LEGAL AND REGULATORY ASPECTS OF MONEY LAUNDERING AND FINANCIAL CRIME - PowerPoint PPT Presentation


Title: 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?

6
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.

7
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

9
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

10
The Multiple Meanings of Financial Crime
  • Specific False accounting offences littered
    throughout companies legislation
  • Fraudulent Trading an Insolvency context for
    fraud

11
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

12
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

13
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.

14
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 )

16
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.

17
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.

18
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)

19
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

20
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?

21
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?

22
What is commonly meant by Money Laundering?
  • Orthodox Techniques of Money Launderers
  • 3 basic stages of money laundering
  • Placement
  • Layering
  • Integration

23
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.

24
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

25
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 ) .

26
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)

27
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

28
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)

29
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)

30
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

31
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

32
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

33
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

34
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

35
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

36
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.
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LEGAL AND REGULATORY ASPECTS OF MONEY LAUNDERING AND FINANCIAL CRIME

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Title: 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?

6
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.

7
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

9
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

10
The Multiple Meanings of Financial Crime
  • Specific False accounting offences littered
    throughout companies legislation
  • Fraudulent Trading an Insolvency context for
    fraud

11
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

12
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

13
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.

14
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 )

16
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.

17
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.

18
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)

19
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

20
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?

21
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?

22
What is commonly meant by Money Laundering?
  • Orthodox Techniques of Money Launderers
  • 3 basic stages of money laundering
  • Placement
  • Layering
  • Integration

23
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.

24
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

25
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 ) .

26
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)

27
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

28
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)

29
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)

30
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

31
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

32
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

33
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

34
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

35
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

36
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.
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