Examination of Witnesses (Questions 40
- 53)
WEDNESDAY 4 MARCH 2009
Mr Desmond Hudson, Ms Felicity Banks, Ms Sally Scutt
and Mr Richard Cook
Q40 Lord Dear:
This may be a terribly naive question and you are at perfect liberty
to tell me if I am naive, if that is indeed the case. We are talking
about reporting very large volumes of instances where there has
been some sort of criminal offence. It seems to me that if I were
laundering money I would do my best not to commit the offence
at all and to get on to the tick box, but that if I raised a doubt
of there is some more to this than meets the eye sort of approach,
in one of your three organisations, then that is exactly the sort
of thing that ought to be reported. That is a very loose way of
putting it, and I as I understand that; but my fear is not dissimilar
to Lord Mawson's in that if all the boxes are ticked de facto
we are all right, yet we are not all right because something has
gone badly wrong. Is there a mechanism or maybe should there be
a mechanism whereby you can report, notwithstanding the fact that
there has not been the tripwire of an offence?
Ms Scutt: No. I believe it is a suspicion-based
regime, and Sir Stephen Lander in his discussions with us says
there is a benefit of having that regime—you rely on the
instincts; you have the framework of the law; you have the framework
of the banks' own methodology for assessing risks, whether it
is the type of customer or the product they are taking, or the
country in which they are situated, and that it is the suspicion,
it is the experience of the person concerned that triggers that.
Q41 Lord Dear:
I understand that; we are at one on that. Are you telling me that
you can report on that gut feeling, that suspicion?
Ms Scutt: Absolutely; you are required to, that
is what the law requires.
Q42 Lord Dear:
You can do that?
Mr Hudson: We have to.
Ms Scutt: We have to. The law requires that
if you suspect you must report.
Ms Banks: Many of the reports of our members
anyway will be based on the fact that clients are acting in a
way which is inconsistent with usual business practice under the
expectation of making a profit.
Q43 Lord Dear:
You smell a rat and you report it?
Ms Banks: Yes.
Q44 Lord Faulkner of Worcester:
My question has very been substantially answered but I will just
ask a second part to it. Are you able to say how often the risk
based approach has gone wrong in the banking sector, where you
perhaps have allowed something to slip through and you have found
that it has been a disastrous mistake?
Ms Scutt: I do not think you can know that.
That is one of the concerns about the framework itself with the
regulators. We are fortunate in that I believe we have farsighted
regulators and authorities in respect of the approach to this
regime, but you cannot know; it is only with the application of
hindsight can you actually see, possibly, that a wrong judgment
was made. It is very difficult to stand there and know that at
the point that something is happening that actually there is something
going wrong here. But the regime allows for the authorities to
come in and do inspections and for banks constantly to reassess
whether or not their risk based approach is correct and whether
they should perhaps not take customers from a particular place;
or, for instance, stop doing business in Iran because they must
balance the risk to their business and their reputation overall
as well as their relationship with their customer.
Q45 Lord Marlesford:
It seems to me that what you have described is a British system
which is very heavily gold plated compared to many of those in
other EU countries, and we are concerned of course with the EU
picture overall. Also, it seems to me, you have highlighted a
pretty basic contradiction between making the use of the professional
expertise of your members in thinking that something is worth
reporting and the obligation to report things which are perfectly
clearly not worth reporting, and if you are going to make your
own efforts more cost effective and indeed swamping SOCA with
rubbish it needs a pretty major change in attitude of the British
Government as to how they interpret the EU directive. Would you
agree?
Ms Scutt: I am not sure I would agree with that
actually. Yes, we have implemented the Directives and you are
correct that there are countries in Europe who simply have not
implemented the second, let alone the third Directive. I think
that we have to remember that the reputation of the UK and the
City—we have a very substantial City, even today—and
the reputation as an international centre rest upon us getting
this framework right and doing what is necessary. The fact that
other countries in Europe do not do it—two wrongs do not
make a right and we have to get the balance right but actually
we are doing much more, I think, in terms of maintaining our reputation
and seeking out those crimes.
Ms Banks: I could not agree more with my colleague.
SOCA is not swamped. Initially it was but it has made huge reforms
to its systems and I would not be able to say that any of the
reports made by our members are wasted. It is very difficult to
divide out those reports that seem to be small in monetary amounts
and where you do not know what the particular offence is; it is
very difficult to say whether those actually provide a trigger
for an extremely important investigation from those which are
not.
Mr Hudson: My Lord, I find myself more in agreement
with your point than my two very learned colleagues. I say so
because I think we have disparity of application across the Union.
I entirely endorse the point that the BBA makes that having a
well regulated market, well regulated City is very important for
us. Where I depart from that point is that I am not sure how our
reputation as a well regulated market is enhanced by a system
where, I believe, we have many problems because the regulations
bite at the wrong point. If it is biting at the wrong point it
is not going to help our reputation. If I may, I will give you
an example. I could be in my office today and Mr Smith, a senior
employee of Acme Inc., can come and instruct me. I could do some
personal work for Mr Smith. A month later the work is finished
and I send him my bill; he pays that bill and he sends it to my
cash office. My cashier cashes the cheque. The cash office does
not notice that he has drawn that cheque on the company. The company
then contacts me and say, "Mr Smith should not have done
this; this is potentially fraud, potentially a criminal offence;
can I have my money back?" I would not, as a solicitor, be
able to give them their money back until I got a Consent Order
from SOCA. I know you might say that that is a rather trivial
example compared to the very weighty points of view that BBA have
just been speaking of so eloquently, but I think it gives an example
of our all encompassing approach, the problems that we have, that
we are not enabling our people to do the right thing and exercise
judgment—we all agree about the benefits of the risk based
thing and we all agree about bankers, accountants, solicitor exercising
responsibilities as professionals. But there are some systemic
problems, the Law Society believes, with the system we have here,
which is why, as I say, I find myself more in agreement with the
noble Lord's points than my colleagues.
Q46 Lord Avebury:
Can I turn to the passage in the BBA evidence where it says that
recognising the necessity to provide feedback on specific cases
does not imply the need of a systematic case-by-case feedback,
but you think that the volume of cases that do receive direct
feedback is currently extremely low. I take it by that you mean
disproportionately low, and that would be some merit in increasing
the number of cases where there is feedback in individual cases.
But the only suggestion you make there is that there is a debriefing
session held for interested parties on the conclusion of some
major investigations, and that is a process that might possibly
be expanded. Could you tell us on how many occasions there have
been these de-briefing sessions and whether you think that is
one way in which people who are suggesting SARs would get a better
indication of the value of their submissions? Then on the general
feedback you say that the BBA has called on the FIU to involve
the reporting sector more regularly in the development and drafting
of information products. Have you made such a recommendation formally
to the FIU and what sort of response have you had from them?
Ms Scutt: We have regular dialogue. We have
a stakeholder manager, someone who looks after us and listens
to our concerns and with whom we work quite closely; so we have
formal quarterly meetings. We do also have meetings with some
of the law enforcement, so the Met and the City of London Police
and specifically the Terrorist Financing Units, so that they can
talk generally about some of that feedback. We have given SOCA
specific feedback on their typologies, on some of their written
alerts which, to be honest, we have not found very helpful in
that they are too general; they say that charities might be a
source of financial crime and, yes, we know that already. But
we have a conversation to try and improve those so that we can
ensure that better information goes back and better information
comes out to the industry. That is an ongoing structured conversation
which we have.
Mr Cook: If I could just add, I think the feedback
that we get from SOCA tends to confirm what the industry already
knows; it does not tell us anything we do not know, which I think
the industry is looking forward to have a better dialogue with
SOCA. So tell us what we do not know and where we should be looking
and do not tell us what we already know. I think it is a learning
process that we are going through SOCA; we are educating them
about how the banks work and how they submit sales and the processes
they go through. We are also trying to understand how SOCA operates
so that we can add value to their operations as well.
Q47 Lord Avebury:
Have you had specific meetings with FIU to discuss the way in
which they develop and draft the information on products to ensure,
as you say, that these add value?
Mr Cook: Yes. SOCA operates a group called the
Small Vetted Group, which are a number of representatives from
the reporting sector who are vetted and meet with SOCA and other
law enforcement officials to discuss how the regime is operating.
Beyond that we use our own panels at the BBA and invite SOCA in
to discuss specific concerns we have around particular alerts,
issues or typology issues so that we can work through some of
those issues and say, "What did you mean here? Where are
you going with that? What would you like us to do? We cannot give
you that information because it would expose us to legal risk."
So we have that dialogue quite regularly with them. What we are
encouraging them to do is to come to us early in the process so
that we can add value to their alert products or their information
products so that they are actually of benefit to the end user
rather than just a very bland statement, as my colleague said,
that charities are used for terrorist financing—we knew
that.
Q48 Lord Mawson:
Has the BBA been directly or indirectly involved in the private
sector consultations engaged in by the FATF? If so, how would
you characterise that experience? How does your experience of
interaction with the FATF in this sphere compare with that enjoyed
with the European Commission?
Ms Scutt: The BBA and also the International
Banking Federation had a great deal of interaction with FATF.
I personally spend a lot of my time dealing with all the international
standard setters because I believe they have a very important
role. FATF was one of the first to actually take up the challenge
by the private sector to talk about things that both sides could
learn about the global framework in individual country implementation
of this. I specifically chaired one of their first meetings on
the risk based approach and with the help of Philip Robinson of
the Financial Services Authority I think we achieved a very dramatic
change in terms of many of those countries attending and their
attitude towards a rule based regime or the risk based approach.
So I think that the experience we have with FATF is very positive
indeed. I am about to host a further meeting with them around
the area of equivalence in terms of how we do more about that
and it works very well because it gets the message across not
only to those within our industry from various countries around
the world, but it also puts the message across to other finance
ministries or regulators who happen to be at the table who do
not necessarily have the same approach. The importance of these
supranational bodies is that we manage to raise the standards
overall because banking is a global industry, even today, and
we need to ensure that all points within the system have an approach
and a framework that actually gets at the weak points and FATF,
I think, provides a very valuable role in the sense of bringing
people to the table and putting them through that experience and
understanding ways of improving and going about it.
Q49 Lord Hannay of Chiswick:
Could I go off the script a bit and ask whether any of your three
organisations have had to grapple with—and, if so, how you
grapple with—the hawala system?
Ms Scutt: We are often asked and of course that
is one of the things that we talk about in terms of if you get
the balance wrong in the system all that you will do is drive
money to these other informal money exchanging systems. So I cannot
speak for hawala systems because clearly money perhaps would move
out of the banking system and into these and I would reiterate
my point about getting the balance right. These informal systems
work, exist and they work for some people, but we do not need
to have a system which drives more from the mainstream into these
informal systems where it is much more difficult to gain intelligence
and to understand what is going through.
Mr Hudson: We would share very much many of
the comments from the lawyers' perspective. It is the linkage
of the transaction with the passing over of the finances and if
the money was passing in that sort of way the disconnect would
clearly be a problem and the solicitor would have I think a rather
complex process to resolve and I would find that it would probably
be the case that they would be in grave difficulty if the money
were not passing through a more formal, transparent system. I
cannot help you, my Lord, as to the incidence of those sorts of
problems—I suspect it is low so far.
Ms Banks: Some of our members undoubtedly advise
Asian grocery shops and will both be able to advise such shops
if they do provide informal banking services on the need to register
with HMRC as a money service business. They also have their own
responsibilities if they see what they suspect is money laundering
going through their clients of making their own report.
Q50 Lord Hannay of Chiswick:
Am I right in thinking that the answers from the bankers and the
lawyers is a bit different to the answer of the accountants because
hawala transactions do not escape the accounting system.
Ms Banks: Many of them will escape the accounting
system, of course, because since the audit exemption limit was
raised so high most commercial organisations in the United Kingdom
are not required to have an auditor and therefore are not required
to have a relationship with an accountant, and of course the unincorporated
businesses have never been required to have a professional accountant.
Q51 Lord Mawson:
A very experienced politician once said to me that government
understands the shape of the forest but it has no idea what is
going on under the trees and it seems to me that one of the difficulties
in the present situation, as government gets more and more involved
in banks and all of this stuff, is that bureaucracies talk to
bureaucracies and this whole little world begins to emerge. But
a lot of this stuff has to do with what is going on down here
in lots of little places—certainly where I come from, the
East End of London actually—and I just wonder how we make
sure that as all this stuff is going on this detail is properly
engaged with and understood because in a modern enterprise culture
this is where it is really happening and not here. There is a
gap.
Ms Scutt: I think from the banking industry
point of view in terms for the banks themselves the industry writes
guidance in order that they can understand how they should approach
these things on a day to day level and how they work. I think
guidance is very important in terms of how your average bank employee
understands their responsibilities and can act accordingly, so
I think industry guidance is a very important part of that. I
think also banks are using not only individuals looking at transactions
but they are using things like electronic monitoring and such
like and I think that is the effective way of looking at those
billions of transactions that go through in the course of a year.
So I think that attention to detail is very important and it is
doing that combined with the risk based approach and actually
providing training, and training is a very important thing to
make sure that those involved in the system actually understand
the risks that are involved and what they are looking for, and
I think that is the important thing so that people like me talk
to the Treasury and the Home Office about the strategic approach;
and organisations like ours work with the regulators in order
to talk about how they should go about regulation and enforcement,
but it is what the industry and bodies like ours do in terms of
training and guidance and such like, which actually establishes
the standard and makes sure that all that detail that is going
on is properly dealt with.
Q52 Lord Avebury:
Britain is now the largest centre of Islamic banking in the world.
Are the Islamic banks based here members of the BBA and are they
fully engaged in the discussions on these processes?
Ms Scutt: Yes. Yes, they are members of the
BBA and also they participate in all the information we provide
and the guidance we provide in this respect.
Q53 Lord Richard:
Thank you very much indeed. Could I say how grateful we are to
see you again this morning? With the combination of the accountants,
solicitors and the bankers we are bound to be better informed
and more able to deal with the problem we have. Having given you
the compliment, may I say one other thing, which is that I think
it certainly struck me—and it may have struck one or two
others—that your comments on the regulation service are
in general fairly clear in the sense that you do not like bits
of it, but we are not absolutely certain what bits of it you do
not like. So what would be very helpful is if your three organisations
could perhaps submit another evidence paper—it need not
be a very long one—just specifying specifically what it
is that you want to see changed and how you want to see it changed.
I think that might be helpful.
Ms Banks: My Lord Chairman, I think I have been
remiss in that I should have declared another interest in that
I am a Trustee Director of the Fraud Advisory Panel, which also
submitted written evidence to you. I had very little involvement
in the preparation of their evidence but I did read through it
before it was submitted.
Lord Richard: Thank you very much indeed; and
thank you very much indeed for coming.
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