CHAPTER 5: CURRENT THREATS
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.
BOX 9
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]
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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]
THE PAYMENT SERVICES DIRECTIVE
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.
Piracy
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.
RANSOMS AND THE FINANCING OF TERRORISM
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]
CONSENT TO THE PAYMENT OF A RANSOM
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 powersHMRC, DWP, the Serious Fraud
Officetogether 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:
http://www.publications.parliament.uk/pa/ld200809/ldselect/ldeucom/999/euc120209ev1a.pdf,
and http://www.publications.parliament.uk/pa/ld200809/ldselect/ldeucom/999/euc190309ev2.pdf
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,
http://cmiskp.echr.coe.int/tkp197/view.asp?action=html&documentId=843941&portal=hbkm&source=externalbydocnumber&table=F69A27FD8FB86142BF01C1166DEA398649 Back
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