Money laundering and the financing of terrorism - European Union Committee Contents

Memorandum by HM Treasury

  1.  This memorandum sets out the UK's involvement in Anti-Money Laundering/Counter Terrorist Financing (AML/CTF) activities internationally including through the EU and globally through the Financial Action Task Force (FATF) and our responses to the Committee's questions.

2.  The UK Government's over-riding goal in this area, as set out in the 2007 paper "The Financial Challenge to Crime and Terrorism" [1] is to protect its citizens and reduce the harm caused by crime and terrorism. Whilst finance is the lifeblood of criminal and terrorist networks, it is also one of their greatest vulnerabilities. The Government's objectives in using financial measures are to:

    — deter crime and terrorism in the first place—by increasing the risk and lowering the reward faced by perpetrators;

    — detect and investigate criminal or terrorist abuse of the financial system; and

    — disrupt criminal and terrorist activity—to save lives and hold the guilty to account.

  3.  In order to deliver these objectives successfully, action in this area must be underpinned by the three key organising principles that were first set out in the 2004 Anti-Money Laundering Strategy:

    — effectiveness—making maximum impact on the criminal and terrorist threat;

    — proportionality—so that the benefits of intervention are justified and that they outweigh the costs; and

    — engagement—so that all stakeholders in government and the private sector, at home and abroad, work collaboratively in partnership.

  4.  The UK has a robust regime for countering money-laundering and terrorist financing. This includes solid legal foundations that outlaw the financing of terrorism and money laundering; financial safeguards applied by industry—backed-up by law; supervision and guidance to ensure compliance of firms with the legal and regulatory requirements; measures to maximise the investigative and intelligence value of the financial information generated by criminals and terrorists as they move through the financial system; a range of instruments to disrupt the flow of criminal or terrorist assets and hold those responsible to account. A wide range of organisations are involved in this work, including regulators and supervisors; law enforcement agencies including police forces, HM Revenue & Customs (HMRC) and the Serious Organised Crime Agency (SOCA); and the security and intelligence agencies.

  5.  The threat from money laundering and terrorist financing is international and the UK places a high value on international cooperation in this area. Much of our effort is focussed on the establishment and enforcement of internationally agreed standards to ensure adequate safeguards against money-laundering and terrorist financing in all countries, with assistance to enable low-capacity countries to achieve these standards. The Financial Action Taskforce (FATF) is the main international body responsible for anti money laundering and countering terrorist finance. In 2006 the FATF conducted a Mutual Evaluation of the UK regime. The UK achieved a rating of Fully Compliant in 24 out of the FATF's 40+9 recommendations, and was judged Largely Compliant in a further 12 ratings. This places the UK as one of the highest-graded countries assessed to date.


  6.  The principal mechanism for dealing with flows of financial intelligence is the Egmont Group, the international coordinating body of 106 FIUs, in accordance with the Egmont Statement of Principles of Information Exchange Best Practice and using the Egmont Secure Web.

7.  In 2008 the UK initiated 501 requests to Egmont members and received 898 requests to the UK (within these figures 192 requests were sent to and 457 received from EU Member States). The resulting information flows have produced good results in assisting prosecutions and identifying assets for confiscation. For example in 2008 a restraint order for nearly $50 million was achieved following the receipt of a Suspicious Activity Report (SAR) in the UK and liaison with two overseas FIUs. Work is in hand within the Egmont Group to review the utility and practical outcomes of these exchanges. The UK engages bilaterally with non-Egmont member countries, subject to risk assessment and assurance that the information will be used appropriately and in line with the Egmont principles.

  8.  SOCA has a network of SOCA Liaison Officers (SLOs), including five Financial Liaison Officers, who engage with host countries' FIU and law enforcement agencies (LEAs) to extract and develop financial intelligence. As representatives of the UKFIU they are able to engage both with the hosts' FIU and their operational money laundering LEA teams and to draw upon a wide range of operational and intelligence material on criminal finance that is harming to the UK. HMRC also deploy a network of Fiscal Crime Liaison Officers (FCLOs) overseas. They are trained in financial matters and engage with partner agencies and FIUs in-line with HMRC responsibilities. They also work closely with SOCA colleagues and sometimes benefit from MOUs between SOCA FIUs and third country FIUs.

  9.  Within the EU, FIUnet, an IT system linking most Member States' FIUs facilitates cooperation by allowing them to make enquiries and exchange certain information. The UK is also a key contributor to the EU FIU Platform, a forum of Heads of FIUs initiated by the European Commission, which identifies and promulgates learning and best practice amongst EU FIUs.

  10.  Europol collates money laundering intelligence that EU Member States contribute and adds value to this. It undertakes this through a series of projects, referred to as Analytical Workfiles (AWFs). At present the UKFIU is contributing to a project known as "Sustrans", set up to analyse data submitted in the EU in Suspicious Activity Reports and Suspicious Transaction Reports relating to cross-border money laundering activity. In addition through the Metropolitan Police Service counter-terrorist liaison officer, based within the UK Liaison Bureau at Europol, UK agencies responsible for counter-terrorism matters engage with the Europol AWFs relating to terrorism. The exchange of intelligence with Europol also includes intelligence on terrorist financing. HMRC second an officer to the SOCA office within Europol to lead on HMRC-related activity and exploit intelligence within the AWFs. HMRC have also seconded an expert to help set up the AWF created to tackle EU-wide MTIC fraud (AWF MTIC), which regularly identifies intelligence cross-matches with AWF Sustrans.

  11.  The high performance of the UKFIU was recognised in the mutual evaluation by the Financial Action Task Force (FATF) in 2006 which reported that the UKFIU substantially met the criteria of FATF Recommendation 26 and appeared to be a generally effective FIU; it noted the private sector reported improved relations and co-operation since the transfer of the FIU responsibilities to SOCA in March 2006. With regard to compliance with FATF regulations on international co-operation (including Egmont), the UKFIU received the highest possible rating—"fully compliant".


  12.  The EU has an important role in both the UK's AML/CFT regime and in meeting our international objectives. Many key regulations in this area are established at EU-level, including through the Third Money Laundering Directive, which is the basis for the UK's 2007 Money-Laundering Regulations. In addition to its regulatory role, the EU acts to facilitate cooperative approaches by member states in several related areas.

13.  In practice, there are a number of different bodies in the EU which have responsibilities for issues related to money-laundering and terrorist financing. The principal forum for policy and technical discussion is the Committee on the Prevention of Money Laundering and Terrorist Financing. This committee, chaired by the European Commission and based within the Directorate-General for the Internal Market, is the central coordinating regulatory and policy mechanism for EU Member States concerning AML/CTF. It has been in existence since 2006, and was formed to assist with transposition and implementation of the Third Money Laundering Directive, including monitoring the domestic implementation of the directive. Since then its role has developed to stimulate debate among industry bodies and member states on financial crime themes; to share information and best practice, and where possible to promote a common approach; to coordinate an EU position on FATF issues which it will represent at FATF meetings (the European Commission is an independent member of FATF); and to review for consistency other relevant EU legislation such as the Wire Transfer Regulations, Payment Services Directive; E-Money Directive.

  14.  There are a number of coordination and expert groups focused on regulatory issues on which the FSA represents the UK. The principal group in this area being the EU Regulators' Anti-Money Laundering Task Force. The aim of this Task Force is to provide a supervisory contribution to anti-money laundering and terrorist financing issues, in particular to foster the convergence of supervisory practices and to facilitate the exchange of information and good practice relating to the implementation of the Third EU Money Laundering Directive.

  15.  Terrorist Finance and Asset Freezing is also coordinated within the Council of Ministers through several Council formations and working parties, including

    Financial Attachés concerning the implementation of FATF Recommendations into EU-legislation;

    — the Council on External Relations (RELEX) concerning the implementation of UN Security Council Resolutions and autonomous EU financial sanctions;

    Working Party on Terrorism for internal EU aspects;

    Committee on Terrorism (COTER) for external aspects (and EU TF Strategy);

    — the CP 931 Working Party for the designation of organisations and individuals involved in terrorist acts; and the

    Multidisciplinary Group on Organised Crime, for law enforcement aspects of AML/CFT.

  16.  The EU's mechanisms for coordinating action against money-laundering and terrorist financing have produced important elements of regulation and made a valuable contribution to improving wider cooperation among member-states on AML/CFT issues. The Third Money Laundering Directive, agreed during the UK's 2005 Presidency of the EU, adapted and implemented the FATF's revised AML/CTF standards across the EU. The directive considerably boosted the consistency and standard of legislation across the EU, while at the same time allowing for minimum harmonisation and the existence of national variations. It also incorporated a risk-based approach to AML rules, which was strongly supported by the UK, significantly broadening the influence of this approach in the EU. The Third Money-Laundering Directive met the UK's objective of establishing a robust system without imposing unnecessary compliance costs and has allowed the UK to construct a very well respected AML regime. The EU cash control Regulation supplements the Third Money Laundering Directive by providing for a harmonised control system for cash entering or leaving the Community.

  17.  The EU continues to work to ensure that community legislation takes ML/TF risks into account, and covers emerging trends. Two current areas are the Payment Services Directive which will extend the regulation of money laundering to new business sectors, such as bill payment providers and mobile phone payments systems, to reflect their emerging importance as money transmission systems and guard against potential criminal exploitation; and the E-Money Directive where the EU is looking to review the AML provisions to ensure that they are not too prescriptive and will not inhibit growth in the industry.


  18.  22 of the 27 EU member states have been assessed by the FATF, IMF or MONEYVAL (the evaluation and review mechanism for AML/CTF in Council of Europe member States which are not members of the FATF) against the current FATF standards. Overall, the reports show a high level of compliance with those Recommendations addressing international cooperation, with only 9% of the ratings across the range of requirements falling below what is judged to be an acceptable level, and only three countries falling short on more than one of the six key issues.

19.  Following a recent fact-finding visit to the UK, an Executive Director of the UN Counter Terrorism Committee (UNCTED) acknowledged that the UK "has developed a comprehensive and coherent all-of-government counter-terrorism strategy" and that they had noted "many areas which we will be able to use as an example of best practice when advising other governments on how to improve their CT strategies and organization".

  20.  The UK is working with international partners to address due process concerns raised by the courts in the Kadi case and others, see Annex A for further details, and to work with the EU and UN to enhance implementation of international sanctions mechanisms and explore the implications of the case.

  21.  While the FATF Recommendations do not include tax offences as a predicate crime for money laundering as some jurisdictions are opposed to this approach, the UK has an "all crimes" approach and so is able to provide assistance in respect of money laundering offences based on predicate tax offences. HMRC may receive potentially tax-related information from anti-money laundering and other authorities either domestically or internationally. By virtue of the Commissioners for Revenue and Customs Act 2005, any information acquired by HMRC in connection with one of its functions may be used in connection with any other function. The extent to which such information is used for enforcing compliance with tax obligations is judged on a case-by-case basis having regard to a range of criteria including an assessment of the potential risk to the Exchequer.


  22.  The EU Committee on the Prevention of Money Laundering and Terrorist Financing has responsibility for monitoring member states' transposition of the Third Money Laundering Directive into national regulations, using informal mechanisms and if necessary, formal infraction proceedings. The UK was one of the first Member States to fully transpose the Third Money-Laundering Directive, and did so within EU deadlines. However several member states have not yet fully transposed the Directive, and are now the subject of infraction proceedings. The success of these proceedings in ensuring the successful transposition of the Directive in the remaining member-states will be an important test for the effectiveness of the EU's enforcement mechanisms, which has yet to be demonstrated in this area.

23.  The UK views continued cooperation and engagement with the private sector as critical to the success of the anti-money laundering and counter terrorist financing regime. HM Treasury consulted extensively prior to the implementation of the third Money Laundering Directive through the Money Laundering Regulations 2007. It also set up a Supervisors' Forum to bring together all organisations with responsibility for ensuring compliance with domestic and international AML/CTF standards, to ensure they perform at the level of the best.

  24.  In addition to considering the overall burden placed on the private sector by the AML/CFT regime, the Government maintains an ongoing dialogue with the private sector aimed at further improving the effectiveness, and reducing the burden, of the regime, including with private sector forums such as: The Money Laundering Advisory Committee (MLAC) which brings together representatives from Government, law enforcement, trade bodies and industry, regulators, and consumers to ensure that the UK's anti-money laundering regime is fair, efficient and effective, proportionate to the risks involved, and provides a forum for discussing the views of all relevant stakeholders; and the Joint Money Laundering Steering Group (JMLSG), which is an example of an sector wide body which issues detailed and practical guidance on interpreting and implementing the money laundering regulations and terrorist financing requirements. The EU also holds regular consultations with the private sector through dedicated organisations such as Anti-Money Laundering Europe.

  25.  On Terrorist Finance issues, the Terrorist Finance Working Group (TFWG) was established to look at the system for countering terrorist financing and make recommendations to ministers on how it might be improved. The FSA's Financial Crime Intelligence Group looks to facilitate sharing knowledge and intelligence between public and private sectors on financial crime matters including terrorist finance.

  26.  There is extensive bilateral engagement with the private sector across the SARs regime. Following Sir Stephen Lander's review and the creation of SOCA in April 2006, a number of improvements to private sector cooperation and communications have been taken forward. These include: structured feedback to SARs reporters by the UKFIU to a vetted group of private sector representatives, including discussion of sensitive casework and reporting issues, and development of intelligence products for industry; the UKFIU working with the Regulators Forum to ensure that regulated firms have access to the information that they need to protect themselves from inadvertent involvement in money laundering and terrorist financing; the creation of the SARs Regime Committee to oversee the performance of regime participants and the discharge of their responsibilities. The work of these groups is supplemented by direct feedback to firms from security and law enforcement agencies, and by ad-hoc bulletins produced by the UKFIU for reporting entities, describing current terrorist financing techniques drawn from current counter-terrorist investigations.

  27.  During the UK's recent presidency of the FATF (June 2007—June 2008) considerable progress was made on among other things advancing the organisation's engagement with the private sector. A private sector consultative forum is now in operation within the FATF, which provides a formal structure within which the private sector can both be informed about the work of the FATF and contribute to the FATF work programme. This gives the private sector the opportunity to raise concerns about the cost of implementing AML measures.


  28.  The Counter Terrorism Act 2008 has conferred on the Treasury new powers to act against jurisdictions of concern. These powers allow the UK, in respect to either a specific entity, a specific class of entity, or all entities in a jurisdiction, to:

    — Require credit or financial institutions to undertake enhanced due diligence (to ensure knowledge of the source and ownership of funds) on transactions with specific jurisdictions;

    — Require credit or financial institutions to undertake enhanced and ongoing monitoring of transactions with specific jurisdictions;

    — Require credit or financial institutions to systematically report on all transactions with a specific jurisdiction;

    — Require credit or financial institutions to limit or cease business with entities in specific jurisdictions.

  The new powers mean the UK is now able to comply fully with FATF Recommendation 21 concerning the requirement to impose counter-measures against jurisdictions of concern.

  29.  Equivalence is a concept designed to inform risk assessments and indicate when Simplified Due Diligence and Reliance are appropriate as an aid to businesses. Equivalent status allows financial institutions to apply simplified due diligence to customers in that country, making business transactions quicker and potentially cheaper. Businesses may rely on another firm's customer identity checks from within that jurisdiction, rather than having to perform their own (although they remain liable for their customer checks). It does not exempt the firm from carrying out ongoing monitoring of the business relationship with the customer, nor from the need for such other procedures (such as monitoring) as may be necessary to enable a firm to fulfil its responsibilities in the UK under the Proceeds of Crime Act 2002.

  30.  Member states agreed to a list of equivalent countries in the EU Committee on the Prevention of Money Laundering and Terrorist Financing in May 2008. The equivalence list recognises all EU and EEA Member States as equivalent (because of their obligations to implement the EU's Third Money Laundering Directive). It also includes FATF member countries with a sufficiently good mutual evaluation assessment. Gibraltar is equivalent because it is obliged to implement the Third Money Laundering Directive by virtue of being considered a territory within the EU for the purposes of implementing Pillar 1 (Internal Markets) Directives. The equivalence list is not exhaustive, and nor is it binding on member-states. JMLSG guidance advises firms to carry out their own assessment of particular countries. The list will be reviewed periodically.

30 January 2009

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