Memorandum by the Institute of Chartered
Accountants in England and Wales (ICAEW)
Written evidence submitted in February 2009
to the House of Lords Select Committee on the European Union Sub-committee
F (Home Affairs) in connection with their inquiry into EU and
international cooperation to counter money laundering and the
financing of terrorism. This evidence was prepared for the Committee,
and is its property.
INTRODUCTION
The Institute of Chartered Accountants in England
and Wales (ICAEW) welcomes the opportunity to provide written
evidence to the House of Lords Select Committee on the European
Union Sub-committee F (Home Affairs), in connection with their
Inquiry into Money Laundering and the Financing of Terrorism.
The ICAEW has been a leading contributor to the debate
on developing anti-money laundering legislation, since the development
of the Proceeds of Crime Act, before it was passed in 2002. Karen
Silcock, the chairman of the ICAEW's Money Laundering Committee
is a member of SOCA's Suspicious Activity Reporting Regime Committee,
selected by SOCA to represent the accountancy sector in this high
level group established by the SOC A board which oversees the
operation of the regime, and the ICAEW's Head of Business Law,
Felicity Banks, represents the Consultative Committee of Accountancy
Bodies on the Treasury's Money Laundering Advisory Body. The anti-money
laundering guidance, issued by the CCAB, has been approved by
the Treasury for application by all accountancy service providers.
This response is mainly aimed at the implementation
of the Third Money Laundering Directive, no 2005/60/EC, which
directly impacts ICAEW members in practice and practising firms.
Unless clear from the text, in this paper the
term "money laundering" should be read to encompass
terrorist funding.
MAIN POINTS
Differences in Implementation—Predicate
Offences and Definitions of Money Laundering
1. There are significant differences in
the implementation of the money laundering directives in the UK,
as compared to other EU member states.
2. The ICAEW believes that the UK has been exemplary
in its speed and thoroughness of implementation. The directives
have also been implemented in the UK in a way which has led to
a very large number of money laundering suspicious activity reports
(SARs) having been made to SOCA, with an expensive and sophisticated
system for their recording and use. For example, through our work
with the European Federation of Accountants (FEE—www.fee.be)
we understand that although practising accountants in the UK submit
over 8,000 SARs a year, the accountancy professions in other member
state have submitted no more than 100 in any year, and some much
less.
3. Some other member states have been slow and
reluctant to implement the money laundering directives. However,
the ICAEW does not believe that inadequate implementation represents
the most significant differences in the operation of the systems
in the UK and other member states. Rather, the differences lie
in the rigour and enthusiasm with which the implemented directives
are interpreted and enforced, in the ways in which options in
the directive are implemented and the underlying criminal offences
are framed. The greatest differences seems to lie in two particular
characteristics of the UK legislation, which are often not reflected
elsewhere. These are:
Under the directives, the definition of "criminal
activity" is limited to involvement in the commission of
a serious crime, with the effect that the laundering of the proceeds
of less serious crimes can be left out of the SARs reporting regime.
That is not the case in the UK.
The definition of money laundering in the directives
is framed firstly in terms of conversion or transfer of criminal
property, and secondly in its concealment or disguise. The third
element of the definition is the acquisition, possession or use
of property, knowing, at the time of receipt, that such property
was derived from criminal activity. Many jurisdictions have interpreted
this as indicating that at least one transaction in the criminal
property must take place for money laundering to exist. In the
UK, the simple and passive possession of the proceeds of an offender's
own crime also represents money laundering. This draws into the
money laundering reporting net many instances, like much tax evasion,
where no active concealment or money laundering takes place.
Cost Effectiveness, and its Measurement
4. The costs of the anti-money laundering
regime in the UK are undoubtedly very high. However, the exact
quantum of the costs that are incurred exclusively on anti-money
laundering are difficult to judge. The client due diligence procedures
which are performed primarily for anti-money laundering compliance
purposes are, for example, undoubtedly also useful in reducing
risks for accountancy firms in accepting inappropriate clients,
or those whose business rationale is unclear, with consequent
reputational risks.
5. Probably, over the profession as a whole,
more costs are incurred in the area of client acceptance procedures
and due diligence than in the systems for suspicion evaluation
and reporting. Since implementation of the directives appears
to have been less variable in requirements for client due diligence
than in the definition and reporting requirements for suspected
money laundering, costs are likely to be high throughout Europe.
6. The benefits of the anti-money laundering
reporting regime are even more difficult to judge. If effectively
fed into the law enforcement process, and used efficiently, SARs
will provide useful intelligence and thus enable criminal investigations
to be carried out more cheaply and with better outcomes. An efficient
law enforcement system has significant benefits in terms of better
public trust and safety, fairer commerce and economic progress
and improved international reputation. Partly due to the secrecy
necessary to much criminal investigation, however, the benefits
are likely to be difficult to assess with accuracy, even in a
single case. This is even more the case for suspected terrorism.
However, the overall cost/benefit balance in the UK does appear
to be improving over time, as shown by the increased use of reporting
intelligence across a wide range of serious and violent crime
as well as being used for restraint and confiscation of criminal
proceeds (evidenced by the most recent report from SOCA on the
operation of the reporting regime). Given the high cost to the
regulated sector of compliance with the directives, an all crimes
reporting system feeding into law enforcement teams focussed on
extracting value from the data would seem better to justify the
cost and extract real benefit for the community than a system
that requires a massive investment in systems and procedures but
produces little of intelligence value.
7. SOCA are conscious of the importance
of feedback about its work, and continue to discuss this issue
with members of the accountancy profession and other stakeholders
on improving it. The ICAEW's perception of the situation is that
with the increased resources being made available to SOCA, and
the improvements made to their systems, the effectiveness of the
system has improved and with it its cost effectiveness.
8. It is the ICAEW's belief that, although
the costs of implementation in the UK, for the accountancy profession
at least, may be higher than in other jurisdictions, the very
significant improvement in the control of illegal activities that
results makes the regime cost effective. Though costs may be less
in other jurisdictions, the ICAEW believes that the costs which
are incurred are more likely to be wasted, due to the much lower
benefit in terms of the control of crime. That is, the higher
benefits justify the higher costs incurred.
9. Ultimately, the benefit of averting even
a single serious terrorist outrage is extremely high.
RESPONSES TO
SPECIFIC QUESTIONS
Cooperation with and between Financial Intelligence
Units (FIUs)
How effective is cooperation among FIUs, and between
FIUs and other authorities? What are the practical results of
this cooperation?
How does the private sector feed into this cooperation?
To what extent is satisfactory feedback to the private sector
required by international standards, and what happens in practice?
10. The ICAEW can provide little evidence
on the effectiveness of cooperation between FIUs, though we are
aware of the existence of the Egmont Group of FIUs and we believe
it to be operating satisfactorily. For example, we have received
assurances from SOCA that sensitive reports of suspicions provided
by ICAEW members will only be released to overseas jurisdictions
through a member of the Egmont Group, with the result that ICAEW
members need not fear irresponsible disclosure or misuse of their
confidential information.
11. Cooperation between the UK FIU and other
authorities appears to be extensive, and the evidence of our own
relationship with SOCA supports this conclusion. Feedback operates
in both directions, increasing trust between the various parties
involved, and hence the efficiency and effectiveness of the system.
12. The private sector feeds into this cooperation
through:
— the Money Laundering Advisory Committee,
led by HM Treasury and the Home Office, which includes representatives
of key elements of the regulated sector, law enforcement and Government
Departments;
— the Anti-Money Laundering Supervisors
and Regulators Fora, where AML supervisors (including both public
bodies and private professional bodies) discuss matters of consistency
and concern with each other and with SOCA and Government Departments;
and
— the inclusion of trusted individuals
from the private sector in SOCA consultative bodies headed by
the Suspicious Activity Reporting Regime Committee but also encompassing
the "Vetted Group" which works with SOCA to share sensitive
intelligence with the reporting community, and special focus groups
such as those set up to provide private sector input into the
development of information management systems within SOCA.
13. In addition, SOCA run their own training
events for members of the private sector, and provide speakers
for privately run training events. These events promote two way
communication, with questions from the floor allowing concerns
and comments on effectiveness to be expressed.
14. An example of the effectiveness of feedback
and cooperation is in the area of the confidentiality of SARs.
In the early years after the implementation of the Money Laundering
Regulations 2003, we received fairly frequent reports of the disclosure
to the clients of our members that their accountant had made a
SAR, revealing a suspicion that the client had acted illegally.
This most frequently occurred through administrative carelessness,
or to assist the effectiveness of questioning (by indicating the
seriousness of evidence of wrongdoing to a suspect). The effect
on the client/accountant relationship could be catastrophic, and
led to marked reluctance in other accountants to report their
suspicions when these instances were revealed in the press. However,
since feedback was given of the serious effects that these lapses
could have on cooperation by the accounting profession, and (we
believe) a more effective relationship between SOCA and the Law
Enforcement Agencies, the reports of breach of confidentiality
have radically reduced and are now very rare.
15. Both EU Directives and the FATF "Recommendations"
require feedback to the private sector, but are not specific about
how or what feedback should be given. Members of the accountancy
profession would prefer more feedback, at a number of levels,
both to help firms and the accounting professional bodies to manage
risk and to provide feedback on the usefulness of reports. The
ICAEW is aware that SOCA is working on increasing the amount and
usefulness of the feedback that can be given.
What is the extent of the feedback and input on
terrorist financing issues from intelligence and security services?
16. The ICAEW understands that SOCA has
good links with the intelligence and security services, and that
terrorist and financing issues form a sizeable section of the
their work.
17. Feedback given to the ICAEW by SOCA (for
dissemination to selected members) includes information on areas
of growing illegal activity which could be associated with terrorism,
and where it is believed that higher awareness of these by our
members could improve the intelligence available to Law Enforcement
Authorities, by the making of more and better relevant SARs.
To what extent are alternative remittance systems
appropriately covered by obligations of cooperation in this context?
What will be the impact of the implementation by Member States
of the relevant provisions of Directive 2007/54/EC in this regard?
18. Alternative remittance systems are by
their nature informal, and not highly organised. Many money service
businesses are not members of trade bodies and many may not be
aware of their obligations under the Money Laundering Regulations.
HMRC, as well as SOCA, are acting to increase awareness in this
sector. The ICAEW has no specific views on the likely impact of
Directive 2007/54/EC in this regard.
EU INTERNAL ARCHITECTURE
19. The ICAEW has no views on this matter.
INTERNATIONAL COOPERATION
What have been the results of the third round
of mutual evaluations of EU Member States to date carried out
by the FATF and MONEYVAL, with particular reference to the effectiveness
of international cooperation (including as between FIUs)?
20. The ICAEW's experience of the process
of mutual evaluations is limited mainly to our contribution to
the FATF evaluation of the UK. This leads us to believe that the
evaluations are taken seriously by both the jurisdiction subject
to the evaluation and the team of evaluators, with great effort
made to justify the ways in which compliance has been achieved
and to understand this justification. This gradually spreads understanding
of differing approaches, adoption of the best and consequently
increased trust and cooperation. This is, however, a slow process.
To what extent has the formal framework for criminal
justice cooperation in this area been effective?
21. The ICAEW has no views on this matter.
To what extent are these systems used to enforce
compliance with national tax obligations?
22. The ICAEW's knowledge of the use of the AML
system to enforce compliance with tax obligations is mainly limited
to the UK, where SARs are submitted in relation to suspected tax
evasion, and are used by HMRC.
23. Not all jurisdictions consider tax evasion
to be a predicate offence for money laundering purposes.
EU-UN COOPERATION
24. The ICAEW has no views on this matter.
MONITORING IMPLEMENTATION
What EU mechanisms exist for monitoring implementation
of the relevant legislative measures, and what results in terms
of formal compliance and effective implementation have so far
emerged from the use of those measures?
What are the implications of those results for
cooperation within the EU, and more broadly?
25. Besides the formal EU mechanisms for
monitoring compliance with the money laundering directives, the
professions and some trade groups have pan-European associations
which also monitor implementation, particularly as it affects
their members or stakeholder groups. An example of this is the
ICAEW's work with FEE.
26. Global professional associations also work
to monitor compliance in various jurisdictions on a global basis
and advise their members on expectations, when acting overseas
or in a cross border context. A good example of this is the useful
site that the International Bar Association has set up at http://www.anti-moneylaundering.org,
which gives a comprehensive guide to anti-money laundering legislation
and compliance, throughout the world.
Has consideration been given within the EU or
by the FATF to whether the overall results derived from the present
system justify the burdens placed on the private sector?
27. The ICAEW is not aware of comprehensive exercises
which have been undertaken by either the EU or FATF to measure
the cost effectiveness of the present system, but see above under
our main points, for our comments on the difficulties of measuring
cost effectiveness, and the value of the system in the UK.
Are there plans to review the existing EU legislation
or international standards in a manner which would be more sensitive
to the position of the private sector?
28. FATF has recently introduced guidance on
the application of a risk based approach to compliance with its
requirements, by the private sector, whereas previously a more
bureaucratic system has been applied in its interpretation of
its requirements and in mutual evaluations. The ICAEW supports
this move, and the further extension of a risk based approach
to implementation, which we believe will lead to a more cost effective
system.
COMPLIANCE AND
EQUIVALENCE
What are the powers and procedures with respect
to those third countries which fail properly to implement international
standards in these areas? Are these adequate?
Does the 2005 Directive adequately encourage non-EU
States which have introduced equivalent systems to counter money
laundering and the financing of terrorism?
29. The main powers and procedures that
the ICAEW is aware of, to put pressure on countries to implement
international standards in this area, are adverse publicity and
additional systems and controls requirements on those dealing
with them, or with their citizens. Positive affirmation is also
given, by membership of FATF itself, or by membership of a regional
FATF style body.
30. Under the 2005 Directive, European financial
institutions are required to apply European anti-money laundering
standards to their branches in non-equivalent jurisdictions, or
to inform the appropriate authorities if this is not possible.
This will help to spread compliance with European standards elsewhere.
However, both financial institutions and professional firms working
in an in international context should be motivated to apply good
standards everywhere anyway, to protect their global branding
and reputation. It is therefore difficult to say whether this
is an effect of the Directive, or would have occurred in any case.
31. Jurisdictions are generally improving their
anti-money laundering systems and requirements, so we believe
that these procedures are adequate, though there is clearly a
great deal further to go.
How does the system for determining equivalence
operate in practice?
32. Whatever the underlying jurisdiction
with which financial institutions or professionals carry out commercial
or advisory business, it is important for them to ensure that
they understand the identity of the person with whom they are
transacting, and the likely risks of the relationship. This is
so whether or not the jurisdiction from which the contractual
partner is operating has equivalent anti-money laundering systems
and requirements. Though overall risks will be higher in non-compliant
jurisdictions, there will nevertheless be higher risk clients
in lower risk jurisdictions and vice versa.
33. The systems for determining equivalence within
Europe and elsewhere are not entirely transparent, but provided
that they do not result in injustice for poorly assessed jurisdictions,
and they assist in improving systems overall, we do not consider
that this is the most important issue in anti-money laundering
policy development.
ABOUT THE
ICAEW
The ICAEW operates under a Royal Charter, working
in the public interest. As a world leading professional accountancy
body, the Institute provides leadership and practical support
to over 132,000 members in more than 140 countries, working with
governments, regulators and industry in order to ensure the highest
standards are maintained. The ICAEW is a founding member of the
Global Accounting Alliance with over 700,000 members worldwide.
Our members provide financial knowledge and guidance based on
the highest technical and ethical standards. They are trained
to challenge people and organisations to think and act differently,
to provide clarity and rigour, and so help create and sustain
prosperity. The Institute ensures these skills are constantly
developed, recognised and valued.
Felicity Banks
Head of Business Law
Nick Maxwell
Public Policy Manager
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