Money laundering and the financing of terrorism - European Union Committee Contents


146.  In this Chapter we examine four matters of importance on which we have received both written and oral evidence in the course of our inquiry. They are:

  • the susceptibility of alternative remittance systems to abuse by money launderers;
  • the effects of the current global economic crisis;
  • the proceeds of piracy; and
  • data protection issues arising from the SARs database.

Alternative remittance systems

147.  The systems for the remittance of money most commonly used in the Western world are by no means the only ones susceptible to abuse by money launderers. Alternative remittance systems, traditionally operating outside the conventional financial sector, are at least as much open to abuse. Of these systems perhaps the best known and most used is Hawala.


A hawala transfers value without the use of a negotiable instrument or other commonly recognised method for the exchange of money. For example, a US resident who wanted to send money to a person in Pakistan would give his money, in dollars, to a US-based hawaladar, or hawala broker. The US hawaladar would then contact his counterpart in Pakistan, giving the Pakistani hawaladar the particulars of the transaction: the amount of money, the code, and the identity of the recipient. The ultimate recipient in Pakistan would then go to the Pakistani hawaladar and receive his money, in rupees, from whatever money the Pakistani hawaladar had on hand. As far as the sender and ultimate recipient are concerned, the transaction is then complete. The two hawaladars would have a variety of mechanisms to settle their debt, either through offsetting transactions (e.g. someone in Pakistan sending money to the US using the same two hawaladars), a periodic settling wire transfer from the US hawaladar's bank to the Pakistani hawaladar's bank, or a commercial transaction, such as the US hawaladar paying a debt or an invoice, in dollars, that the Pakistani hawaladar owes in the US. Hawalas typically do not have a large central control office for settling transactions, maintaining instead a loose association with other hawaladars to transfer value, generally without any formal or legally binding agreements.[87]

148.  As Sir James Sassoon emphasised, "informal money flows are a critical component of what makes economies and has made economies flow in parts of the world for many centuries." (Q 424) In particular, such systems facilitate transfers of money by migrant workers to their relatives in their countries of origin. Mr Nilsson, formerly a member of the Council Secretariat, explained that Hawala was a very important tool for moving money back to the countries with large migration pressures. Figures suggested that something like ten per cent of the GNP of some countries was being moved back through remittances without any cost or at very small cost, because one of the problems of normal remittance systems was the cost. (Q 258)

149.  But the EU Counter-terrorism Coordinator has explained that while Hawala and other alternative remittance systems serve entirely legitimate purposes, they may also offer an opportunity for criminals and terrorist organisations to move funds virtually without there being any traceability.[88] He told us: "The financing of the insurgency, both in Pakistan and in Afghanistan, was not only the product of drug trafficking but also private money coming from the Gulf through Hawala and remittance systems. It is less remittance and more Hawala. That is a serious concern because that is where we have to intensify our discussions with the Gulf countries." (Q 255) A balance therefore has to be found between safeguarding the legitimate use of the systems and combating their abuse for terrorist financing activities.

150.  Hawala and other alternative remittance systems are in law treated in exactly the same way as more conventional systems. HMRC regulates Hawala operations alongside other money service businesses, and anyone who is operating a Hawala business is required to register. Their directors have to be subject to a fit and proper persons test, and they need to provide training and procedures in order to comply with the regulations. HMRC carries out risk based supervision in relation to Hawala. Mr Robertson told us that the Treasury aimed not to discriminate between different forms of transmission of funds, but tried to make sure that people carrying out all forms of money transmission were subject to the regulations, were regulated, had in place the necessary procedures and were subject to the necessary standards. (Q 88)

151.  Mr Webb and David Thomas, the Director of the UKFIU at SOCA, both spoke to us about particular problems in this sector. The process of netting off money between the agent in the United Kingdom and the agent abroad meant that transactions were much harder to trace through the system; agents overseas were often unregulated, unknown to the authorities and in some cases questionably legal. There was an obligation to report suspicious activities, and SARs came from money service businesses, money transmission agents, and those that operated in greengrocers, butchers, and newsagents; but because Hawalas were firmly embedded in certain ethnic communities, getting awareness among them was more of a challenge. (QQ 89, 212-213) We were told that there were sometimes language problems, but that guidance notices were issued in a number of minority languages.[89]


152.  FATF Special Recommendation VI on alternative remittance specifies preventive measures such as licensing and registration, requirements for customer identification, record keeping, suspicious transaction reporting and sanctions. This Recommendation is implemented in EU law by the Payment Services Directive[90] which was adopted on 13 November 2007 and is due to be implemented by Member States on 1 November 2009. Ms Mieneke de Ruiter from the Council Secretariat thought this would be an important date: "Once Member States start to implement the Payment Service Directive all those alternative remittance bureaux or businesses or little shops will have to be registered and licensed and will have to apply all the rules under the Anti-Money Laundering Directive. Then you can get a grip on it and you can try to get it under control. At the moment there is no control and that is the big challenge." (Q 254)

153.  The Counter-terrorism Coordinator states in his Strategy of July 2008 that a uniform implementation of the Directive "is of key importance to prevent the abuse of money remittance services by potential terrorist financers." He expects implementation of the Directive to facilitate the gradual migration of these services from the unofficial economy to the official sector. Mr Pellé from the Commission said that at that stage any alternative systems operating in the EU would need to be registered or licensed in accordance with the requirements of the Directive; if they were not, they would be breaking the law. (Q 312)

154.  It must be right that Hawala and other alternative remittance systems should always be treated as a money service business like any other more formal money service businesses. The Payment Services Directive should ensure that this happens across the EU.

155.  However we believe that by its nature Hawala is more susceptible to misuse, and that particular care needs to be taken to ensure that money service businesses and money transmission agents are made aware of their responsibilities, and comply with them. This will involve making information and instructions available in a wide variety of languages.

156.  The United Kingdom has considerable experience in regulating Hawala; we recommend that the Government should actively share this experience with their EU and FATF partners, and seek to ensure that no vulnerabilities in these systems are overlooked.

The global economic crisis

157.  The Declaration issued by the G20 after the meeting in Washington DC on 15 November 2008 included the following passage: "The Financial Action Task Force should continue its important work against money laundering and terrorist financing, and we support the efforts of the World Bank-UN Stolen Asset Recovery (StAR) Initiative." Mr Robertson, giving evidence to us before the meeting of the G20 in London on 2 April 2009, told us that he interpreted this statement as quite positive in its language towards work that the FATF had undertaken in the past. (Q 64)

158.  Mr Pellé, giving evidence to us after the European Council on 19-20 March 2009 but again before the London G20, pointed out that the Council "in the context of the current crisis, called for the G20 in London to fight with determination tax evasion, financial crime, money laundering and terrorist financing as well as, and I am quoting, 'any threat to financial stability and market integrity'." (Q 270) He added that the global financial crisis was already influencing the thought processes of the FATF, and the Commission was contributing to this. (Q 280)

159.  Finally, the London G20 reconstituted the Financial Stability Forum as a new Financial Stability Board (FSB) with a greatly increased membership. Sir James Sassoon thought that this was a missed opportunity for the FATF to have been put on to the FSB; that would have created another layer of useful oversight and a check on the FATF's processes. (Q 391)

160.  The G20 Declaration on Strengthening the Financial System stated: "It is essential to protect public finances and international standards against the risks posed by non-cooperative jurisdictions. We call on all jurisdictions to adhere to the international standards in the prudential, tax, and AML/CFT areas … We agreed that the FATF should revise and reinvigorate the review process for assessing compliance by jurisdictions with AML/CFT standards, using agreed evaluation reports where available … We call upon the FSB and the FATF to report to the next G20 Finance Ministers and Central Bank Governors' meeting on adoption and implementation by countries."

161.  In a separate initiative at the FATF plenary meeting in February 2009 the Netherlands, who were then about to take over the FATF Presidency (and did so in July 2009) tabled a proposal to examine the impact of the global financial and economic crisis on efforts to combat money laundering and terrorist financing. The objective is to analyse the impact of the financial crisis on AML issues in general and on the mandate of the FATF, and to have a particular look at non-transparent and non-cooperative jurisdictions. A report is expected in October 2009.[91]

162.  At a time when all Governments are having to scrutinise public expenditure with particular care, the FATF has stated that it "will continue to consider the measures which countries are taking to mitigate the impacts of the crisis, as such measures should not undermine AML/CFT controls." (p 248) Sir James Sassoon stated: "I would be very concerned about the possible diversion of resources within finance ministries and financial regulators, in particular, and maybe in other authorities away from this area of work, as the authorities are under enormous and continuing pressure to deal with the day-to-day aspects of the crisis." (Q 410) We agree with both these views. Measures taken to mitigate the impact of the economic crisis should not adversely affect AML/CFT controls, and should be scrutinised to make sure that they do not. Nor should such measures divert resources away from AML and CFT.


163.  Piracy on the high seas, and particularly off the Horn of Africa, is a current threat which, despite the measures being taken by the EU and others, shows no sign of diminishing. Money extorted by the payment of a ransom to free a ship, its crew or its cargo clearly becomes the proceeds of crime. The money may be laundered, although Mr Webb pointed out that this was a cash-driven economy, and that the money would be unlikely to be placed in a financial institution, at least initially. (Q 186) Whether the money is laundered or not, it may be used for the financing of terrorism. We considered whether the Government's approach to these questions was correct.

164.  The Treasury and the Home Office provided us with a useful summary of the relevant law.[92] While in some countries the payment of a ransom is illegal, in the United Kingdom it is not. The Departments rightly point out that if ransom payment was an offence this would risk criminalising families and employers who were already in the position of having to make difficult decisions regarding the fate of the hostages. A change in the law could also discourage those of whom the demand is made from contacting the law enforcement authorities for their assistance. We agree. We have received no evidence to suggest that the payment of a ransom should be made a criminal offence, and we do not suggest that the law should be changed.

165.  Mr McGovern of Lloyd's provided us with valuable evidence about the manner in which shipowners deal with the payment of a ransom. He explained: "As a general principle, whether insurance is provided through hull coverage, hull war-risk cover, cargo cover or, in relatively rare cases, stand-alone kidnap and ransom cover, insurers do not get involved in negotiating with pirates and do not get involved in making payment. Insurers stand behind the insured and provide, after the event, indemnification for the insured's loss." (Q 507) Later he explained this more fully, concluding: "the Proceeds of Crime Act and any terrorist financing legislation would not therefore apply to the transaction between the insurer and the shipowner because that is a transaction between legitimate parties for a legitimate purpose." (QQ 526-528) We have therefore considered this question only in so far as the law and practice affect a shipowner based in and doing business in Britain of whom a ransom has been demanded.


166.  It seems to us that there is a serious risk that a significant proportion of money paid to pirates as a ransom could be used for the financing of terrorism. When we put this to Ian Pearson MP, the Economic Secretary to the Treasury, he told us "… there is no direct evidence of the proceeds of piracy being directed towards terrorism". But he added: "I have been careful not to say that it is not going to terrorism. What I have said is that we have not found a direct link to that." (Q 479-480) Subsequently the Home Office conceded that in the case of Somalia the existence of terrorist groups in the area was well known, but added that it was not thought at the present time that Somali pirates were connected in any systematic way to those terrorist organisations. If in the future it were to become known that such a connection existed, then a person might have "reasonable cause to suspect that [the money or property involved in a ransom] … may be used for the purposes of terrorism", so that an offence under sections 15-18 of the Terrorism Act 2000 would be committed by the payment of a ransom. The conclusion of the Home Office is that "anyone involved in the provision of a ransom payment must satisfy themselves that there is no reasonable cause to suspect that the money or other property will or may be used for the purposes of terrorism."[93]

167.  We regard this as an extraordinarily passive and complacent attitude. The Government, together with other States, are far better placed than individual shipowners to decide whether ransoms are likely to be used to finance terrorism; but they seem unwilling to shoulder this responsibility. We think that they should. We agree that it is not their duty to offer shipowners legal advice in specific situations; but we believe it is their duty to establish the facts on the basis of which shipowners can base their own assessments. In our view the likely reason no link has been found between piracy and terrorism is that no link has been sought. We concede that in the case of a failed State like Somalia, almost devoid of law enforcement authorities, with a minimal banking system and large ungoverned areas, it is extremely difficult to trace what happens to a ransom once it is paid. However it is important to know whether the proceeds of piracy are being used for terrorist financing, and if so the order of magnitude of the sums involved. The Government must take the initiative, if possible in concert with other interested States.

168.  We are struck by the sharp contrast between the naval efforts being deployed by the Government, the EU and NATO to deter and eliminate the threat from the rise of piracy off the Horn of Africa,[94] and the lack of any concerted action to inhibit the transfer of the proceeds of these criminal acts, or even to establish whether they might be helping to finance terrorism. The Government point to the limited mandate and remit of the FATF, and suggest that the best means of addressing the issue through the FATF is for the FATF to continue its work on promoting money laundering and terrorist financing controls in low capacity countries. A further course of action the Government are currently exploring "would be some kind of FATF statement about the problem".[95] Rather more than a statement is needed. We urge the Government to raise this issue with their EU partners and in the FATF with a view to establishing the extent of the link between the proceeds of piracy and terrorist financing, and to warning members of the FATF about these risks.

169.  Perhaps the countries best placed to help find answers to these questions are those in that area. Saudi Arabia and Yemen are members of the Middle Eastern and North African FATF (MENAFATF), while Kenya and the Seychelles are members of the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG). The Government should consider raising in the FATF the question whether a joint typologies exercise between the FATF and these FSRBs would be of use.[96]


170.  Money which is assembled in the United Kingdom in preparation for the payment of a ransom to pirates is not at that stage criminal property. It becomes criminal property when in the hands of the recipient. Therefore, as the Home Office say, consent may be required when assembling money in order to provide a defence to the money laundering offence under section 328(1) of POCA.[97] A decision by SOCA to grant consent is a decision to confer a defence to a prosecution for a money laundering offence, and not to judge the propriety of the planned ransom payment.[98]

171.  Thus far we agree with the Home Office. We do not however understand the statement that they "have no legal instrument to prevent companies from [paying ransoms] or for requiring them to report their activities, unless a link is established between piracy and terrorism".[99] It seems to us that the possibility of a prosecution for money laundering if consent is not obtained can be an effective instrument, even if no connection is established between piracy and terrorism.

172.  Where we also part company with the Home Office is in their conclusion that "in the event that a person did not seek consent, and the money was in all respects legal until it reached the hands of the pirates, it is unlikely that a prosecution for money laundering, solely because consent was not obtained, would be regarded as being in the public interest".[100] Where an offence has been committed, prosecutors retain a discretion not to prosecute where a prosecution is not in the public interest; they do not have a discretion to announce in advance of the commission of a class of offences that no prosecution is likely to be brought if the offence is committed. This is simply encouraging lawbreaking. So long as a failure to obtain consent results in an offence, it must be prosecuted. If prosecution is not thought desirable, then the law must be changed.

173.  In every case of piracy where a ransom has been demanded and the payment is being assembled in the United Kingdom, those involved have in our view a duty to seek consent for the payment of the ransom. Not to do so is likely to result in the commission of a criminal offence. We regard it as an abdication of responsibility by the Home Office to suggest otherwise.

The SARs database: data protection issues

174.  We have already referred to the very large number of SARs submitted to SOCA each year.[101] The great majority are submitted by the regulated sector, but some come from other sources, including a few where the source is listed as "unknown/anonymous".[102] The SARs are entered onto a database known as ELMER maintained by SOCA. At the end of September 2007 there were 932,324 entries on this database,[103] and the number increases by more than 200,000 each year.[104] David Thomas, the Director of the UKFIU, thought that by March 2009 there were about 1.5 million entries on the database. (Q 193)

175.  ELMER is in effect a database of suspects. Access to it is available to "every police force in England and Wales, Scotland, Northern Ireland, all of the national agencies that have prosecution powers—HMRC, DWP, the Serious Fraud Office—together with other agencies such as trading standards, and some county councils … every day there are over 1,500 trained and authorised users across the country who as their core business are examining SARs that relate to their own public duty". (Q 193) It is also used for purposes unrelated to serious organised crime, such as ensuring compliance with tax obligations. Nottinghamshire County Council uses ELMER to investigate housing benefit fraud.[105]

176.  On receipt of a SAR no steps are taken to confirm whether or not the suspicion on which it was based is well founded, and SOCA believes it would not be practicable or useful to do so. SOCA is of the view that there are few SARs with no value. The Proceeds of Crime Act 2002 requires the reporting of activity that makes the transaction suspicious, and as future circumstances unfold the fact that the reporter was suspicious is unaltered. The SAR therefore remains on the database and is available for use by the full range of end users.[106] Each SAR is assigned a deletion date of ten years after receipt, and is automatically deleted unless it has been amended or updated, in which case the deletion date is reset to six years following that event. There is a procedure for earlier deletion of individual SARs where all necessary activity relating to that SAR has been undertaken. SOCA estimates that 20,880 SARs have been permanently deleted from the database.[107]

177.  An individual who wishes to see whether the ELMER databases includes entries relating to him, or to transactions or activities in which he has been involved, is unlikely to succeed. SOCA is not subject to the Freedom of Information Act 2000. Information may be sought under section 7 of the Data Protection Act 1998, but it is likely that the exemptions relating to national security and crime will apply.[108]

178.  We put these matters to the Information Commissioner's Office (ICO) and sought their views. David Smith, the Deputy Information Commissioner, confirmed to us that the ICO had jurisdiction over these matters. In his view it was important that the SAR process should be operated in a proportionate manner. The database should focus on assisting with the investigation and prevention of serious criminal behaviour, and the thresholds for reporting, recording and granting access should reflect this. He would be concerned if local authorities were using the SAR database to investigate minor matters or matters which would not ultimately result in criminal prosecution.

179.  The ICO therefore expect SOCA to have established retention periods for the information held on its database. If there are SARs based on financial transactions meeting a particular threshold level rather than on hard evidence of criminal activity, the prolonged retention of those records will in their view be inappropriate and disproportionate. The ICO believe that it should not be the general rule that all SARs are kept indefinitely. (p 272)

180.  Although SARs are not kept indefinitely, the fact that they are routinely retained for ten years on a database to which there is wide access is a matter of concern to us, especially in those cases where it can be shown that the initial suspicion was unfounded. We contrast this with the ruling of the European Court of Human Rights that the retention on the DNA database of the DNA of persons not convicted of a criminal offence was a breach of their right to privacy under Article 8 of the European Convention on Human Rights.[109]

181.  As we explained in the previous chapter, the operation of the SARs regime is burdensome because of the scope and volume of the transactions and activities which have to be reported. We hope that adoption of our recommendations on a de minimis provision, on improved guidance and on feedback will lead over time to a lessening of the burden and an improvement in the quality of the ELMER database, so that entries on it are focused on serious organised crime, including money laundering.

182.  The FATF Recommendations do not require information on the ELMER database to be made available other than in connection with serious crimes. Access for other purposes should be on request to SOCA.

183.  The Information Commissioner should review and report on the operation and use of the ELMER database, and should consider in particular whether the rules for the retention of data are compatible with the jurisprudence of the European Court of Human Rights.

87   From a US Treasury report The Hawala Alternate Remittance System and its Role in Money Laundering, undated (prepared by the Financial Crimes Enforcement Network in cooperation with INTERPOL, probably in 1996). Back

88   Revised Strategy on Terrorist Financing, document 11778/1/08, 17 July 2008. Back

89   QQ 214-215 and 470-471; Supplementary memorandum (2) by HM Treasury, p 66. Back

90   Directive 2007/64/EC of the European Parliament and of the Council of 13 November 2007 on payment services in the internal market amending Directives 97/7/EC, 2002/65/EC, 2005/60/EC and 2006/48/EC and repealing Directive 97/5/EC(OJ L 319 of 5 December 2007). See also Article 36 of the Third Directive. Back

91   Memorandum by the FATF Secretariat, paragraph 28, p 247; Robertson Q 55; Pellé Q 280. Back

92   Supplementary memorandum (3) by HM Treasury and the Home Office, May 2009, Annex A, pp 69-71. Back

93   Ibid, paragraphs 13-14. Back

94   See the evidence given to Sub-Committee C of this Committee (Foreign Affairs, Defence and Development Policy) by Rear-Admiral Philip Jones on 12 February 2009, and by Lord Malloch-Brown, the Minister for Africa, Asia and the UN, on 19 March 2009:, and  Back

95   Supplementary memorandum (3) by HM Treasury and the Home Office, May 2009, p 68. Back

96   Every year the FATF holds typologies exercises bringing together law enforcement experts and members of national regulatory authorities to examine current money laundering techniques, and publishes reports. Among topics reported on in 2008 were the vulnerabilities of commercial websites and internet payment systems; and in 2007, money laundering and terrorist financing through the real estate sector, andlaundering the proceeds of VAT carousel fraud. Back

97   i.e. the offence of entering into or being concerned in an arrangement, knowing or suspecting that it facilitates the acquisition, retention, use or control of criminal property by or on behalf of another person.  Back

98   Supplementary memorandum (3) by HM Treasury and the Home Office, May 2009, Annex A, paragraph 6, p 70.  Back

99   Supplementary memorandum (3) by HM Treasury and the Home Office, May 2009, p 67.  Back

100   Supplementary memorandum (3) by HM Treasury and the Home Office, May 2009, Annex A, paragraph 6, p 70.  Back

101   Paragraph 100. Back

102   SARs Regime Annual Report 2008, Annex B, p 40. Back

103   SARs Regime Annual Report 2007, p 15. Back

104   SARs Regime Annual Report 2008, p 16. Back

105   Reply by Lord West of Spithead to a question from Lord Marlesford: HL Deb 2 April 2009, cols. WA 287-288. Back

106   Supplementary memorandum by SOCA, 17 April 2009, p 108. Back

107   Supplementary memorandum (3) by HM Treasury and the Home Office, May 2009, p 69. Back

108   Sections 28 and 29. Back

109   S and Marper v United Kingdom, judgment of 4 December 2008, Back

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