented by alternative remittance systems(ARS) to disguise ML.[8]

Cash couriers generally speaking will move physical cash locally, internationally, or transfer cash into a physical asset such as gold, precious stones, and hard to trace commodities. This particularly stands true for countries with poor ML governance and oversight such as the Middle-East, Africa, and South-Asia which coincides with having a cash-based society. This is where Non-Profit Organisations(NPO’s) are set up as charities with the help of legitimate businesses which in turn seek donations for humanitarian causes. However, it has been established that even though the organisation does undertake some charity work, the funds can also be used for terrorism-related activities. As an example, Zakat, which is prevalent in the aforementioned regions – an obligation to donate money to good causes by way of charity. A security council report in 2020 noted that Zakat intake has significantly increased in the Taliban controlled urban areas of Afghanistan alongside an increase in Poppy fields to provide financial support.[9] Afghanistan remains a largely cash-based society due to years of geopolitical struggles and lack of well-established financial systems. Taliban uses this cash donated by the civilians and businesses to buy land to cultivate poppies which in turn will be sold internationally to drug cartels to create TF and ML.

US government identified Zakat as one of the means to fund Al-Qaeda which directly resulted in the 9/11 attacks. In Saudi Arabia, it is alleged that Al-Qaeda has illegally received between $300-$500 Million in charitable donations in 10 years following 9/11 attacks from wealthy businessmen and bankers guised as Zakat and sourced by various charities. This amounts to 20% of Saudi Arabia’s gross national product.[10] Although Saudi Arabia has a good financial infrastructure, society is still reliant on cash and commodity-based transactions. Therefore, charities receiving Zakat will be a combination of electronic, paper-based currency alongside high-value commodities to distort its origin. 

To provide a practical example of how this is achieved, consider a charity that receives funding from donors in the form of individuals and/or legitimate businesses based in countries A, B, and C to provide shelter and legal aid for refugees in country D. In reality, the charity has 10 refugees that require support but rogue parties involved in the day-day operation of the charities, will, with or without the support of senior management provide a false report showing that they have 100 refugees requiring urgent shelter and legal aid by creating false identifies and resulting costs. This will then be used to garner support for additional donations which will be used for terrorism-related activities as well as to provide shelter for the 10 refugees. The donations will be laundered through a web of complex big and large international financial, ARS transactions in the form of cash and electronic payments, or buying physical assets for TF. 

With the introduction of increasing governance and sanctions by regulatory bodies worldwide such as FATF and UN security council, laundering money by traditional means such as state-sponsored terrorism has become more difficult. This has resulted in terrorist organisations exploiting other means to fund their activities. As a direct result, proceeds of crime have become a more popular means to generate funding. It is also accepted that not all proceeds of crime are used for terrorist financing but differentiating between the illegitimate source of funds for terrorism or other criminal activities has inadvertently become more difficult.

The primary means of achieving this is by drug trafficking as it generates predominantly cash and physical asset-based wealth in a short space of time due to the ever-increasing supply-demand worldwide. According to research conducted by UN between 2006-2016 wholesale prices of cocaine in the UK fell from approximately $50,900 to $44,700. Whereas, the retail price per gram fell from $87 to $54. Compare this to America where both the wholesale and retail prices increased over the same period from $26,500 to $28,000 and $77 to $93.[11] This is primarily due to the increasing globalisation and the advancement of financial and technological services allowing terrorist groups alongside serious and organised criminal groups to expand and diversify by forming an international alliance.

The FATF’s report on financial flows linked to the production and trafficking of Afghan opiates in June 2014 confirmed that drug trafficking involves the three stages of ML being placement, layering, and integration. Whereas the proceeds of crime are placed into financial centers made up of various companies, institutions, and individuals to redistribute the financial flows. The same financial centers can then further be used to layer and integration the money locally and internationally through interlinked organisations operating in various jurisdictions such as charities, legitimate businesses, or buying physical assets which are in turn used to support and fund terror-related activities. [12]

c)

To consider key risks and issues, regulated firms need to have key personnel in place who fully understand jurisdiction-based sanction screening requirements and evaluate risk appetite based on its product offering.

The FCA recommends that all regulated firms must have a risk-based approach to transaction screening throughout the life cycle of the relationship between the customer and the service provider. This is maintained effectively by having a documented system in place that clearly outlines a step-by-step guide of relevant controls and processes. These controls include Sanctions based risk assessment, meaning a firm must carry out a risk assessment based on its product offering and consider the likelihood of the firm dealing with a sanctioned individual or entity. When implementing sanctions screening, the firm must document associated risk and therefore introduce relevant calibration and fuzzy logic within the system to flag potential matches that accounts for relevant jurisdictions and demographic differences. This should further be supported by having in place relevant policies, procedures, and training for financial sanctions screening undertaken internally or externally and must be approved by senior management including but not limited to how to review, alert, and mitigate sanction matches as well as periodic internal and external audit review to assess compliance. 

Consider an example of UK finance company ABC Ltd that offers services in the UK and also in Cambodia through its sister company XYZ Ltd. Even though ABC Ltd does not directly offer any services to customers based in Cambodia, it would need to have systems and controls in place to ensure it adheres to not only UK HMT sanctions screening but also OFAC and EU sanctions because Cambodia transacts in USD and is subject to EU trade sanctions. Unlike other local jurisdictional sanctions, US sanctions specifically OFAC require companies, in this instance XYZ Ltd, and by association ABC Ltd, that transacts in USD to adhere to OFAC sanctions and therefore screen customers not only on the local proscribed sanctions lists but OFAC too.

The issue ABC Ltd and XYZ Ltd face is balancing its legal obligations against a humanitarian cause which does not unduly prejudice against one particular set of customers. This will not only impact the business directly but will prevent other businesses from providing crucial services in Cambodia. However, the business must ensure it is not used as a vehicle to further human rights abuse which is the reason for EU sanctions and potential TF activities. The complexity around implementing relevant governance is a task that many companies are still falling short on and therefore subject to heavy criminal and financial penalties.

d)

Consider FATF Recommendation 3, which states tax evasion amounts to a predicate offence giving rise to proceeds of crime and therefore giving rise to criminal liability for ML whereby a financial institution receives proceeds of crime under mens rea and fails to report to the relevant authority. Foreign tax evasion by definition is subject to Criminal conduct under the old English CJA model or the new UK PoCa model which most offshore financial centres have used to enact their AML legislations. Under the CJA model, a UK institution would only be liable for ML offences if the offence of foreign tax evasion was indicatable under the UK laws. Whereas with PoCA a dual-criminality test which I have touched on previously but effectively makes it an offence for failing to report ML suspicions. The difference between PoCA and CJA is that with PoCA, the offence of tax evasion must amount to an indictable offence both offshore and in the UK, to make it a criminal conduct under the AML legislation in the UK or that the offence in itself is punishable by imprisonment with a maximum term of 12 months or more in the UK. This means that the financial institution in the UK in receipt of the proceeds of crime is committing the offence of ML unless the disclosure has been made to provide a defence.[13]

Furthermore, within the UK, MLR 2017 Part 2 ML and TF, Chapter 2; Part 3 CDD, Chapter 1 and 2 set out clear guidelines on what a UK firm must do to complete CDD and EDD to apply the objective test of knowledge or suspicion which is also explained above. With this in mind yes, it does constitute an offence of ML. [14]

e) 

Within the UK, dual-use goods are described as objects that can be used for both civil and military applications such as software, technology, documents and diagrams, including raw materials used to make industrial machinery which can be used as is or modified for manufacturing weapons and is also widely accepted as a uniform definition across the world. UK complies with EU Dual-Use regulation and also Export Control Order 2008.[15] Proliferation financing(PF) is a term introduced by FATF to explain both financing of weapons of mass destruction(WMD) and dual-use goods.

According to FATF Recommendation 7 Terrorist financing by way of proliferation, 'Proliferation has many forms but ultimately involves the transfer and export of technology goods, software services or expertise that could be used in nuclear, chemical or biological weapons-related programmes, including delivery systems.'[16] Lack of appropriate safeguards makes proliferation an easy task for use in WMD.

The organisation involved in PF has the use of formal and informal sectors of the increasing global financial system. This can be in the shape of cash transfer services such as Western Union, to purchase high-value commodities such as gold or buy physical assets such as properties after putting the funds through the financial system and use these to purchase dual-goods.

PF for weapons significantly differs from ML. This is due to the very nature of the financing involved given that the funds can be sourced from criminal and/or legitimate activities. Therefore, making identification of the funds used for proliferation activity that much more complex. Much like the use of NPO's to launder money for terrorist financing the ultimate source is hidden by a web of complex physical and virtual asset transfer by using multiple intermediaries that provide financial services but not limited to traditional banking. This can involve the transfer of money from one intermediary to another based locally or internationally to hide the fund's origination and then be used to purchase dual-goods with the ultimate goal to disguise the true nature of the transaction.

The impossible challenge a regulated financial firm in the UK faces in tackling and identifying PF is to implement both local and international regulations without impacting the customer journey. Current requirements as per FATF recommendations are to embed PF within the existing risk-assessment framework. When conducting the risk-assessment the firms are required to consider geographical, customer, product and services risk to then implement an effective asset freeze control mechanism in line with FATF best practice guidance published in 2013.

f)

FATF was established in 1989 by the G7 summit in Paris and now consists of 200 countries and jurisdictions operating as a global ML and TF watchdog which implements policies to raise awareness amongst local governments to introduce necessary governance and bring high-risk countries in line with global standards around AML and CFT.[17] The objectives are delivered in form of 40 recommendations for AML and 9 special recommendations that specifically relate to TF. 

From a transparency point of view, in February 2009, followed by a global financial crisis FAFT decided to evaluate the direct impact of the economic crisis on AML and CFT. This was further scrutinised by the G20 leaders who requested a review of AML and CFT jurisdictional standards by increasing transparency. This resulted in FATF publishing Review of the Standards – Preparation for the 4^th Round of Mutual Evaluations – Second Public Consultation in June 2011, followed by consolidation of the previous 40 plus 9 special recommendations into a revised set of international standards to combat ML, TF and WMD on February 2012. The requirements set out included but not limited to a risk-based approach when reviewing high-risk cases much like sanctions screening to consider and adapt jurisdictional challenges around ML and TF. This would be delivered by increasing transparency around legal and beneficial ownership of legal entities and arrangements which also requires cooperation on a global level between international authorities to help trace, freeze, confiscate and repatriate illegal assets. The recommendations are regularly updated without changing the overall nature of their content, as an example recommendation 2 was revised in February 2018 to adapt AML/CFT requirements with data protection and privacy to increase information sharing between various competent domestic inter-agencies.[18]

One of the key operational challenges FATF faces is to ensure ongoing monitoring and implementation of the FATF recommendations as they are revised and improved upon with emerging trends. To tackle the challenge, all FATF members are now required to implement the recommendations and agree to a two-tier monitoring approach. This is carried out by an annual self-assessment by the member state to review implementation and adherence of FATF recommendations followed by an on-site mutual evaluation conducted by the representatives elected by FATF.

Both steps take approximately a year each to complete. An on-site evaluation requires 4-6 selected FATF member state experts and 2 members of the secretariat carry out an assessment of AML/CFT governance of the evaluated country and present it in form of a detailed report. The report measures the implementation of all 40 recommendations, identifies deficiencies and provides a rating accordingly which is reviewed and accepted by a FATF Panel before been published. Followed by a report that the evaluated country must submit within 2 years to provide an update on the progress made in line with the findings with importance placed on deficiencies.

During 2014, FATF carried out the 4^th round of mutual evaluations based on the 2012 FATF Recommendations and its revised 2013 Methodology assessing technical compliance and its effectiveness and published its consolidated assessment ratings in September 2020. As an example, this report showed that Myanmar, since its 2018 evaluation report where recommendation 10,12,13 and 14, 24 went from partially compliant and non-compliant to largely compliant and partially compliant respectively. To further understand the findings, consider recommendation 14, Money or value transfer service(MVTS) where the state was found to be non-compliant based on lacking risk-based approach to identify entities that carry out MVTS without permission including the scope and scale of hundi, an informal money transfer system used by money brokers in developing countries such as Myanmar and therefore Asia-Pacific Group(APG)  were not able to determine if preventative measures were applied.[19] This is a cause for concern since hundi also known as hawala is a popular means of transfer concerning ML and CFT. A recent report in September 2020 identified that there are relevant investigations taking place of hundi operators but determined the percentage to be small compared to the expected population of hundi operators and therefore the rating was updated from non-compliant to partially compliant.[20]

This means that Myanmar remains subject to enhanced follow-up and is required to provide progress reports to APG on its implementation of AML/CFT measures.

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[1] IMF, n.d. Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT). [Online]
Available at: https://www.imf.org/external/np/leg/amlcft/eng/aml4.htm#antimoney
[Accessed September 2020].

[2]  Cornhill, S., 2019. Module 1. In: W. B. Howarth, et al. eds. ICA International Diploma in Anti Money Laundering. 23rd Edition ed. Birmingham: International Compliance Association, p. 7.

[3] CPS, 2018. Proceeds Of Crime Act 2002 Part 7 - Money Laundering Offences. [Online]
Available at: https://www.cps.gov.uk/legal-guidance/proceeds-crime-act-2002-part-7-money-laundering-offences
[Accessed September 2020].

[4]

CPS, 2018. Proceeds Of Crime Act 2002 Part 7 - Money Laundering Offences. [Online]
Available at: https://www.cps.gov.uk/legal-guidance/proceeds-crime-act-2002-part-7-money-laundering-offences
[Accessed September 2020].

[5] Cornhill, S., 2019. Module 1. In: W. B. Howarth, et al. eds. ICA International Diploma in Anti Money Laundering. 23rd Edition ed. Birmingham: International Compliance Association, p. 72.

[6] Jackson, M., 2015. A Theory of Cimplicity. In: Complicity in International Law. Oxford: Oxford University, p. 54.

[7] FCA, 2019. FCA fines Standard Chartered Bank £102.2 million for poor AML controls. [Online]
Available at: https://www.fca.org.uk/news/press-releases/fca-fines-standard-chartered-bank-102-2-million-poor-aml-controls
[Accessed September 2020].

[8] Cornhill, S., 2019. Module 2. In: W. B. Howarth, et al. eds. ICA International Diploma in Anti Money Laundering. 23rd Edition ed. Birmingham: International Compliance Association, p.293.

[9] Djani, D. T., 2020. Security Council Report. [Online]
Available at: https://www.securitycouncilreport.org/atf/cf/%7B65BFCF9B-6D27-4E9C-8CD3-CF6E4FF96FF9%7D/s_2020_415_e.pdf
[Accessed September 2020].

[10] Djani, D. T., 2020. Security Council Report. [Online]
Available at: https://www.securitycouncilreport.org/atf/cf/%7B65BFCF9B-6D27-4E9C-8CD3-CF6E4FF96FF9%7D/s_2020_415_e.pdf
[Accessed September 2020].

[11] UN, 2016. Heroin and cocaine prices in Europe and USA. [Online]
Available at: https://dataunodc.un.org/drugs/heroin_and_cocaine_prices_in_eu_and_usa
[Accessed September 2020].

[12] FATF, 2014. Financial flows linked to the production and trafficking of Afghan opiates. [Online]
Available at: http://www.fatf-gafi.org/media/fatf/documents/reports/Financial-flows-linked-to-production-and-trafficking-of-afghan-opiates.pdf
[Accessed September 2020].

[13] Cornhill, S., 2019. Module 1. In: W. B. Howarth, et al. eds. ICA International Diploma in Anti Money Laundering. 23rd Edition ed. Birmingham: International Compliance Association, p.143-144.

[14] Gov, 2017. The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. [Online]
Available at: https://www.legislation.gov.uk/uksi/2017/692/pdfs/uksi_20170692_en.pdf
[Accessed September 2020].

[15] Gov, 2012. Controls on dual-use goods. [Online]
Available at: https://www.gov.uk/guidance/controls-on-dual-use-goods
[Accessed September 2020].

[16] FATF, 2019. The FATF Recommendations. [Online]
Available at: http://www.fatf-gafi.org/media/fatf/documents/recommendations/pdfs/FATF%20Recommendations%202012.pdf
[Accessed September 2020].

[17] FATF, n.d. About. [Online]
Available at: https://www.fatf-gafi.org/about/

[18]

Cornhill, S., 2019. Module 2. In: W. B. Howarth, et al. eds. ICA International Diploma in Anti Money Laundering. 23rd Edition ed. Birmingham: International Compliance Association, p. 24.

[19] FATF, 2018. Anti-money laundering and counter-terrorist financing measures, Myanmar, Mutual Evaluation Report. [Online]
Available at: http://www.fatf-gafi.org/media/fatf/documents/reports/mer-fsrb/APG-Mutual-Evaluation-Report-Myanmar.pdf
[Accessed September 2020].

[20] FATF, 2020. Mutual Evaluation of Myanmar. [Online]
Available at: http://www.fatf-gafi.org/media/fatf/documents/reports/fur/APG-2nd-Follow-Up-Report-Myanmar-2020.pdf
[Accessed September 2020].