Anti-Money Laundering feature: Beware of the lawyers

Justin Quillinan looks at a number of recent legal cases that threaten to change the way anti-money laundering (AML) rules, procedures and technology are implemented in the UK. Beware of the lawyers bearing sheaths of court papers, he warns

A legal action currently chugging its way through the courts could potentially undermine the confidentiality enjoyed by financial institutions' Money Laundering Reporting Officers (MLROs) by making their processes more publicly transparent and limiting their anonymity. Whether this will help or hinder the fight against money laundering has to be up for debate. FST magazine cannot comment on the rights or wrongs of the case for which an appeal has been granted but not yet heard; such matters are for the law to decide. But many in the industry are expressing concern in general terms about the impact the case involving HSBC may have, and much debate about the potential impact of the proceedings can be heard in banking security and crime-fighting circles.

Briefly, the case revolves around entrepreneur Jayesh Shah who is in dispute with HSBC and, depending how it goes, the outcome could mean that banks may have to compensate customers whose transactions are delayed by lengthy anti-money laundering (AML) procedures. Mr Shah's $28 million transfer attracted suspicion that money laundering was involved and he is claiming $300 million compensation from the bank for the delay.

HSBC had raised a Suspicious Activity Report (SAR) on the transfer under the Proceeds of Crime Act (POCA) 2002. The deal had to be delayed while it was reported to the Serious Organised Crime Agency. According to Outer Temple Chambers in London, the case raises a number of issues of public interest about how banks care for their customers and provide them with adequate information. More importantly, whether the test for suspicion under POCA could include 'irrational' suspicion is under review. Whilst Mr Shah's claim was thrown out at an earlier hearing, the banking sector is watching the appeal case closely. If the appeal is upheld serious consequences for AML procedures will follow.

Speaking generally, and not specifically about the Shah case, James O'Sullivan, who is policy advisor on financial crime at the Building Societies Association (BSA), fears the consequences of 'breaching the spirit' of POCA in which MLROs are protected from having to face their customer and reveal publicly in court - rather than anonymously - what their reasons were for raising a SAR. "The reporting regime currently gives the reporter complete freedom and confidence to highlight potentially criminal positions without revealing their reasons and there is a danger that the regime could be knocked down by a wrecking ball," he claims.

O'Sullivan adds that every sector involved in SARS - not just financial employees, but solicitors and accountants too - is waiting for the government to decide whether to 'rush through' a change in the law, revising finance industry guidelines, but this is unlikely given the looming general election in May.

Catriona Shaw, financial crime consultant, the British Bankers' Association (BBA), shares "serious concerns" about the future of the current money-laundering regime. She believes it was always the intention of POCA that actions would be taken on a suspicion basis rather than justified in public, which could put bank staff at risk from intimidation and even retribution from the criminal fraternity.

Retrospective action
A second case, resolved at the Court of Appeal late last year, remains of some concern to the financial services sector as it appears to give the impression that money laundering activities can be retrospectively criminalised - a notion that is proving uncomfortable to some and could, once more, revolutionise the present AML regime in the UK.

The case involves a father and son team, Abbas Hussain Khanani and his offspring, Ameer, who were each convicted of entering into a money-laundering scheme contrary to section 328 of POCA 2002. Both were given leave to appeal and Ameer chose not to, but his father did. They operated a Hawala banking system, which in itself is perfectly legal, but used it to facilitate the movement of criminal funds from Pakistan. Hawala enables funds to be transferred between people or companies, often across international boundaries, and is generally built on links based upon family, tribe or ethnicity. Hawala sums tend to be small but still need to be properly recorded and the system should operate under the same legal obligations as conventional banking.

It was found that very large sums of cash were collected in unorthodox ways. A Dutch national, for example, was seen under police surveillance to deposit a brown holdall containing £140,000 in bank notes in the back of Ameer's car outside a Tube station. Both men were arrested and bailed but the Dutch man fled.

Court reports show that Ameer's father received £2 million in cash from July to August 2004 and kept it at his home - an indication of the scale of their activities. To obfuscate matters, records were poorly kept and often wildly inaccurate. In one instance an entry recording £1,049.20 was shown to relate to a receipt of £104,920 by simply moving the decimal point.

As a result of things like this Mr Khanani (senior) argued via his appeal lawyer that many of the allegations levelled against him were from before the indictment was made against him and therefore would not have been criminal, contravening the principle against imposing retrospective criminal liability. His lawyer argued that there was no evidence the prosecution could give proving when he had first received criminal property. The appeal, however, was thrown out leaving lingering doubts as to whether others will face retrospective money laundering charges. A precedent would appear to have been set, which may affect record keeping procedures and technology cross-referencing deployments further down the line.

The bizarre story may well be a one-off, says James London, manager of financial crime policy, at the Financial Services Authority (FSA): "As a general principle I share the view of most jurisprudence in that making anything retrospective is on the whole not to be welcomed. By its nature it's probably going to cause unfairness unless there are exceptionally good reasons.

"It [the case] certainly hasn't impinged on anything we're doing in terms of regulation though," he adds, "so I suspect it's a highly technical point which will not have any significant impact for the foreseeable future."

More legal changes on the way?
Yet another legal move in the AML landscape was the issue late last year of the Treasury's first 'Direction' under the Counter Terrorism Act 2008. The CTA came into force to provide the Treasury with an additional means - alongside the Money Laundering Regulations 2007 and sanctions regime - to tackle money laundering, counter terrorist financing, and to reduce the proliferation of nuclear, radiological, biological or chemical weapons. It gives the Treasury new powers to instruct firms in the UK finance sector to change the way they conduct business with individuals in certain countries who may be reclassified as a higher risk, thereby limiting their access to certain financial products and services. It may also direct such business relationships to cease altogether.

So far the Direction has been issued against Bank Mellat of Iran, which may be the subject of an appeal, and the Islamic Republic of Iran Shipping Lines (IRISL) calling for a cessation of all business transactions. The Direction, which stems from a UN Security Council Resolution, is being used in this instance to try to encourage Iran to come back into the fold in the eyes of the Western world.

The ability of firms to react quickly to a Direction and adapt their systems and controls as required has yet to be tested, which is why this first ever instance is interesting. This Direction against Bank Mellat is a significant step and it will be instructive to see how well equipped, or otherwise, firms are to respond. Failure to comply carries a potential fine and/or prison sentence of up to two years.

The war against money laundering is a continuous one hence all the changes in recent years covering everything from the third EU Money Laundering Directive through to the response of the FSA and the Joint Money Laundering Steering Group (JMLSG) in incorporating it into national practice. A lot of work is also going on through the Financial Action Task Force (FATF) which is part of the OECD in Paris, comprising 36 member states and the European Commission. FATF operates two lists: the first contains those countries, which are not trying to improve their standards such as Iran and Ecuador, and a second list where countries are trying to deal with their shortcomings; the first EU member here is Greece.

Money laundering is a global problem and the most recent survey by the consultants KPMG suggests that in excess of US $1 trillion is being laundered every year by drug dealers, arms traffickers and other criminals. Minutely accurate figures are impossible to come by but Richard McCarthy, vice president of product marketing at banking technology firm Fiserv, estimates that in the UK alone it could be as much as £57 billion - more than the entire defence budget. "It's a big like Harry Potter's Voldemort - the name no-one wants to speak and the banks are not that open about how big the problem is." The recession has also seen an increase in financial crime, he says, so that money laundering is now seen as a generic crime, and it is being tackled by the banks alongside fraud initiatives, particularly internal fraud.

Mark Hunter, a partner in forensic services at the PricewaterhouseCoopers (PwC) consultancy explains that: "Recently the key issue for banks has obviously been about surviving the crash of 2008, so controls and resources may not have been as readily available as they were before a bank was about to go bust or be nationalised. Fraud and financial mis-reporting tend to crawl out of the woodwork during an economic downturn, so an upturn can be expected."

Catriona Shaw at the BBA says she also sees a move away by the regulator from money laundering into general financial crime enforcement, rather than purely supervision. Many expect to see the focus to shift to the securities industry and the futures market, as part of the general fight against fraud, laundering, insider dealing and criminality in financial services.

The FSA's London agrees that the regulator has become a lot more intensive over the last 12 months - not just from a money laundering perspective, but rather in enforcing an overall 'beefing up' of supervision, aimed at small and large firms, under a general anti-crime push.

Technology, of course, plays a vital role in spotting wrong-doing as Trevor Barritt, head of compliance at Actimize, points out: "A corner shop can bank £10,000 a week for years and then suddenly banks £25,000 - this shows a red light if you're got the systems to highlight it."

Potential problems surround false positives where too strict a criteria can show up innocent transactions as 'suspicious'. Someone may have £20,000 in their bank account, for instance, and pay it all out to someone else the following day; simply because they have sold an investment in order to perfectly legally buy a new car. Thankfully, Barritt says, regulators are now talking about taking a risk-based approach rather than a tick-box approach to overcome problems like this. "Giving someone 500 alerts a day is as useless as giving them none at all and technology can search, monitor, match and move into suspicious activity reporting in a more meaningful way, assisting the targeting process."

So rules are changing, judgements are being contested through the courts and there remains the issue of incorporating technology smoothly into bank operations without disturbing innocent customers - not to mention economic and political uncertainty. So what might happen over the next 12 months? The jury's out.

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