Examination of Witnesses (Questions 1
- 19)
WEDNESDAY 4 MARCH 2009
Mr Desmond Hudson, Ms Felicity Banks, Ms Sally Scutt
and Mr Richard Cook
Q1 Chairman:
First of all can I say to all four of our witnesses thank you
very much indeed for coming. Sally Scutt is hotfoot from Washington,
she arrived this morning, and we particularly appreciate your
being here. We appreciate very much the helpful information you
have already sent us. This is the first witness session we have
had—which will run on into the summer. Let me begin. The
Government say that they seek to maintain an ongoing dialogue
with the private sector on the nature and scope of the anti-money
laundering and terrorist finance regime. Could each of you from
the three organisations summarise the manner in which your organisations
are involved in such consultation and the extent to which you
believe they have proved to be valuable. Maybe I can start with
the accountants, taking it from left to right.
Ms Banks: I am Felicity Banks and I have represented
the Institute of Chartered Accountants in England and Wales in
this area for about 15 years. I have sat on the Treasury's Money
Laundering Advisory Committee since it was first set up where
I represent the main accountancy bodies and I also chair the Anti-Money
Laundering Supervisors Forum Accountants Affinity Group. These
are all fora through which we communicate with Government, with
other regulatory bodies and with law enforcement. I think they
are all working really quite well. At the time that the Proceeds
of Crime Act was passed in 2002 we had serious concerns with
the regime. We thought it was far too rigorous and would undermine
the relationship of professional accountants with their clients
but since then several reforms have been made which have improved
the regime, made it more cost-effective and to some extent less
burdensome. We now feel that it is a cost-effective system that
requires further improvement but we are content that our comments
are taken into account.
Q2 Chairman:
What sort of improvements?
Ms Banks: The change in the definition of the
reporting regime so, for example, our members no longer have to
report suspicions where the identity of the suspect and the whereabouts
of the proceeds are not known. Before that our members felt we
were obliged to report shoplifting, for example where our members
advised small retail shops. Such reports took as much time as
an anti-money laundering report of more substance to make but
were virtually useless in the hands of law enforcement.
Q3 Chairman:
Can we turn to the Law Society?
Mr Hudson: Yes, My Lord Chairman, my name is
Desmond Hudson, I am Chief Executive of the Law Society. I would
largely echo the comments of my colleague Ms Banks in relation
to the first part of her answer. For the Law Society we find that
our engagement with things like the Anti-Money Laundering Supervisors
Forum, the Regulators Forum, the other committees is very good;
we find that SOCA has made a noticeable difference in terms of
the responsiveness to the comments and submissions from the wide
professions and we also of course have contact with the Government,
particularly through the Treasury, as well as through the European
Union which clearly has a significant role here. However, we would
depart somewhat from the latter part of the ICAEW's comments in
the sense that we continue to have concerns as to the effectiveness
of the scheme, the regulatory burden that it imposes on UK Plc
and certainly on the practice of law in the UK and that there
are a number of important questions that we believe need to be
addressed.
Q4 Chairman:
The bankers, which one of you would like to answer?
Ms Scutt: I am Sally Scutt, I am Deputy Chief
Executive of the British Bankers' Association and also Managing
Director of the International Banking Federation which represents
the banks in the US, Canada, Europe, Japan, Australia, China,
India and South Africa. In the BBA, and less so internationally
with the others, we have worked closely over the years with the
authorities in terms of trying to ensure that we have a regime
that is effective and does its work in terms of barring criminals
from the financial services industry. We have worked closely always
with the Bank of England originally but now as an independent
group on the joint money laundering steering group, and I am currently
chair of the editorial panel, and we produce guidance notes for
the industry in order that they can achieve a suitable standard
in ensuring that they comply with all the obligations that are
put upon them. We also deal extensively with SOCA and have a role
on their SARs transformation project which is about improving
the effectiveness of their handling of the intelligence that they
get from the industry and we too, like Felicity, are represented
on the Money Laundering Advisory Committee. We have always held
the view that no one part is alone and the system can only work
if the industry, the authorities—and by that I would say
the Treasury and the Financial Services Authority—and law
enforcement have a balanced relationship in terms of obligation
and effort. Our criticism would be that law enforcement are the
ones who are rarely at the table for the policy debate but actually
their problem is that they are simply completely under-resourced
and that they do not have a target to tackle financial crime.
That means that the burden on the industry is therefore greater,
but that alone, the industry by taking its responsibilities, cannot
ensure that the system is thoroughly effective.
Chairman: Thank you. Lord Hodgson.
Q5 Lord Hodgson of Astley Abbots:
I wonder if we could go to the Law Society for a discussion about
feedback. Your evidence—extremely impressive evidence if
I may say so—is very helpful and you talk about the need
for improvement in the regime by the UK Financial Intelligence
Unit of case specific feedback on SARs. Certainly my discussion
with City firms indicates that there is very little of this and
therefore your members are operating slightly in a vacuum. What
practical and legal difficulties do you think there would be for
your members when the feedback is not provided—it is important
to get that on the record—and also what priority would you
afford to getting improvements in these areas?
Mr Hudson: I suppose the first part of the question
is that in direct terms the absence of that feedback does not
create an immediate problem for the practitioner; it is more the
sense of the potential imposition of a higher burden of obligation
or activity on behalf of the practitioner and the sense that they
are not able to direct that in the way that they perhaps could
if they were aware of what are the signs, what are the aspects,
what are the issues. In saying that I recognise that there is
clearly a very sensitive balance to be struck here between the
provision of particularly specific case feedback, which one would
not want to see in the wrong hands, so I understand that there
needs to be some degree of confidentiality, but there is, as I
say, a practical problem and what we would like to look at is
to see whether there are better ways of making that case-specific
feedback available. If I may say so I would specifically endorse
the points made on behalf of BBA that the role of law enforcement
is particularly important in those activities. As to what priorities
I would give that, we think that is important but you might gather
that we believe there are perhaps some wider-ranging issues that
the UK Government should be reconsidering in relation to our AML
regime.
Q6 Lord Hannay of Chiswick:
I wonder if I could pursue that a little bit further. All of you
have said that you are broadly satisfied with your dealings with
the authorities on this; and that there is a real dialogue. But
could you perhaps explain how that dialogue occurs. Do you sit
and wait for the Government to come to you and talk about these
matters or do you have a regular basis on which you can talk to
them? If you want to propose changes do you generate those yourself
or do you wait for them to come forward with them? It would be
good to get some feel for how this dialogue works; is it purely
a formalistic one or does it really leave scope for adjustment,
flexibility and so on?
Mr Hudson: That is a very interesting series
of questions. There is no regular dialogue so far as the Law Society
is concerned with Government. We are in a position to initiate
that dialogue and for the Law Society, for example, we have published
some objectives, possibly some lobbying objectives, that we have
set ourselves. For example, we believe it would be highly beneficial
if there were to be a thorough study undertaken of the cost-benefit
analysis because we have some concerns about the absence of clear
empirical evidence here. The relationship, the dialogue that exists
in terms of some of the taskforces we have spoken about, that
is much more effective and there is more regularity to it. SOCA,
for example, has introduced a whole series of improvements in
that and information and views are passing two-ways in a much
better way there and we are beginning to see practitioner-driven
improvements and changes. As I say, it is in the wider systemic
issue that I believe there is no regular dialogue, speaking of
the Law Society, with Government and there needs to be such. We
certainly feel ourselves free and the Government departments are
receptive, they will obviously give one an audience to listen
to proposals, and as I say we have set ourselves some public targets.
The most obvious perhaps, in terms of our discussion this morning,
is the importance we attach to providing this study of where the
cost and benefit lie because it is our view, as you will have
gathered from our evidence, that the strict application that we
have here in the UK carries some issues with the wider debate
and appreciation as to the appropriateness and the benefits that
arise from them.
Q7 Lord Marlesford:
It is in a sense a follow-up to what has been said, but the whole
burden of the evidence from all three of our witnesses is to do
with the burden and the cost and, as you put it, the cost benefit,
all very important points. To give us some feel for the scale
of the thing I found it very helpful that the bankers have told
us that they have approximately 145,000 suspicious activity reports
a year; could the other two groups give us some comparable figure
for the number of suspicious activity reports which their members
file a year?
Mr Hudson: On behalf of the Law Society I can
give you that information. In the last year solicitors in England
and Wales filed 6,460 SARs, quite markedly down from our previous
estimate that would have been about 10,000 or so. One of the factors
that I am sure is important, certainly speaking on behalf of solicitors,
is that the provision of a report is a very important step in
managing the potential criminal liability, the criminal sanctions,
that solicitors face.
Ms Banks: Accountants in practice submitted
something over 7,000 reports, I think of the order of about 7,300.
Of course, chartered accountants working in financial services
will have contributed to a lot more made by the regulated financial
services.
Q8 Chairman:
Would the bankers like to make a response to Lord Marlesford?
Ms Scutt: As we said in our figures last year
we made something like 145,000 reports. That number could be significantly
higher: one of the issues we have had with the system is the working
of the consent regime which puts a very particular burden on the
banks and, currently, the banks have to operate—we have
a sort of agreement with SOCA on how to proceed. If the banks
actually reported, as they were required to, according to the
law under the consent regime SOCA would be completely swamped
and that number would be very significantly higher and the whole
system would grind to a halt. We were deeply disappointed with
the review of the consent regime by the Home Office recently and
they have decided not to change it; however, that does not change
the situation with regard to the risk of sanction upon money laundering
reporting officers in banks being found to not perform properly,
so we are seeking a memorandum of understanding with SOCA and
with the Home Office in order that they should be adequately protected.
Ms Banks: We would agree with the banking industry
that it was extremely disappointing that the Home Office were
not able to complete their proposed reform on the consent regime;
however it is a very difficult area in that the necessities for
professional firms in this area are very different from the needs
of retail banks and so the problem was that it could not be changed
in a single way which would make it easy to be operated by retail
banks without making it more difficult to be operated by professional
firms, so the decision was taken to run it on in the informal
pragmatic way that necessarily worries the banks.
Q9 Lord Marlesford:
Could the bankers submit to us as a paper, please, a copy of the
way in which they wanted the consent regime changed, the submission
they made, and if indeed the other two bodies also made submissions
it would be very helpful if we could have a copy of those.
Mr Hudson: Certainly.
Ms Scutt: Yes, we can do that.
Chairman: That would be very helpful,
if you could all do that. Lord Mawson.
Lord Mawson: I have been very interested
in reading all these papers and getting a feel for all the macro
relationships but I am a simple soul really and I wonder how it
works for individual people like the lady who arrived in my office
this week with very large folders about a problems which show
that her family may have lost three houses through money laundering,
with linkages into Pakistan and Oman—a very complicated
picture really—but she is finding it impossible for anyone
out there to take seriously her probably, even when she goes to
the local police station. I am just wondering, firstly, how does
a person like that actually get into the system to share her problem
with someone who will take it seriously and drill into the detail
of the problem and, secondly, how many people like her are out
there, finding it impossible to engage with all this infrastructure
that is meant to be in place to deal with these realities?
Q10 Chairman:
Shall we have the Law Society's response to that?
Mr Hudson: My Lord Chairman, I would be very
happy to have a go at that. Clearly the facts are rather complicated
and one would need to know those, so my comments are perforce
generalised. It seems to me that there are probably two issues
that you are alluding to here: first of all that there could well
have been criminal activity, criminal activity if I may say so
beyond the predicate offence of, say, money laundering, and that
must be an issue that the police ought to be considering. I would
have thought that they have to be the first port of call in relation
to an allegation of criminal activity. It might also be the case
that the petitioner who spoke to you also has suffered some form
of loss in relation to the transfer of title to property through
identity impersonation, and you may be aware, my Lords, that this
is not an unknown situation so far as the land registration is
concerned, certainly in England and Wales. There one would have
thought that again they could perhaps get in touch with the Land
Registry if that is a factor, that that would be a place to start.
As to the questions of how many I have to say I find that very
difficult to answer. I am certainly aware that there is a problem,
for example, in terms of the potential for identity impersonation
leading to property being mortgaged or sold away underneath an
owner as it were, but the number of cases of that I think are
relatively small; in relation to the specific context of AML I
really just could not estimate but my guess would be that it is
relatively small scale. I would suspect that this is a very intractable
problem and, pursuing this through a retained and remunerated
accountant or solicitor I submit would be very expensive.
Q11 Lord Avebury:
We have moved a very long way from Lord Hodgson's original question
which was about the feedback rather than individual SARs and in
referring to this matter in 3.2.11 you outline the factors which
determine whether or not there is feedback; that is to say whether
the law enforcement requires further information from the reporter
and even in those cases you say the feedback in very limited.
What I would like to ask is whether you think this limitation
on individual feedback is satisfactory or whether you would want
to broaden the circumstances in which there is individual feedback
on particular SARs.
Mr Hudson: From the Law Society's perspective
we would see some benefit in providing more feedback on SARs,
I think it could be helpful. I understand, as I alluded to in
my earlier answer to the noble lord, that we need to balance that
issue for reasons of confidentiality but, in a sense, if I may
put it so without being disrespectful, this is something of a
palliative. Our concern is that there is a systemic issue here
and if I may, very briefly, I will give you an example. Let us
say I am a solicitor in London and I am dealing with the sale
of a hotel for £5 million and it turns out that the owners
of that hotel have failed to obtain an appropriate licence—let
us say they did not have their required waste disposal licence.
They might have saved themselves £30 or £40 in not paying
that waste disposal licence; that is probably a criminal offence
and therefore the entirety of the sale proceeds of that hotel
become tainted money and the full force of AML would bear on that
circumstance. When I allude, my Lord Chairman, to the importance
that we see in the progress, for example, that SOCA have made—particularly
compared to NCIS—we welcome that and we support that and
we applaud them for doing that, but there are more wide-ranging
issues that concern the Law Society, such as that example I quote
of a solicitor dealing with that problem, a £30 to £40
licence not obtained, therefore the entirety of the sale proceeds
under our strict application of AML are tainted. That would not
be the case if the lawyer dealing with that sale was based in
Amsterdam or Paris or Frankfurt. It is important, therefore, that
we do look at this issue of interchange of ideas as the system
is here, Parliament has put this law in place and we need to make
it work, but there are some wider issues that I would urge my
noble lords to be considering and cost benefit and that sort of
issue—the criminal application of sanctions and the applicability
to all criminal offences, even something as I suggested there—I
put to you is problematic.
Chairman: We have strayed an awful
long way from Lord Hodgson's question and I am watching the clock
because we are going to have to move on. Lord Dear, do you want
to follow up Lord Hodgson or do you want to move on to SOCA?
Q12 Lord Dear:
We will move on. Mr Hudson, thank you; I was going to ask something
which has largely been covered anyway and that was to do with,
on the one hand, this enormous volume of reports into an organisation
which, by and large, may or may not be able to deal with the volume—you
have covered that and are going to cover it in response to Lord
Marlesford who asked for a further paper from you. Could I just
focus on the question of the relationship between the Law Society
and SOCA (the Serious Organised Crime Agency); to what extent
is there co-operation and consultation? I recognise that you have
links, but what are they like on the more general feedback of
typologies of money laundering and terrorist financing as well,
and what steps if any do you think could be taken to increase
the effectiveness of that sort of guidance? You have brushed up
against that already so it is coming right into volume on the
one hand and accurate drilling down or response on the other.
Mr Hudson: Certainly from the Law Society's
perspective we believe that SOCA has made a number of very useful
improvements, that they are working seriously and effectively
and there is this issue of co-ordination and sharing of information
within sensible bounds. For example, we have seen them react very
positively and sensibly to issues in relation to the SARs regime
and in particular the consents regime. The performance we see
from SOCA, for example, despite the clear resourcing problems
that arise here, are much, much better than those that went before
them. Also, as I have said before—forgive me for repeating
this but it is important—we do recognise the need for a
sensible balancing of openness and sharing of awareness with the
need for confidentiality of some of those issues, so within the
constraints that we are currently working with in the system I
think we have seen sensible progress in the right direction. It
has been very helpful and we would be very supportive of SOCA's
intents in that regard.
Q13 Lord Dear:
Could I follow that up? I am very concerned about volume as against
the bottleneck effect that the volume would cause and it occurs
to me as we sit here that one way that you could help to sieve
out the wheat from the chaff is a signal on the SARs report that
this really does look as if it is something serious or, frankly,
this is the example you gave of the £5 million hotel and
the waste disposal licence—"Frankly, we are letting
you have this because we have to but we would not look any further".
Does that sort of approach go on unofficially, because it would
be a huge advantage to SOCA to have a professional indicating
the wheat from the chaff so to speak?
Mr Hudson: There are already limited value reports
so that point that you very sensibly suggest, can we have some
way of identifying the very big matter and the rather small matter,
there is already a structure for that to work and that is very
sensible.
Q14 Lord Dear:
Does that work?
Mr Hudson: It works within the constraints of
the system because we come back to the point that we have this
very strict application. My example was a little dramatic but
it is not fanciful because of the very strict application of the
way we would regard tainted money and, therefore, potential proceeds
of crime; it is all-enveloping and that is different in many respects
from the approach adopted by other European Union partners. My
colleague from the BBA also made the point about pragmatic steps
being taken, practical choices having been made, if you like,
on a common sense basis, simply to make the volume of transactions
work. It is not as acute for the legal profession as it is probably
for bankers by a long, long way, but our members are having to
take some of those pragmatic steps. Of course, for a lawyer and
for a law firm there is inherent risk there because if I volunteer
more information, trying to be helpful, what if my information
is incorrect; what liability do I bring on myself or my firm in
terms of trying to make the system work. If I may say so without
appearing to be obstructive it is for the enforcement authorities
and for the Government to design a system that is workable rather
than for the practitioners, with all the best will in the world,
to try and make the best of it.
Lord Dear: Could we ask for a similar
view from the other agencies because it would be very helpful?
Q15 Chairman:
If you wish to, but briefly if you could.
Ms Scutt: Of course we have a suspicion-based
regime so the moment a bank suspects that there is something wrong
with a transaction then they must submit reports. I would say
in the early days of the regime, with the deep concerns about
regulatory sanction from the FSA, there would have been many,
many defensive reports in terms of just making sure that they
were not going to miss something. Now we get feedback from SOCA,
that helps a little, but we have to consider that even in these
times the banking industry is passing through 550 transactions
a second; without very much feedback—there is some but it
is limited—it is very difficult to be able to prioritise,
without intelligence of any kind, finding the sorts of things
that are going through. The big step that we could take, particularly
in the realms of counter-terrorist financing and now proliferation
financing, is if we could find a way of communicating intelligence
straight back to those required to report I think we would end
up with a reporting regime that was much more accurate, that was
better informed, and more intelligence which would be of use to
SOCA and others would then be available.
Q16 Chairman:
I am anxious to move on; can we hear very quickly from the chartered
accountants?
Ms Banks: There is a box at the end of the SARs
reporting form called "The reasons for suspicion" which
enables reporters to identify what it is about the report that
makes it worth making. Also, for extremely urgent cases, I understand
from my members that you can ring up the duty desk at SOCA and
this helps both with obtaining consent in very urgent cases and
also drawing attention to live intelligence issues that need to
be actioned very quickly.
Chairman: I am going to move on,
I am very sorry, because we are getting very behind the clock.
Lord Richard.
Q17 Lord Richard:
Thank you, my Lord Chairman. I am quite interested in this concept
of third-state equivalence and as I understand it—and can
I just say my understanding is not yet very great—if you
can establish third-state equivalence that does two things: one,
it makes business transactions a bit easier and, secondly, it
removes some of the potential risk that there is from the person
in this country who is conducting the business. If one looks at
the Law Society's evidence—which I agree with Lord Hodgson
is indeed comprehensive and terribly useful—at paragraph
8.3.7 you say that the Treasury has agreed a list of countries
outside of the EU considered to have equivalent money laundering
legislation. You then say: "However, the list is voluntary,
non-binding and does not have the force of law." I can understand
the not have the force of law but what about the voluntary and
non-binding clause, what is the use of something that is just
voluntary?
Mr Hudson: I suppose that the argument behind
the voluntary is to encourage participation and involvement and
that might be seen as an initial step to, as it were, get the
thing launched, but certainly for the legal practitioners there
is a clear problem if it is voluntary and non-binding, it leaves
you in a grey area, so if I were advising you as your solicitor
would I say, "Look, we can take a risk on blah-blah-bah,
it looks okay" or do we say "Well, this is a very high-profile
transaction, public notoriety, we had better repeat all of the
due diligence activities that we need." It is in a sense,
therefore, this grey area that we have a problem with. You will
of course remember that there is this voluntariness on the part
of the government of the relevant country to take part and these
are difficult beasts to drag into line as it were.
Q18 Lord Richard:
Could I just follow this up with one or two questions. You have
a list of countries there which includes Argentina, Australia,
Brazil, Canada, Mexico and the United States; as I understand
it the anti-money laundering legislation does not apply to legal
professionals in any of those countries, so if you are a solicitor
in this country dealing with an attorney in America, the relationship
there would not be one which was covered by third-state equivalence,
is that right?
Mr Hudson: Yes.
Q19 Lord Richard:
Good heavens.
Mr Hudson: It is very limited in its efficacy,
it is very limited indeed.
|
