Memorandum by the Law Society of England
and Wales (The Law Society)
1. SUMMARY
1.1 The Law Society ("The Society")
is the professional body for solicitors in England and Wales representing
over 115,000 solicitors. The Society represents the interests
of the profession to decision makers within Parliament, Government
and the wider stakeholder community, and has an established public
interest role in law reform.
1.2 The Society is committed to ensuring that
anti-money laundering measures are clear, proportionate, effective
and workable in practice. Through lobbying, the Society is campaigning
for the achievement of a level playing-field across the EU and
the rest of the world, in order to ensure that UK legal practitioners
and businesses are not at a disadvantage in relation to non UK
legal practitioners and businesses.
1.3 The Society welcomes the opportunity
to provide evidence to the Sub-Committee on UK's anti-money laundering
regime, and in particular, the opportunity to address the interplay
with the anti-money laundering regimes across European and the
rest of the world.
1.4 The European anti-money laundering Directives
impose quite burdensome obligations on certain parts of the private
sector. The strict implementation of the Directives by the UK
Government and its decision to impose criminal sanctions for all
breaches of the Directive is negatively affecting the competitiveness
of UK solicitors, particularly in comparison to other legal practitioners
in the EU and around the world.
1.5 The Society encourages the UK Government,
the European Commission and the Financial Action Taskforce (FATF)
to comprehensively examine whether the benefits of the anti-money
laundering and asset recovery regimes they have each instigated
actually outweigh the burdens imposed. The Society would like
them to consider practical ways to help reduce the burdens placed
upon the private sector and to provide more detailed information
of methodology to help the private sector be more effective in
their compliance.
2. BACKGROUND
2.1 International action to tackle money
laundering began with the UN treaties on trafficking of illicit
substances in 1988 and confiscating the proceeds of crime in 1990.
2.2 Following the G7 summit in Paris in 1989,
FATF was formed to develop international policies to combat money
laundering. FATF published the 40 Recommendations on Money Laundering
in 1990 (the FATF recommendations).
2.3 The European Commission incorporated
the FATF recommendations into its First Money Laundering Directive
in 1991. That Directive was implemented into UK law via the Criminal
Justice Act 1993 and the Money Laundering Regulations 1993. The
Regulations applied to financial institutions and to those engaged
in investment business under the Financial Services Act 1986 eg
solicitors undertaking private client and corporate work.
2.4 In 2001, the European Commission responded
to amendments to the FATF recommendations, by passing the Second
Money Laundering Directive (the Second Directive). The Second
Directive extended anti-money laundering obligations to a number
of "service" professionals, such as accountants, auditors,
tax advisors, estate agents and independent legal professionals.
The individuals and entities covered by these obligations are
referred to as "the regulated sector" throughout this
evidence. The Second Directive was incorporated into UK law via
the Proceeds of Crime Act 2002 and the Money Laundering Regulations
2003.
2.5 In 2005, the European Commission decided
to adopt a Third Money Laundering Directive (the Third Directive).
Key changes within the Third Directive were the extension of client
due diligence checks to beneficial owners, the recognition of
the need for checks to be applied on a risk-based approach, and
the requirement for enhanced client due diligence to be undertake
in certain circumstances.
2.6 The Third Directive was implemented
in the UK via the Money Laundering Regulations 2007, and further
amendments to the Proceeds of Crime Act 2002. Implementation was
completed on 15 December 2007.
2.7 The Society has had many years experience
of the UK's legislation and the Money Laundering Regulations and
has been actively involved in lobbying on the Directives and the
Regulations, both in Europe and in the UK. The majority of the
Society's members undertake work which is within the regulated
sector and are therefore familiar with the primary legislation
as well as having to comply with the regulations.
RESPONSE TO
QUESTIONS
3. COOPERATION
WITH AND
BETWEEN FINANCIAL
INTELLIGENCE UNITS
(FIUS)
3.1 How effective is cooperation among FIUs,
and between FIUs and other authorities? What are the practical
results of this cooperation?
3.1.1 The Society's representative arm is
not generally involved in making suspicious activity reports (SARs)
to the Serious Organised Crime Agency (SOCA), the UK's FIU. As
such, the Society does not have direct experience of the effectiveness
of cooperation between FIUs.
3.1.2 However, a number of the Society's members
have been required to submit SARs in relation to suspected cross-jurisdictional
money laundering activities. They advise us that SOCA generally
takes the lead in sharing the SARs with other FIUs through the
EGMONT Group (an international group of FIUs) and keeps the Society's
members informed of the progress of the SAR and the granting of
consent in different jurisdictions. Solicitors advise the Society
that on this practical level, there appears to be a good level
of cooperation between FIUs at an international level.
3.2 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?
Private sector's involvement
3.2.1 Through the submission of SARs, in
accordance with the requirements under the Proceeds of Crime Act
2002, the private sector provides the FIUs with raw intelligence
on money laundering and other crimes. Where those SARs contain
information on cross-jurisdictional criminal activity, they may
form the basis for intelligence reports to be disseminated by
SOCA to other FIUs.
International standards on feedback
3.2.2 The provision of feedback to the private
sector from FIUs is required by a number of international standards,
issued both by FATF and the European Commission.
3.2.3 FATF recommendation 25 provides: The
competent authorities should establish guidelines, and provide
feedback which will assist financial institutions and designated
non-financial businesses and professions in applying national
measures to combat money laundering and terrorist financing, and
in particular, in detecting and reporting suspicious transactions.
3.2.4 FATF recommendation 32 provides: Countries
should ensure that their competent authorities can review the
effectiveness of their systems to combat money laundering and
terrorist financing systems by maintaining comprehensive statistics
on matters relevant to the effectiveness and efficiency of such
systems. This should include statistics on the STRs (suspicious
transaction reports) received and disseminated; on money laundering
and terrorist financing investigations; prosecutions and convictions,
on property frozen, seized and confiscated; and on mutual legal
assistance or other international requests for cooperation.
3.2.5 The Third Directive contains the following
articles:
(i) Member States shall ensure that they
are able to review the effectiveness of their systems to combat
money laundering or terrorist financing by maintaining comprehensive
statistics on matters relevant to the effectiveness of such systems.
(ii) Such statistics shall as a minimum
cover the number of suspicious transaction reports made to the
FIU, the follow-up given to these reports and indicate on an annual
basis the number of persons prosecuted, the number of persons
convicted for money laundering or terrorist financing offences
and how much property has been frozen, seized or confiscated.
(iii) Member States shall ensure that
a consolidated review of these statistical reports is published.
Article 35 (sub parts 2 and 3)
(ii) Member States shall ensure that
the institutions and persons covered by this Directive have access
to up-to-date information on the practices of money launderers
and terrorist financiers and on indications leading to the recognition
of suspicious transactions.
(iii) Member States shall ensure that,
wherever practicable, timely feedback on the effectiveness of
and follow-up to reports of suspected money laundering or terrorist
financing is provided.
Feedback from FATF
3.2.6 FATF provides a number of detailed
typology reports on their website each year. In 2008 these reports
began to focus in greater detail on terrorist financing methodologies
and to cover how these methodologies apply in non-financial sectors
also covered by the FATF Recommendations. These reports are of
interest in identifying global money laundering and terrorist
financing trends and methodologies, but can be of less relevance
for smaller firms wanting to understand the money laundering risks
they face in their local communities.
3.2.7 While mutual evaluations are undertaken
in relation to different FATF jurisdictions each year, there is
no consolidated report produced by FATF which outlines the size
of the criminal economy in each jurisdiction and how effective
the anti-money laundering regimes have been in disrupting and
preventing the criminal activity and the laundering of the proceeds
of that criminal activity. At present there is no agreed methodology
for making such assessments, and academic research questions the
capacity of agencies to undertake such assessments on the basis
of existing information.
Feedback from the European Commission
3.2.8 The European Commission does not provide
any information on methodologies or an annual report on the effectiveness
of the money laundering regimes within each of its jurisdictions.
Feedback within the UK
3.2.9 SOCA issues an annual threat assessment
which outlines the estimated size of the criminal economy and
provides a general overview of the criminal activities prevalent
across the UK, as well as an indication of where certain criminal
activities are concentrated.
3.2.10 SOCA has recently started producing a
range of "alert products" which highlight detailed methodologies
being utilised within the UK to launder funds. Some information
is also provided as to where in the UK these particular methodologies
are being employed. Currently these alert products are provided
to law enforcement bodies and anti-money laundering regulators
and supervisors. Due to the nature of the protective marking and
confidentiality disclaimers on these products, permission needs
to be obtained from SOCA on a case by case basis when disseminating
this information publicly to one's members.
3.2.11 In relation to individual SARs, the
private sector will only receive feedback on the usefulness of
their SAR and what action law enforcement is taking if they have
sought consent, or if law enforcement requires further information
from the reporter during an investigation. However, the level
of feedback will be very limited or non-existent in most cases.
Many of the Society's members still report a perception that their
SARs are simply going into a black hole and they are not sure
that they are actually making any difference in the fight against
crime generally or money laundering more specifically.
3.2.12 SOCA is now producing an annual SARs
report. This provides an overview of:
— the number of SARs received;
— who is making those SARs; and
— where they are able to obtain information
from other law enforcement agencies: information on the amount
of money seized or recovered, arrests made, and convictions obtained.
3.2.13 This report goes some way to helping
demonstrate to those covered by the UK's anti-money laundering
regime that their SARs are actually being used. However, the report
does not make clear how many of the SARs made by the non-financial
sector provide information which adds value to that provided by
the financial sector. Nor does the report provide a comprehensive
review of the whole UK criminal asset recovery regime. Responsibility
for asset recovery sits across 43 police forces; a number of government
departments, including HM Revenue and Customs and the Department
of Work and Pensions; as well as the CPS. The information held
by all of these separate agencies on asset recovery is not collated
into a single report.
3.2.14 The Society welcomes the efforts
by SOCA to provide greater levels of feedback to the private sector
and greater transparency in its processes. The Society also welcomes
the consistent support from FATF to the regulated sector through
the public dissemination of emerging methodologies.
3.2.15 The Society would encourage the UK
government to look at how they can provide a more comprehensive
review of the effectiveness of the anti-money laundering and asset
recovery regimes within the UK on a regular basis. The Society
would be interested in seeing both the European Commission and
FATF produce a regular review on the effectiveness of the activities
being undertaken across their member jurisdictions to prevent
and disrupt money laundering. The Society appreciates that at
this time, there is no internationally agreed methodology for
collecting and assessing this information. The creation of such
a methodology should be the first step in this process.
3.2.16 The Society would also be interested
in more information being provided about methodologies which will
assist those regulated persons in the non-financial sector to
identify warning signs of money laundering within their sector
and particularly to help identify suspected terrorist financing.
3.3 What is the extent of the feedback and
input on terrorist financing issues from intelligence and security
services?
3.3.1 The Society appreciates that the provision
of information about terrorist methodologies can be particularly
sensitive and has the potential to jeopardise existing investigations
or provide inspiration for new terrorists cells in their planning.
However, there is a legal obligation on solicitors to be alert
to warning signs of terrorist financing and to report cases of
known or suspected terrorist financing. Failure to discharge those
legal obligations effectively may lead to a jail term.
3.3.2 For this reason the Society is concerned
about the lack of information, particularly for those in the non-financial
sector, in relation to warning signs of terrorist financing. The
Society appreciate the work being done by FATF to incorporate
more terrorist financing methodologies within their typology reports,
and encourages both the UK Government and the European Commission
to look at ways to develop greater information on terrorist financing
methodologies for those outside of the financial sector.
3.3.3 The Society would be happy to work
with governments and law enforcement agencies on ways to disseminate
this information to its members for the purpose of terrorist financing
prevention, without it being disseminated more widely to the public.
3.4 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?
3.4.1 The Society has no comment to make
on this question.
4. EU INTERNAL
ARCHITECTURE
4.1 To what extent is the EU internal architecture
adequate to counter current and future challenges?
4.1.1 The European Union's internal architecture
in this field is a complex structure of inter-governmental cooperation
under the third pillar in relation to policy and judicial cooperation
mechanisms and first pillar Community law. Because the anti-money
laundering obligations originate from FATF, an international body,
there is no obligation on the Commission to undertake any impact
assessment to consider whether the obligations imposed are proportionate
to the perceived ill within Europe or that they are fit for purpose.
4.1.2 The competence relating to anti-money laundering
matters is split between the Directorate General for Internal
Market and the Directorate General for Freedom, Security and Justice.
4.1.3 This results in a myriad of decision-making
procedures, including:
— implementation measures adopted under
the comitology procedure; and
— adoption by parliament in the form
of a directive.
4.1.4 Implementation into national law is
left to Member States, who may face internal pressures during
implementation processes that are different to those taken into
account during negotiations for the passing of the Directive through
Commission processes. This may mean that Member States significantly
delay implementation, only partially implement or implement on
a basis that is different to its represented intentions during
the negotiations in relation to a Directive.
4.1.5 While the Commission has the power
to commence infringement proceedings against those Member States
which fail to implement a Directive, this procedure is costly
and time consuming. The Commission cannot act to remove either
gold-plating or under-implementation in national law which acts
as a competition barrier.
4.1.6 The Society has found that the current
approach has not provided the best model for coherence and clarity.
The Society appreciates that in the area of money laundering there
is a delicate balancing act in developing legislation that will
give sufficient powers to law enforcement, but not overburden
private sector participants, all within the confines of the FATF
recommendations.
4.1.7 During the drafting of the Third Directive,
the Society proposed a number of amendments which were tabled
by a Member of the European Parliament. These amendments were
proposed on the basis of the Society's detailed understanding
of how various legal entities are formed and conduct their business,
and how different transactions proceed to completion. The Society
recommended amendments which were designed to reduce unnecessary
burdens on the regulated sector while ensuring that the right
information about ownership and transactions were obtained at
the time where it was most likely to uncover money laundering.
The Society also made a number of recommendations which were designed
to ensure a more level playing field across the European Union.
4.1.8 During the committee stages many of
the Society's proposed amendments were adopted and formed part
of the draft plenary session report. However most of these amendments
were withdrawn seemingly as part of the wide political negotiations
with the Council of Ministers and the rush to secure agreement
on the text. Many of the issues on which the Society sought amendments
are the same issues which are still causing the solicitors profession
much difficulty and great expense.
4.1.9 In terms of national implementation,
many of the other Member States have not extended their anti-money
laundering regime to legal professionals and seven Member States
have failed to implement the Third Directive a year after the
deadline for implementation.
4.1.10 The UK, on the other hand, has strictly
implemented the directive. The Society found the implementation
of the concept of beneficial owners in relation to trusts particularly
challenging. During negotiations in Europe, the Society were advised
that steps would be taken during implementation into national
law to make sure the definition actually worked for common law
jurisdictions. Unfortunately when it came to drafting the regulations,
HM Treasury advised that they were unable to make amendments because
they were bound by the wording of the Third Directive.
4.1.11 The Society did not accept this as
the correct position on UK implementation and received support
from the Commission for its view. This meant that the Society
had to undertake extensive lobbying work and obtain legal opinion
which demonstrated that the proposed drafting was so lacking in
meaning in English law that it was unconstitutional and unlawful.
Compromise drafting was eventually agreed upon, although the application
of the civil concept of beneficial ownership to common law trust
is still an area which causes difficulty to many solicitors and
others within the regulated sector. The repeated need to re-lobby
on particular issues uses up valuable resources of professional
and supervisory bodies, limiting the time available to be devoted
to preparing guidance and advice for their members to help them
comply with their obligations.
4.2 What are the respective roles of Europol
and Eurojust in countering money laundering and terrorist financing?
4.2.1 Europol is the organisation that aims
to improve the effectiveness and co-operation of competent authorities
in the Member States in preventing and combating terrorism, unlawful
drug trafficking and other serious forms of international organised
crime. Under this remit, they have competence to deal with anti-money
laundering and examine activity in relation to terrorist financing.
However, the Society understands that Europol has little direct
impact in the UK and that investigations will instead be led by
UK agencies, such as SOCA.
4.2.2 Eurojust is a permanent network of judges
and prosecutors, with a remit to enhance the effectiveness of
the competent authorities within Member States when they are dealing
with the investigation and prosecution of serious cross-border
and organised crime. In the Council Decision establishing Eurojust,
the competence to act in relation to the laundering of the proceeds
of crime is clearly set out. The Society understands that co-ordination
meetings between national authorities have taken place in relation
to money laundering offences, but that the cases considered at
these meetings have not had terrorist financing as their core
issue. Eurojust has a coordinating function rather than a prosecutorial
or investigative role as such. The Treaty of Lisbon would provide
Eurojust with a mandate to initiate criminal investigations which
it does not have under the current legal basis.
5. INTERNATIONAL
COOPERATION
5.1 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)?
5.1.1 Full details of the mutual evaluations
can be found on the FATF website. A short summary of the key international
cooperation indicators for the mutual evaluations published in
2007 and 2008 is attached at Annex A of this paper [not printed].
5.2 To what extent has the formal framework
for criminal justice cooperation in this area been effective?
5.2.1 The mutual evaluation reports appear to
suggest that criminal justice cooperation in the area of anti-money
laundering and counter terrorist financing works well at times
but could be improved.
5.3 To what extent are these systems used
to enforce compliance with national tax obligations?
5.3.1 While the Society is aware that information
on suspected breaches of taxation obligations, both nationally
and internationally, forms the basis for SARs made the in UK,
the Society is not aware of the extent to which this information
is being shared with other FIUs.
6. EU-UN COOPERATION
6.1 What is the extent of EU-UN cooperation
on financing of terrorism? What are the longer-term implications
of the Kadi judgment?
Background to Kadi's case
6.1.1 The United Nations Sanctions Committee
designated Mr Kadi and the Al Barakaat International Foundation
as associated with Usama bin Laden, Al-Qaeda or the Taleban. In
accordance with resolutions of the Security Council, UN Member
States must freeze the funds and other financial resources of
such persons or entities. To give effect to the resolutions, the
Council amended Regulation 881/2002, ordering the freezing of
funds and economic resources of the persons and entities listed,
in order to include the claimants. The Court of First Instance
(CFI) rejected Mr Kadi's and Al Barakaat's action for annulment
of the Regulation. It ruled that in principle the Community courts
have no jurisdiction, except concerning jus cogens, to
review the validity of the Regulation as Member States are bound
to comply with Security Council resolutions according to the Charter
of the United Nations, an international treaty which prevails
over Community law.
Judgment
6.1.2 While the ECJ confirmed that the Council
was competent to adopt the Regulation, it set aside the CFI judgment.
It found that Community courts must ensure the review of the lawfulness
of all Community acts in the light of the fundamental rights which
form an integral part of the general principles of Community law.
This includes the review of Community measures which are designed
to give effect to resolutions adopted by the Security Council.
It annulled the Regulation in so far as it froze Mr Kadi's and
Al Barakaat's funds as their rights of defence, including the
right to be heard, and the right to an effective legal remedy
had not been respected. Indeed, the Regulation had no procedure
for communicating the evidence justifying the inclusion of the
names of the persons concerned in the list. Moreover, the lack
of guarantee, enabling the case to be put in the circumstances,
constituted an unjustified restriction on the right to property.
The Court maintained the effects of the Regulation for a period
of three months in order to allow the Council to remedy the infringements.
Implications from the judgement
6.1.3 The Society appreciates and accepts
that there is a public interest in the protection of society as
a whole from terrorism and terrorist financing, and accept that
at times law enforcement and international bodies will have to
act quickly on preventative measures. However the Society firmly
believe that due regard must be had for the individual's human
rights at all times. These rights must particularly be respected
once the initial threat of the financing has been curtailed through
the imposition of sanctions and freezing orders.
6.1.4 In terms of the relationship with the UN/EU
for future counter terrorist financing cooperation, the Society
believes that this judgement will promote a greater transparency
and accountability in the relationship. This will allow the European
Union, through its legislative body to act as a responsible check
and balance on the UN's use of what is an extremely draconian
power.
6.1.5 The Society hopes that the Kadi judgement
will produce a greater awareness within all international and
legislative bodies of the need to balance carefully the public
interest with the fundamental human rights of individuals when
exercising powers.
7. MONITORING
IMPLEMENTATION
7.1 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?
7.1.1 The Directorate General for Internal
Market publishes a log of the transposition measures for the Financial
Services Action Plan Directives. As of 8 January 2008 this includes
the Third Directive.[1]
This table identifies where Member States have completed that
notification process on the implementation of the Third Directive—or
not.
7.1.2 At present there are seven Member States
who have not communicated this information and infringement proceedings
have been commenced.
7.1.3 Where a Member State notifies the Commission
of their implementation measures the file is closed. To date no
examination of the substance of the provisions contained in the
Member State's legislation has been undertaken to determine infringement
of specific articles. As such there is extensive variation in
the level of implementation between Member States.
7.1.4 While the infringement procedure may
be helpful in the long term as regards effective compliance with
the EU Directive this is a lengthy and time consuming process.
7.1.5 As regards third pillar measures,
the Council instigates a system of peer review. The European Commission
publishes implementation reports. While these have the persuasive
"name and shame" capability, there are no infringement
powers under the third pillar.
7.1.6 The FATF mutual evaluations have a
similar persuasive "name and shame" capability. However
the fact that these reviews are conducted as a peer review and
adoption of the final report is subject to a vote by the FATF
membership. The Society is concerned that there may be pressure
to soften criticism of fellow jurisdictions for political reasons
rather than a strict application of the evaluation methodology.
This may in turn reduce the effect of such mutual evaluation reports
in shaping governmental action by the individual Member States.
7.1.7 FATF also has the power to list a
jurisdiction as being non-compliant. The review of 47 jurisdictions
commenced in 1998, with 23 jurisdictions listed as non-compliant
in 2000 and 2001. FATF can not prohibit individuals or entities
undertaking business with other individuals or entities within
the non-compliant jurisdictions. However, it can issue warnings
about those jurisdictions and recommend that Member States imposed
high levels of due diligence for transactions and business relationships
with individuals and entities from those jurisdictions. In 2006
the last two jurisdictions were removed from the non-compliant
list. It should be noted that removal from the FATF non-compliant
list does not mean that a jurisdiction has an anti-money laundering
or counter terrorist financing regime which is fully compliant
with the FATF recommendations or equivalent to the Third Directive.
7.2 What are the implications of those results
for cooperation within the EU, and more broadly?
7.2.1 Where there are differing levels of
implementation across different jurisdictions there is the risk
of businesses within more regulated jurisdictions suffering a
competitive disadvantage to those in less regulated jurisdictions.
7.2.2 The Society is aware that in certain jurisdictions
where legal professionals are not covered by the Third Directive,
their complete exemption from reporting suspicious activities
is being used as a selling point. Even where direct competition
is not affected, the costs of the extra burden of compliance with
stringent anti-money laundering obligations decreases the ability
of those firms to price their services competitively.
7.2.3 There is a risk that regulated businesses
within strictly compliant jurisdictions will be subsidising law
enforcement and crime reduction in other jurisdictions, where
their greater compliance and higher levels of quality reporting
result in relevant intelligence being disseminated abroad. This
is of greater significance if the other jurisdictions are failing
to provide timely and relevant intelligence to the FIUs in the
strictly compliant jurisdictions.
7.3 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?
7.3.1 The mutual evaluations conducted by
FATF do not consider the costs actually borne by the private sector
in meeting their compliance obligations. The mutual evaluations
also do not quantify the scale of the criminal economy in the
relevant jurisdiction or the actual overall results in disturbing
or preventing criminal activity achieved through the anti-money
laundering regime in that jurisdiction.
7.3.2 The European Commission did not undertake
an impact assessment of the FATF obligations before passing any
of the European Directives on anti-money laundering. The Second
Directive contained a requirement to conduct a review of the extension
of anti-money laundering obligations to legal professionals. This
review did not occur until after the adoption of the Third Directive.
Due to the number of Member States which had either not extended
their anti-money laundering regime to cover legal professionals
at all or who had significantly delayed in doing so, the report
was unable to draw any significant conclusions as to the appropriateness
of their inclusion.
7.3.3 The Society is of the view that it
would be appropriate for both FATF and the European Commission
to consider in detail whether the overall benefits from anti-money
laundering regimes justify the burden placed on the private sector.
As stated earlier in this evidence, a starting point for such
a review would be the difficult task of formulating an agreed
methodology by which to collect information and assess the extent
of the criminal economy and the effectiveness of the anti-money
laundering regime.
7.3.4 In the UK the Society understands
that there are approximately 150,000 private sector entities regulated
for anti-money laundering. In 2007-08 they made 210,000 SARs.
In that period, the UK government actually recovered approximately
£135.7 million in criminal property. Even if all of the criminal
property recovered in the UK was as a result of the anti-money
laundering regime and the receipt of SARs, which it is not, the
highest average return per SAR would be approximately £646.
While government may point to the prevention value of the anti-money
laundering regime, it is very difficult to calculate the monetary
value of crime that is disrupted and prevented. However, it is
interesting to note that there has been no change to estimated
economic and social cost of serious organised crime in the UK
of around £20 billion, according to the UK threat assessments
in both 2006-07 and 2008-09.
7.3.5 Estimating the cost of compliance
with anti-money laundering obligations for the regulated sector
is also not an easy task. Firms may be able to quantify:
— the number of staff employed to undertake
client due diligence checks and make SARs;
— the cost of subscriptions for e-verification
services;
— the cost of new case management systems
to record due diligence and ongoing monitoring; and
— fees incurred for training programmes
or the cost of providing internal training.
7.3.6 Many firms will not however be able
to quantify the amount of time spent by individual staff members
across the firm:
— assessing the risks of clients;
— chasing up due diligence material;
— monitoring clients and transactions
for warning signs; and
— discussing suspicions and internal
reports with MLROs and deciding whether or not a SAR is required
to be made.
7.3.7 These hidden costs are felt more keenly
by those parts of the regulated sector where transactions are
not mere numbers and ongoing monitoring is not susceptible to
automated processes. What is clear is that the private sector
is investing more in the UK's anti-money laundering regime than
the UK government is recovering because of it.
7.3.8 The Society conducted a survey in
late 2008 to assess how solicitors were implementing the Money
Laundering Regulations 2007. While the responses in relation to
costs of compliance were very small in number, by comparison to
the profession as a whole, they do provide illustrative examples
of what some firms are spending on compliance. The results suggest
that even small firms are spending thousands of pounds a year
in compliance, while large international firms are spending millions.
7.3.9 The results of the survey are at Annex
B of this response (printed only in part).
7.4 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?
7.4.1 The Society is aware that the European
Commission is set to review certain aspects of the implementation
of the Third Directive during 2009 and 2010. The Society is already
in discussion with the Commission about the issues which the review
may legitimately cover.
7.4.2 From December 2007, FATF engaged in more
open dialogue with the non-financial parts of the private sector
which are covered by the FATF Recommendations. The Society was
pleased to be involved, in conjunction with the CCBE and the IBA,
in these productive discussions with FATF. These discussions lead
to the development of useful guidance on applying the risk based
approach to the legal sector.
7.4.3 The Society welcomes increased dialogue
with legislators and policy setters in the area of anti-money
laundering and counter terrorist financing. The Society is particularly
keen to enhance understanding of legislators as to how non-financial
sections of the regulated sector operate, so that greater proportionality
can be built into anti-money laundering obligations.
8. COMPLIANCE
AND EQUIVALENCE
8.1 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?
8.1.1 As outlined in section 7.1 above,
FATF undertakes mutual evaluations and regular reviews of their
non-compliant list. Where a jurisdiction is listed as non-compliant,
FATF can recommend that Member States impose higher due diligence
and require extra precautions be taken when dealing with individuals
and entities from those third jurisdictions. FATF cannot take
any direct action against the non-compliant jurisdictions.
8.1.2 The Commission's infringement powers do
not extend to non-EU jurisdictions.
8.1.3 Individuals and firms in strictly regulated
Member States which undertake business with those from under-regulated
third jurisdictions face a higher risk of being involved in money
laundering. This risk may act as a deterrent for some in conducting
business within those third jurisdictions, but it is not clear
that this restriction on business is sufficient to bring about
changes in the anti-money laundering regimes of third jurisdictions.
Instead, the higher the sanctions for those in the strictly regulated
Member States, the greater the risk to undertake business in these
third jurisdictions and the greater restriction is placed on their
competitiveness and ability to operate freely across jurisdictions.
8.2 Does the 2005 Directive adequately encourage
non-EU States which have introduced equivalent systems to counter
money laundering and the financing of terrorism?
8.2.1 The Third Directive allows for client
due diligence burdens to be reduced in certain cases where a regulated
individual or entity is undertaking business with an individual
or entity in a jurisdiction with equivalent anti-money laundering
obligations. The Third Directive also requires that enhanced due
diligence is undertaken in circumstances where there is a higher
risk of money laundering; although what amounts to enhanced due
diligence in such cases is undefined.
8.2.2 There are two key areas where equivalence
can reduce burdens, these are through reliance and simplified
due diligence.
8.2.3 In the Society's recent survey (at
Annex B), only 40% of respondents had relied on regulated persons
outside the UK and this was generally only other legal professionals.
64% of respondents advised that they chose not to use the reliance
provisions because they remained criminally liable for any failures
by the person relied upon, while 48% were not happy with the due
diligence undertaken by others, even where the standards were
supposed to be equivalent.
8.2.4 In relation to simplified due diligence,
71% found these provisions useful when they could use them; but
for the majority of respondents, these provisions applied to less
than 50% of their clients. Also, 43% found it difficult to obtain
information which would allow them to decide that simplified due
diligence actually could be applied.
8.2.5 Respondents reported a very small
amount of work being lost due to enhanced due diligence, although
some had received negative comments from clients about the extra
requirements.
8.2.6 As such the barriers to non-equivalent
jurisdictions are not insurmountable and the reductions in burdens
for those which are equivalent are minimal.
8.2.7 The greatest incentive for other non-EU
jurisdictions to develop equivalent systems to counter money laundering
and terrorist financing would be clear evidence that the benefits
to their economy and society as a whole outweigh the burdens imposed
on the private sector. Unfortunately, to date this analysis has
not been undertaken, nor this evidence provided.
8.3 How does the system for determining equivalence
operate in practice?
8.3.1 There is currently no transparent
system which provides an individual or entity in the regulated
sector in the UK with any certainty that they are dealing with
an equivalent jurisdiction or regulated market.
8.3.2 Regulated individuals or entities are required
to make the assessment of equivalence themselves. Under the Money
Laundering Regulations 2007 there is no single definition of an
equivalent non-EU jurisdiction.
8.3.3 For reliance provisions to apply in
relation to persons within a non-EU jurisdiction, the person must
be:
— a credit or financial institution
(or equivalent institution), auditor, insolvency practitioner,
external accountant, tax adviser or independent legal professional;
— subject to mandatory professional
registration recognised by law;
— subject to requirements equivalent
to those laid down in the money laundering directive; and
— supervised for compliance with those
requirements in a manner equivalent to section 2 of Chapter V
of the money laundering directive.
8.3.4 Simplified due diligence will apply
where the client is a company whose securities are listed on a
regulated market subject to specified disclosure obligations.
These are disclosure obligations which are consistent with:
— Article 6(1) to (4) of Directive
2003/6/EC of the European Parliament and the Council of 28 January
2003 on insider dealing and market manipulation;
— Articles 3, 5, 7, 8 10, 14 and 16
of Directive 2003/71/EC of the European Parliament and of the
Council of 4 November 2003 on the prospectuses to be published
when securities are offered to the public or admitted to trading;
— Articles 4 to 6, 14, 16 to 19 and
30 of the Directive 2004/109/EC of the European Parliament and
of the Council of 15 December 2004 relating to the harmonisation
of transparency requirements in relation to information about
insurers whose securities are admitted to trading on a regulated
market; or
— Community legislation made under
the provisions mentioned above.
8.3.5 Neither the Third Directive nor the
Money Laundering Regulations 2007 specify whether it is sufficient
that the other jurisdiction simply has legislation in place or
whether practical compliance and enforcement is actually required.
It is also not clear whether it is sufficient that the majority
of the requirements set out are met or if all must be met.
8.3.6 Simply obtaining information, in one's
own language, on the legislative frameworks existing in other
countries, let alone information on their practical application
is very difficult, time consuming and costly for those within
the private sector.
8.3.7 HM Treasury has agreed a list of countries
outside of the EU which are considered to have equivalent money
laundering legislation. However this list is voluntary, non-binding
and does not have the force of law.
8.3.8 The countries included on that list
are:
8.3.9 However, in the case of Argentina,
Australia, Brazil, Canada, Mexico, and the United States, the
anti-money laundering legislation does not apply to legal professionals,
which is a requirement under the Third Directive. Other countries
on the list have been reviewed by FATF which has deemed aspects
of their compliance only partial or in some cases there are aspects
which are non-compliant. As such, it is not clear that reliance
on the list issued by HM Treasury would satisfy the requirements
set out in the Money Laundering Regulations 2007 for assessing
equivalence.
8.3.10 The Society and its members appreciate
the flexibility that the current regulations provide in allowing
firms to take a risk based approach in assessing equivalence in
emerging markets. However the Society is of the view there needs
to be greater transparency in the law, not just guidance or government
statements, to make it easier and more cost effective for regulated
individuals and entities to actually assess equivalence, particularly
in well established jurisdictions and markets.
1 http://ec.europa.eu/internal_market/finances/docs/actionplan/index/transposition_en.pdf Back
| 
