Select Committee on International Development Minutes of Evidence

Memorandum submitted by Jeremy P Carver CBE, Head of International Law Group, Clifford Chance LLP[1]

The Need for Legislation

  1.  As a matter of policy, British Governments do not normally ratify international Conventions unless and until domestic United Kingdom laws permit full compliance with the international obligations to be performed. Exceptionally, in the case of the OECD Anti-Bribery Convention of 17 December 1997, the United Kingdom ratified the Convention before UK laws had been changed to allow the United Kingdom to abide by its international obligations. Despite doubts expressed from various quarters, Parliament was assured that the scope of the OECD provisions was "fully compatible with existing UK law" (see paragraph 1 of Explanatory Memorandum presented to Parliament September 1998—attached).

  2.  Since ratification of the OECD Convention by the United Kingdom, the United Kingdom's compliance with its obligations have been a matter for international concern, not only by other parties to the Anti-Bribery Convention, but in particular by the OECD Working Group responsible for monitoring implementation of the Convention. The Working Group's evaluation of the United Kingdom found its compliance with the Convention to be sadly wanting. One result was the overdue announcement from the Home Office on 20 June 2000: Stamping out the Virus of Corruption. Our international partners were led to believe that the Convention would be swiftly implemented. Nevertheless, despite the Home Office announcement and despite the numerous occasions when concerned and professional bodies have pointed out the defects in our domestic laws, the Government has presented no legislation to Parliament to comply with our international obligations.

Use of Money-laundering and related enforcement capabilities

  3.  New legislation will provide cover for the present gap in UK compliance with the OECD Convention; but will not thereby demonstrate that the United Kingdom is taking its obligations as a signatory sufficiently seriously to ensure effective implementation. That will be tested at the next stage of monitoring. A frequent plea from Departments is lack of necessary resources, in a prevailing climate of economic stringency. This supposes that, to give effect to the Convention, new resources are needed; whereas the probability is that resources that are already being mobilised to meet other international obligations and expectations are available to combat international corruption.

  4.  Corruption involves the payment or promise of payment contrary to the law. When made, a payment enters the financial marketplace as an illegal transaction which is capable of being identified and giving rise to prosecution as are other illegal payments. The fight against money-laundering, narco-traffic and similar criminal transactions has led to the development of increased resources: both at the official level and among financial institutions. The Swiss Federal Banking Commission report on Abacha funds moving into and out of Switzerland illustrates why banks need to ensure tighter scrutiny of customer transactions. Loss of reputation is of fundamental concern to banks. Moreover, even inadvertent handling of illegal funds introduces levels of risk into a bank's business which can prove very expensive.

Developments in international banking practice

  5.  On 16 January 2001, a multi-agency working group drawn from the United States Justice and Treasury Departments and various federal agencies issued guidelines to meet the perceived threat arising from the transmission of the proceeds of foreign political corruption to U.S. financial institutions. These guidelines are designed to advise banks, broker-dealers, and other financial institutions on their obligations with regard to funds that appear to be related to the theft of sovereign assets by foreign political leaders. The guidelines follow in the wake of embarrassing disclosures relating to the transmission of funds to U.S. financial institutions by a long list of foreign leaders including the Marcos family of the Philippines, Raul Salinas of Mexico, and General Abacha of Nigeria.

  6.  Entitled "Guidance On Enhanced Scrutiny For Transactions That May Involve The Proceeds of Foreign Official Corruption" (the "Guidance"), the Guidance is intended to help financial institutions identify and avoid transactions involving the proceeds of foreign political corruption by suggesting specific know your customer and account monitoring steps that institutions should take with respect to accounts owned by a foreign political official or his or her family or close associates. The Guidance also sets forth some examples of suspicious transactions involving the proceeds of foreign political corruption. The Guidance applies with equal force to banks, broker-dealers and other types of financial institutions engaged in businesses such as private banking. The Guidance is available at Several features of the Guidance may be instructive for UK regulators.

    —  The Guidance Is Not Mandatory

  7.  The Guidance is advisory; it is not law, rule or regulation. Rather, the Guidance contains "advice that financial institutions are encouraged to employ in conjunction with policies, practices and procedures that are in place to enable financial institutions to comply with applicable laws and regulations and to minimize reputational risks." On the other hand, according to the Guidance, deficiencies in a financial institution's anti-money laundering controls may prompt a regulator to require that the Guidance be integrated into the institution's policies and procedures.

    —  The Guidance applies to a finite class of "Covered Persons"

  8.  The Guidance focuses on the risks presented by accounts held for foreign political leaders, their families and their close associates, all grouped under a defined class of "Covered Person". This includes a senior official of a major political party, a senior executive of a foreign government-owned corporation, and any entity formed by a senior political figure, his or her "immediate family"; or a close associate (one who is "widely and publicly known to maintain an unusually close relationship with the senior political figure").

    —  Action Steps for Know Your Customer and Account Monitoring Procedures

  9.  The Guidance sets out five know your customer and account monitoring steps to take with respect to accounts beneficially owned by a Covered Person. These include establishing the identity of the account holder and the account's beneficial owner, their reputation and source of wealth and waiver of local law secrecy protections. Banks must document the purpose of opening the account and anticipated account activity, and should measure account activity against the Covered Person's official salary and any other sources of wealth. Additional periodic oversight should be applied to the account, and at a more senior level of management, recording all material decisions.

    —  The Guidance describes suspicious activities

  10.  The Guidance gives examples of questionable or suspicious activities that may involve the proceeds of foreign official corruption: requests to involve a bank unaccustomed to foreign transactions; requests for secrecy or routing through a secrecy jurisdiction or missing wire transfer information; unusual and unexplained fund or transaction activity, such as fund flow through several jurisdictions or banks, use of a government-owned bank, excessive funds or wire transfers, rapid increase or decrease of funds or asset value not attributable to the market value of investments, high value deposits or withdrawals, wires of the same amount of funds into and out of the account, and frequent zeroing of account balance; and large currency or bearer transactions, or structuring of transactions below reporting thresholds.

    —  The Guidance Identifies Other Valuable Sources of Information

  11.  The Guidance identifies other valuable sources of information (including many internet websites) that can be used to assist a financial institution to decide whether to conduct business with a Covered Person. These include publications issued by the US Treasury's Financial Crimes Enforcement Network ("FinCEN"), the State Department, the CIA, the General Accounting Office, Congress, the Financial Action Task Force ("FATF"), international financial institutions (such as the World Bank and the International Monetary Fund), the United Nations, and other government and non-government organizations.

  12.  The Guidance, in effect, imposes new responsibilities on financial institutions in the United States. Although foreign political corruption has yet to be included as a "specified unlawful activity" under money laundering laws (nor have OFAC laws yet been expanded to cover corruption), the Guidance intends to achieve the same goal, by telling banks and broker-dealers to stop doing business with senior foreign political figures unless there is clear information demonstrating the legitimacy of the proposed business.

Jeremy P Carver, CBE, Head of International Law Group,Clifford Chance LLP

March 2001

1   These comments supplement the evidence given by Jeremy Carver to the Committee on 23 January 2001. Back

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Prepared 5 April 2001