Examination of Witnesses (Questions 20
- 39)
WEDNESDAY 4 MARCH 2009
Mr Desmond Hudson, Ms Felicity Banks, Ms Sally Scutt
and Mr Richard Cook
Q20 Lord Richard:
Finally, what amendments to the regulations would you like to
see in order to cover it?
Mr Hudson: What we would ideally like to see—I
stress the word ideally—is that there would be effective
third-state equivalence that you could rely upon, but that is
very problematic because of the point you make: if there is a
different regime applying to a legal professional in the United
States of America just how much equivalence can we get even if
the government of the United States would want to agree? For example,
there are significant differences between the positions of bars
and law societies in continental Europe and here in the United
Kingdom about the obligation to make any reporting. If I was speaking
to colleagues at the French Bar or the Belgian Bar it would be
a breach of my obligation as an avocat to make any disclosure,
whereas in our country we take the view that solicitors for example
as officers of the court have a wider obligation, and we generally,
if I can put it this way, take the view that helping to deal with
the financing of terrorism is an important obligation on a solicitor
as an officer of the court, but that difference of approach makes
the whole thing with third-state equivalence very, very problematical
lawyer to lawyer and transaction to transaction.
Q21 Lord Faulkner of Worcester:
Staying with the same thing, Mr Hudson, you make the point in
your written evidence that there are common standards adopted
within the European Union and you say in 3.2.8 that "The
European Commission does not provide any information on methodology
or an annual report on the effectiveness of money laundering regimes".
Are you saying that because that does not exist you think the
problems are particularly severe in certain Member States?
Mr Hudson: No, the Law Society is not expressing
an opinion on whether there are particular problems in Member
State X or Member State Y; what rather we are saying is that because
of those problems the comparability of processing, if you like
the regulatory burden, differs across the EU, that certain activities
for a law firm based in London would be more problematic, more
expensive and carry a greater risk to the partners of that firm
than if that activity was being done in Amsterdam or Paris or
a different Member State.
Q22 Lord Faulkner of Worcester:
How would you improve that?
Mr Hudson: I think that we here in the UK need
to review the very strict application that we have brought in
with the use of criminal sanction and liability for a lawyer or
a chartered accountant to look at this all-enveloping definition
of tainted money and, you know, if it is a criminal offence then
it is money laundering. That is part of the problem.
Q23 Lord Faulkner of Worcester:
A further part of the problem is that we in Britain enforce these
directives and regulations to the letter while others do not;
are you saying that as well?
Mr Hudson: There have not so far been many prosecutions
that I am aware of involving solicitors but certainly our assumption
is that the strict application we have adopted will follow all
the way through to the courts.
Chairman: I am sorry, I know I
have a number of people who want to come in but we are going to
go on halfway through the afternoon at this rate. I had proposed
that at the end of each of the three sections to ask the two who
were not concerned in those sections if they wish to add anything,
but I would say to the bankers and the chartered accountants if
you have any further comments you would like to make with regard
to what Mr Hudson has been saying, perhaps you would let us have
that in a paper. I want now to move across to the chartered accountants.
Lady Garden.
Q24 Baroness Garden of Frognal:
Thank you, my Lord Chairman. I wonder if I could ask you about
your relationship with SOCA. You are actively involved in various
activities with SOCA but could you elaborate on the nature and
the value of that engagement and perhaps particularly say how
you think SOCA might further improve the effectiveness of the
discussions, the processes and the product and touch on the feedback
that you may or may not be getting in adequate quantity from SOCA?
Ms Banks: My response actually would be very
similar to my colleague Mr Hudson's response for the Law Society.
Our relationship is close and we are getting increasing feedback
in the form of typologies. Many accountants would like more feedback
on a case by case basis, but that is particularly problematic
for a number of reasons including the fact that SARs feed into
different processes, different law enforcement engagements. Many
SARs can contribute to a single criminal investigation and some
SARs are used more for civil proceedings than criminal proceedings—reports
of tax evasion being a particular example of that. While we want
to see continuous improvement, therefore, we think SOCA are already
working hard with us in that area and so it is not something that
necessarily needs political or parliamentary attention at this
time.
Q25 Baroness Garden of Frognal:
Do you have regular meetings with SOCA? Are they on a set basis
or just as when?
Ms Banks: We have regular meetings through the
Anti-Money Laundering Regulatory Forum and numerous informal meetings.
We have representation on the SARs Review Committee which also
meets regularly.
Lord Hannay of Chiswick: Could I just
follow up a little bit on this from the earlier discussion; if
I understand it rightly all three of you would like to see better
information and feedback from SOCA on the various criminal issues
which might be crossing your desks, and that divides into two
sections—one which is specific to each individual case and
the other is as it were generic. Presumably that means better
information about the sort of things that people who are dealing
with nuclear proliferation materials need to look out for and
so on. How would you evaluate those two things in real value to
you? Is what you really need more generic training, or are you
looking for feedback specific to each case, which seems to be
pretty sensitive?
Chairman: Before you answer that
the question which Lord Hannay has put is one which Lord Avebury
very largely was going to put in a few moments, so before you
answer that I would like to ask Lord Avebury if he would like
to add to what Lord Hannay has asked so that we get a complete
answer.
Q26 Lord Avebury:
Could I refer to the answer you gave earlier that there were 6,460
SARs in a particular year 2007. Could you tell us how many of
those cases did result in criminal prosecutions and whether you
felt that in the cases where they did not there was sufficient
individual feedback to enable those who submitted them to evaluate
the merits of the process? Do you think that in cases where there
are no criminal prosecutions there should be more general feedback
on the principles behind the submission of the SARs?
Ms Banks: I cannot answer on how many of the
SARs made by our members resulted in criminal prosecutions partly
because of the lack of the one-to-one relationship between SARs
and criminal prosecutions. For example, we have been told by SOCA
that in one particular really serious criminal investigation a
contribution was made by the information contained in 5,000 SARs.
It would be very difficult to give feedback to every one of the
originators of those SARs. Also, as I said, a lot of the information
goes through into civil investigations and into the disruption
of future crime. It is probably better if you get evidence from
SOCA in this area but certainly in the accounting profession we
believe that the SARs regime is cost-effective as it stands. The
benefits must be measured not only in terms of prosecutions for
money laundering but in prosecutions for the underlying criminal
offences; they must be measured not only in terms of the recoveries
made but also in terms of more cost-effective criminal investigation
generally, in the reputation of this country in terms of clean
business practices and in economic benefits in that business can
be carried out much more fairly if people are competing on a level
playing field, in that economic crime is picked up and dealt with.
Q27 Lord Avebury:
If I could ask a quick supplementary, looking at it the other
way round if you took the prosecutions for money laundering or
for terrorist offences and you said in each case were there any
SARs that contributed to this prosecution, then you would have
some measure of the effectiveness of the SARs process, would you
not, so that in the year where these 6,000 SARs were submitted
have you looked at the number of prosecutions for, if you like,
SARs-related offences in money laundering and terrorism to see
in what proportion of those cases where the prosecutions occurred
there was a contribution from the SARs process?
Ms Banks: I would very much like to see that
information, yes. It is not something that we can tell you because
it is extremely important to our members that their SARs are kept
confidential. We do not know which of our members made the 7,000
SARs and we would not expect to get that information because as
I have said confidentiality is so important for the makers of
SARs.
Q28 Lord Avebury:
It would not actually breach confidentiality if the responses
by SOCA or whoever it was were in a generalised form and did not
particularise the individual SAR that contributed to those prosecutions.
Ms Banks: I agree that would be very valuable;
I would like to see that.
Q29 Lord Hannay of Chiswick:
Could I possibly have an answer to my question now because it
was not in fact the question that Lord Avebury asked?
Ms Scutt: I am happy to answer that. There is
a role for both types of feedback; we get very little and the
banking industry does not know how many of their reports lead
to prosecutions. The SOCA annual report does say how many from
the consent regime may lead to prosecutions but we do not. I believe
there is a role for both types of feedback for different purposes
to make the system overall more effective. For instance, we believe
that a bank recently has submitted a SAR on proliferation finance
and we are led to believe that it was absolutely spot-on; the
intelligence that was provided and the way in which it was provided
was a perfect example. However, for the rest of the industry we
can have no knowledge of what it was that was spotted, how it
was spotted and whether or not information on that could actually
help other banks find these very important transactions. In that
sense, therefore, taking specific information and enabling it
to be applied more generally is very important. For individual
institutions when they are dedicating £36 million a year
from one bank in order to try and fulfil their obligations in
this regard it is very helpful to get specific feedback on their
own, so it is a question of feedback to improve the system but
also to raise the standard throughout the industry in terms of
understanding what it is they are looking for and how to go about
it, so I think you need both.
Q30 Lord Mawson:
I am not an expert in banking and I am very naive about banking
but my reading of the recent credit crunch thing is that lots
of these different parts of the system have ticked lots of boxes
and when you look at it all the processes have been followed very
fairly but all the sheep have run off the cliff together and landed
us in difficulty. I wonder with regard to this whole area of money
laundering and these various aspects of this complex jigsaw who
is the person and what is their name and address who is actually
worrying up here about all of these pieces and how they actually
interrelate together. Is there such a person and do they have
a name and address and what is it?
Ms Scutt: Within an individual bank there is
a person who is nominated and they will be the chief money laundering
reporting officer and it is their responsibility and they are
responsible to the regulators and they must worry about it.
Q31 Lord Mawson:
The bank is one piece of the jigsaw but what we are hearing is
that there are these other pieces. I am just wondering out there
who is the person who is watching the interrelationship between
these pieces of the jigsaw and how it is worked into the big picture
and worrying about it in a coordinated and continuous way. Who
is worrying about that? Is there such a person?
Ms Scutt: I believe that responsibility is vested
between the Treasury and the Home Office.
Q32 Lord Mawson:
Is there a person? I am always interested who the person is?
Ms Scutt: It is the Treasury Minister who is
responsible.
Q33 Lord Mawson:
Who is the Treasury Minister?
Ms Scutt: I think it is Stephen Timms. Sorry,
it is Home Office and Treasury together.
Chairman: We have those witnesses next week
so we can pursue that.
Q34 Lord Marlesford:
Can I just ask are your three bodies given a guidance book by
SOCA as to how you are expected to comply? If you are, I do not
know whether you all get the same book or whether you each get
a different book but it would be helpful if we could have a copy
of the book or the books and also see the forms that you are meant
to fill in.
Mr Cook: If I could answer that, that is actually
available on SOCA's website, detail about how to fill in a SAR
and the SAR forms are available; so it is publicly available information.
Ms Banks: We have also separately, each of us,
written authoritative guidance for our members on how to comply,
which is better than having one because it is modified for the
characteristics of our professions or trade.
Q35 Lord Marlesford:
Can we have a copy of that?
Ms Banks: Yes.
Chairman: Lord Mawson, do you
want to come back with this?
Q36 Lord Mawson:
Yes. What has been the experience of the ICAEW in the Money Laundering
Advisory Committee led by HM Treasury and the Home Office? To
what extent has it proved to be an effective forum for the discussion
of private sector concerns in the AML/CFT sphere?
Ms Banks: It is really quite effective, though
on many occasions there seems to be relatively little talked about
it. Nevertheless, the fact that it meets regularly means that
if there are matters of concern they can be raised. Not only that,
but it means that you meet and know the most important people,
the most important stakeholders in this field who are law enforcement
and government departments as well as your colleagues in the regulatory
sector, which makes it far easier to raise things informally.
I have a current example actually which may reflect on equivalence
in that one of the firms we regulate for money laundering purposes
has a client that was introduced from Switzerland, which has been
known as an equivalent jurisdiction, but they are having trouble
in being given the underlying identity of the client. We have
raised this and it is going to be put on the agenda for the Money
Laundering Advisory Committee—a very swift response to something
that could be a difficult problem.
Chairman: I am going to have to apologise
to our witnesses in that I have to go to a memorial service now
and forgive me if I do that. Lord Richard has most kindly said
that he will stand in as the Chairman of this meeting, so if we
could have a very brief pause whilst I move out and he moves in.
Thank you again for coming; we appreciate it.
In the absence of the Chairman, Lord Richard
took the Chair
Q37Lord Hodgson of Astley Abbots:
You will have gathered from the line we have been following that
we are very interested in finding ways of reducing regulatory
burden and I think you welcome the idea of the introduction of
some risk based approach to compliance and regulation. Could you
tell us how that is working, could you tell us something about
where you hope it could take us to; is there a glorious sunny
tomorrow we can arrive at? If so, how will we achieve it?
Ms Banks: The risk based approach is difficult
in its application but it is worth working hard on because it
enables the regime to be more cost effective. It is the application
of the risk based approach which means that accountants taking
on new clients are required to get good evidence of identity,
say from South African or South American general traders, while
they have less trouble in taking on as a client an old lady with
neither a passport nor a driving licence. So I think it is absolutely
essential to make the regime work well and in an acceptable way.
We see it as having produced fewer burdens on low risk clients
while probably increasing them in higher risk clients.
Q38 Lord Hodgson of Astley Abbots:
For all three witnesses. When I have asked people out there about
how can we do something to reduce the regulatory burden and to
reduce the risk they say a carve out in the definitions of the
Proceeds of Serious Crime Act sections 327 to 329 to get rid of
things like health and safety requirements. Is this a practical
proposition and, if so, could we achieve it?
Ms Banks: Our preference would be to keep an
all criminal offences reporting regime. When I talk to money laundering
reporting officers they tell me that it is actually easier just
to report everything where a crime is there than to try and make
a judgment as to whether or not the crime is serious or not.
Q39 Lord Hodgson of Astley Abbots:
There needs to be a crime then?
Ms Banks: There has to be a crime. So a lot
of things which initially people feared they might have to report
are not now reported because, for example, a parking offence is
a civil offence not a criminal offence.
Mr Hudson: It will be no surprise to say that
we differ from the ICAEW and the example I quoted earlier on I
think goes to the heart of it. It is the fact that we take all
criminal activity as the initiator of a predicate offence, therefore
for money laundering purposes and so on, and it seems to me that
that is central to what we perceive to be part of the UK problem
here.
Ms Scutt: I would agree that the risk based
approach does not sit comfortably with the all-crimes approach
of SOCA. However, we would argue as the banks that the risk based
approach brings great efficiency in the system, as it were, in
that it enables banks to dedicate their resources to those things
which are of higher risk and, as Felicity suggested, those customers
of lower risk cannot be burdened with undue due diligence and
such like. So there is benefit. There is a risk to the risk based
approach itself in that it does mean that banks have to make judgments,
people have to take responsibility and in the sort of environment
in which we are now, if we take US sanctions, actually many banks
would like to see a more prescriptive rules based approach with
sanctions because of the extra territorial reach of US law and
for which they are forced to make a judgment between do they comply
with US law or do they comply with EU law, and that is a very
uncomfortable decision to have to make and we have made those
points on a number of occasions but unfortunately it is not easily
resolved.
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