LEGAL AND REGULATORY ASPECTS OF MONEY LAUNDERING AND FINANCIAL CRIME

1
LEGAL AND REGULATORY ASPECTS OF MONEY LAUNDERING
AND FINANCIAL CRIME

• Lecture 1
• Joanna Gray LL.B., LL.M. , Professor of Financial
  Regulation in Newcastle Law School, University of
  Newcastle upon Tyne, UK.

2
The Nature of Crime and Criminal Law

• Taxonomy of a Legal System such as India or UK
• -Criminal Law
• -Civil Law
• -Regulatory Law (Statute Based rather than
  common law)

3
Special features of Criminal Law

• Trial process
• Evidence Rules
• Use of juries (UK)

4
Special features of Criminal Law

• Stricter rules of construction in face of legal
  uncertainty
• Sanctions more punitive deterrent rather than
  remedial
• Human Rights constraints (in UK) apply more
  rigorously

5
The Multiple Meanings of Financial Crime

• Theft (obtaining money or property by deception)
  combination of crime and property has always
  caused lawyers headaches
• Illegal or Sharp Practice according to whose
  moral compass should the law judge this issue?

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The Multiple Meanings of Financial Crime

• Conspiracy to defraud at common law
• R v Sinclair
• Conspiracy to cheat and defraud -- "Fraud" --
  Director and others concerned in take-over of
  shell company -- Assets of company used to
  provide funds for paying assenting shareholders
  -- Test of fraud on the part of a director and
  others in such a transaction.

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The Multiple Meanings of Financial Crime

• To cheat and defraud is to act with deliberate
  dishonesty to the prejudice of another person's
  proprietary right. In the context of this case
  the alleged conspiracy to cheat and defraud is an
  agreement by a director of a company and others
  dishonestly to take a risk with the assets of the
  company by using them in a manner which was known
  to be not in the best interests of the company
  and to be prejudicial to the minority
  shareholders. (Court of Appeal)

8
The Multiple Meanings of Financial Crime

• In UK basic fraud law has yet another layer
  grafted onto it Fraud Act 2006
• New legislation to deal with ATM fraud, computer
  phishing in online banking etc etc

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The Multiple Meanings of Financial Crime

• Civil law parallels possible for reparation where
  criminal offences of fraud committed include
• Deceit
• Fraudulent Misrepresentation
• Setting aside contract as vitiated by fraud
• Breach of Fiduciary Duty
• Misfeasance in Public office
• Conversion

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The Multiple Meanings of Financial Crime

• Specific False accounting offences littered
  throughout companies legislation
• Fraudulent Trading an Insolvency context for
  fraud

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The Multiple Meanings of Financial Crime

• Tax Evasion
• Fraudulent claims for subsidies/entitlements
• Corruption see OECD Convention on Bribery and
  Corruption see Blackboard International Standards

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The Multiple Meanings of Financial Crime

• Of course many other crimes are committed for
  pecuniary/financial motivations and require a
  degree of organised financing in order to commit
  them in first place
• E.g. People trafficking, counterfeiting, drugs
  offences, etc etc

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The problem of money laundering and terrorist
finance

• Organised crime causes social and economic harm
  estimated at 20 billion to communities in
  Britain each year.
• The UK - and British interests overseas - face an
  enduring terrorist menace that is historically
  unique in both its scale and international
  dimensions. Finance is the lifeblood of these
  threats. Organised criminals, driven by profit,
  use the financial system to move money, and
  launder and disguise it in other types of assets.

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The problem of money laundering and terrorist
finance

• Terrorists move funds through the financial
  system to promote militant ideologies, train new
  members, pay operatives, acquire weapons, stage
  attacks and sometimes carry out ostensibly
  legitimate activities to provide a veil of
  legitimacy for essentially terrorist
  organisations. ..

15
The problem of money laundering and terrorist
finance

• For it to be successful, the financial challenge
  to crime and terrorism must involve law-makers,
  legitimate businesses in the financial sector and
  law enforcement agencies. Given that the
  financial system, organised crime and terrorism
  are global in their reach, so the financial
  challenge must also be global. Just as there must
  be no hiding place for criminals and terrorists,
  so there can be no hiding place for those who
  profit from organised crime or fund terrorist
  activities.
• (FEB 2007 UK Government HM Treasury Document
  The Financial Challenge to Crime and Terrorism )

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The problem of money laundering and terrorist
finance

• The goal of a large number of criminal acts is
  to generate a profit for the individual or group
  that carries out the act. Money laundering is the
  processing of these criminal proceeds to disguise
  their illegal origin. This process is of critical
  importance, as it enables the criminal to enjoy
  these profits without jeopardising their source.

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The problem of money laundering and terrorist
finance

• Illegal arms sales, smuggling, and the activities
  of organised crime, including for example drug
  trafficking and prostitution rings, can generate
  huge sums. Embezzlement, insider trading, bribery
  and computer fraud schemes can also produce large
  profits and create the incentive to legitimise
  the ill-gotten gains through money laundering.

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The problem of money laundering and terrorist
finance

• When a criminal activity generates substantial
  profits, the individual or group involved must
  find a way to control the funds without
  attracting attention to the underlying activity
  or the persons involved. Criminals do this by
  disguising the sources, changing the form, or
  moving the funds to a place where they are less
  likely to attract attention.... (Financial
  Action Task Force/OECD 1999)

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Rationales for Legal Proscription and Sanction

• Why are AML controls and laws proliferating
  across the world?
• motive for primary crime
• political stability and rule of law
• problem for politically unstable, fragile
  democracies

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Rationales for Legal Proscription and Sanction

• reduction in confidence of other users of
  financial markets and institutions and
  consequent loss to overall economic and
  investment activity
• Why are AFT laws and controls now spreading
  across the world?

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Rationales for Legal Proscription and Sanction

• reduction in confidence of other users of
  financial markets and institutions and
  consequent loss to overall economic and
  investment activity
• Why are AFT laws and controls now spreading
  across the world?

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What is commonly meant by Money Laundering?

• Orthodox Techniques of Money Launderers
• 3 basic stages of money laundering
• Placement
• Layering
• Integration

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What is commonly meant by Money Laundering?

• -Placement the physical disposal of cash
  proceeds derived from illegal activity
• -Layering structuring of complex layers of
  financial transactions so as to conceal the
  source of the funds and make it as difficult as
  possible to follow the audit trail created in the
  process. This often involves the use of multiple
  bank accounts in numerous jurisdictions to create
  as complex a web of transactions as possible.

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What is commonly meant by Money Laundering?

• -Integration the provision of apparent
  legitimacy to the financial proceeds of crime by
  returning them into the economy, at the end of
  the layering process, as bona fide business funds

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Why might Money Laundering and Use of Financial
System for Terrorist Finance on the increase?

• Ironically, the very same things that have
  enhanced global financial market integration (and
  as we have seen challenged regulators in their
  mainstream tasks) have also increased the use of
  the threat of use of financial system by money
  launderers and criminals (growth in electronic
  money/electronic banking, exchange controls
  lifted etc etc ) .

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A provocative challenge to law makers, Courts,
supervisors and policing agencies

• The ingenuity of Money laundering criminals knows
  no bounds The only laws that are permanent are
  the laws of nature. Everything else is flexible.
  We can always work in and around the laws. The
  laws change.
• (Agha Hasan Abedi Founder of BCCI Banking
  group)

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Relevant International Standard Setters and Key
developments

• Some landmark measures taken at international
  level
• 1988 UN Vienna Convention Illicit Traffic in
  Narcotic Drugs and Psychotropic Substances
• 2000 UN Palermo Convention against Transnational
  Organised Crime

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Key international developments

• Basel Committee 1988 Statement on Prevention of
  Criminal Use of the Banking System for the
  Purpose of Money Laundering
• Financial Action Task Force (FATF) 40
  recommendations directed at countering money
  laundering 1990 (these recommendations have
  been revised twice in 1996 and in 2003)

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Anti-Money Laundering and Terrorist Financing

• Why involve financial institutions, financial
  sector supervision and financial sector
  supervisors in this geo-political agenda?
• "... the banking system can play a highly
  effective preventive role while the cooperation
  of the banks also assists in the repression of
  such criminal acts by the judicial authorities
  and the police".(Council of Europe Report 1980)

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Anti-Money Laundering and Terrorist Financing

• Basel Committee 1988 Statement on Prevention of
  Criminal Use of the Banking System for the
  Purpose of Money Laundering stated four basic
  principles which banks should comply with
  including customer identification procedures and
  co-operation with law enforcement authorities

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Financial Action Task Force FATF

• established by the G-7 Summit in 1989 to
• examine money laundering techniques and trends,
• review action been taken at a national or
  international level,
• set out the measures that still needed to be
  taken to combat money laundering (40
  Recommendations directed at countering money
  laundering in 2001 9 special recommendations
  adopted to counter terrorist financing

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FATF Recommendations AML

• The FATFs recommendations cover
• (1) design of legal systems
• examples standardised scope of criminal offence
  of money laundering (including importantly that
  knowledge/intent can be inferred from objective
  factual circumstances)
• - interim control (e.g freezing/seizure orders)
  and confiscation measures

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FATF Recommendations AML

• (2) Measures to be taken by financial
  institutions and nonfinancial businesses and
  professions to prevent money laundering and
  terrorist financing
• e.g. customer due diligence/record
  keeping/Reporting of suspicious
  transactions/Regulation and supervision of firms
  compliance with AML controls

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FATF Recommendations AML

• (3) Institutional and other measures necessary in
  systems for combating money laundering and
  terrorist financing
• e.g establishment of competent authorities/FIU
  (Financial Intelligence Unit)/Transparency of
  legal Persons and arrangements
• (4) International co-operation e.g mutual
  assistance/extradition

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FATF Recommendations Anti-terrorist financing
recommended measures

• Ratification and implementation of UN
  instruments
• Criminalising the financing of terrorism and
  associated money laundering
• Freezing and confiscating terrorist assets
• Reporting suspicious transactions related to
  terrorism
• International co-operation
• Alternative remittance
• Wire transfers
• Non-profit organisations
• Cash couriers

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RECENT EXAMPLE AS TO HOW ALIVE THIS AREA IS

• FATF Statement on Iran The Financial Action
  Task Force (FATF) is concerned that the Islamic
  Republic of Irans lack of a comprehensive
  anti-money laundering / combating the financing
  of terrorism (AML/CFT) regime represents a
  significant vulnerability within the
  international financial system. FATF calls upon
  Iran to address on an urgent basis its AML/CFT
  deficiencies,.FATF members are advising their
  financial institutions to take the risk arising
  from the deficiencies in Irans AML/CFT regime
  into account for enhanced due diligence. FATF
  looks forward to engaging with Iran to address
  these deficiencies.