ust J How Effectiis evMoney Laundering Legislation?

Security Journal, 2008, 21, (189 – 211)© 2008 Palgrave Macmillan Ltd 0955–1622/08 $30.00

www.palgrave-journals.com/sj

Just How Effective is Money Laundering Legislation? Jackie Harvey Newcastle Business School, Northumbria University , Newcastle NE1 8ST , U.K. E-mail: [email protected]

While much is made of the risks associated with money laundering, little in-depth work has been undertaken to understand the true extent of the problem. Money laundering is diffi cult to meas-ure. However, there is the implicit assumption among the regulatory authorities that amounts involved are huge; posing a signifi cant threat to the integrity of the fi nancial system and the reputation of domestic fi nancial institutions. This paper draws attention to problems that the author believes arise from the current focus of money laundering legislation on fi nancial sector compliance, by examining the validity of “ second best ” indicators of effectiveness. A prelimi-nary attempt is also made to evaluate the association between money laundering and reputation looking for evidence of a “ virtuous circle of compliance ” . It draws from a pilot questionnaire and interviews carried out with fi nancial institutions as well as from statistical data made available to the author by the U.K. Home Offi ce. Security Journal (2008) 21, 189 – 211. doi: 10.1057/palgrave.sj.8350054

Keywords: money laundering ; compliance ; reputation

Introduction

While much is made of the risks associated with money laundering, in particular to the in-tegrity of the fi nancial system, little has been done to accurately assess the true extent of the problem or the appropriateness of the legislative measures in place. In the absence of accu-rate data, amounts are assumed to be huge, posing a signifi cant threat to society in general and to the fi nancial system in particular. This paper contributes to the debate by drawing attention to the practical implications of the legitimacy seeking activity displayed by the regulatory authorities that is focused on “ effectiveness measures ” . It draws from a pilot questionnaire and interviews (details given in Appendix B ) carried out with fi nancial institu-tions as well as from statistical data made available to the author by the U.K. Home Offi ce.

“ Justifi cation ” for money laundering legislation

One of the challenges facing academics working in the fi eld of money laundering is the fact that this phenomenon defi es attempts to develop any accurate economic analysis of its true magnitude. It can be argued, therefore, that global estimates are little more than informed guesses: “ … large numbers are frequently thrown around without serious support ” ( Reuter and Truman, 2005, p. 56 ), that are re-produced to the point at which they gain, through mere repetition, some form of reliable accuracy (see also Levi and Reuter, 2006, p. 327 ).

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In consequence, the alarmist notion of the volume of money laundering being of major sig-nifi cance cannot be objectively challenged ( Harvey, 2005b ). Van Duyne (2003) points to the tendency to assume money laundering is of such a magnitude and scale that it is a “ global menace ” (pp. 68, 74), while van Duyne et al. (2005, p. 122) draw attention to the spurious nature of these numbers and the zealous assumption of their constant upward spiral. Citing Reuter (2000) , they fi nd justifi cation for talking up the fi gures as lower estimates simply invalidate the logic and emphasis of anti-money laundering (AML) legislation ( ibid. p. 136). Alvesalo and Tombs (2005, p. 13) interpret such social panic approach as providing oppor-tunity “ for expanding the totality of the repressive armoury of the State ” while Alldridge (2003) notes the rhetoric deliberately employed by the authorities who talk of the “ war on drugs ” , the “ fi ght against terrorism ” ; implicitly indicating such skirmishes to be winnable through the reduction of money laundering activity. To the extent that they are not “ … the money laundering crusade could be presented as an exercise in futility ” (p. 17).

Theoretically, effectiveness of AML legislation should be measured by reference to a reduction in predicate crime ( Reuter and Truman, 2005 ; Boorman and Ingves, 2001 ) as well as by a reduction in opportunity for money laundering to occur. This diffi cultly with meas-urement is also highlighted, albeit within the context of international intervention, by Levi and Gilmore (2002, p. 342 ) who state:

… it was never clear whether such monitoring [of fi nancial transactions] and confi scation [of criminal proceeds] constituted a suffi cient as well as a necessary condition for success (nor how it would be identifi ed if and when ‘ success ’ had been attained.

However, keen to provide performance indicators for elusively non-quantifi able outputs, regulatory authorities in the U.K. have, inadvertently, promoted what can be described as a second best legitimizing approach focussed on compliance with systems and procedures – the “ tick-box ” culture ( Harvey, 2005a ). Interviewee 5 1 acknowledged that “ the emphasis on money laundering is on inputs and processes with little on the basis of outputs ” . However, they were also aware of the “ transmission loss ” from their “ risk based approach to supervi-sion ” and the industry ’ s “ slavish adherence to rules ” 2 with the result that “ The risk for the regulator is to set rules [as this] authorises a tick box mentality ” . Similarly, Interviewee 3 noted “ there is a clear tension between over-guidance and fi rms taking a risk based approach ” . This argument has also been made by Gill and Taylor (2003b, p. 210) who suggest that the “ regime is better characterised as ‘ one size fi ts all ’ ” .

The recent and continued expansion of legislation ( van Duyne, 2003 ; Harvey, 2005a ; Levi and Reuter, 2006 ) contains no real analysis of the costs and benefi ts or of its effective-ness but sheer hope that such blanket approach will in some way prove effective. Appendix A gives a summary of the key pieces of AML legislation that have been put into place over the period from 1986 to 2005. Yeandle et al. (2005, p. 14) notes that AML legislation “ applies to approximately 19,000 organisations in the U.K. ” and draw attention to the

1 Refer to Appendix B for information relating to both the pilot questionnaire and the interviews. 2 A further abstract from this interview is “ Companies do what they think they are required to do without thinking about why they are being required to comply … 9 out of 10 fi rms want to be told what to do – it absolves them of responsibility – if the regulator says they have to do it but it is nonsense it is not their problem ” .

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fervent nature with which the U.K. apply these regulations ( Harvey, 2005a ). The U.K. Gov-ernment is particularly assiduous in the application of its AML systems and procedures, being identifi ed by Levi (2003, p. 111) as “ the greatest devotee of anti-money laundering provisions within the European Union ” . Ever keen, the authorities point to the development of new and increasingly complex criminal methodologies as justifi cation for tightening the regulatory noose in order to remove any possibility of laundering activity, irrespective of the economic ineffi ciency imposed by such a burden. 3 Of course, widening the defi nition of laundering does, by implication, increase the amount of “ laundering ” taking place ( van Duyne, 2003, p. 69 ). Interviewee 7 noted that the “ widening of legislation to include tax evasion means that the original intention of the legislation is lost ” .

A social panic approach could perhaps justify blanket legislation but it “ could result in a competitive disadvantage ” ( Yeandle et al. , 2005, p. 14 ) in the event that the U.K. places a higher regulatory burden on its fi nancial sector than is the case in other jurisdictions. Results from the pilot questionnaire indicate some, but not overwhelming, agreement with the state-ment “ the costs of transaction monitoring far outweigh the potential benefi ts ” . 4 Interviewee 7 commented “ We have lost business due to compliance as despite best efforts we cannot sort out new customers quickly enough – this happens now and again ” , although Inter-viewee 1 commented “ reporting requirements may lead to a loss of wholesale business but [it] is not likely to be critical ” . 5

Costs and “ effectiveness ”

Clearly, the amount of regulation cannot continue to grow exponentially as at some point the costs, in terms of potential ineffi ciencies imposed on the economy as a whole and on the fi nan-cial services sector in particular, will outweigh any conceivable benefi ts. Masciandaro (1998, p. 112) views this trade-off as being “ between the effectiveness of anti-money laundering regula-tion … and the effi ciency of the system itself which is … impaired by the costs of regulation ” .

The costs of compliance are generally thought of comprising those tangible operational costs required to carry out the compliance function ( Masciandaro and Filotto, 2001, p. 136 ). Ceteris paribus , these are likely to be higher, the more extensive the regulation. Interviewee 7 commented that a “ rule of thumb in the business is one member of staff in compliance for 100 staff in investment and commercial banking business in the U.K. ” , while this statement refers to all compliance-related activity it does, nevertheless, provide an indication of the overheads implied. The machinery of compliance has become self-generating with increas-ing cost implications for the fi nancial sector ( Harvey, 2005a ). Interviewee 7 noted that

“ Stopping money laundering is a worthwhile and worthy objective but it has impli-cations in terms of costs and the requirement to hire additional resources. Demands of money laundering are immense and it is harder to cope with the costs of compliance .”

3 Implicit here is a belief in a causal linear relationship between increasing legislation and decreasing money laun-dering and by implication predicate crime. This relationship is explained by Masciandaro (1998, pp. 106 and 108) with the same point made by Levi and Reuter (2006, p. 320) . 4 Five respondents scored these 3 – 4, while two used a 6, indicating disagreement. 5 Refer also to the comments provided from the questionnaires, collated in Table B2, on the question over customer perception of variable practice between fi rms.


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and that “ the level of rigour disregards how little is achieved by obtaining the re-quired information ” .

It is interesting to note that Interviewee 5 commented

The fl ow of requirements from the FATF and the EU constrains the U.K. in terms of room for manoeuvre but there is no appetite for radical government change ” and that “ the KYC procedures is embedded in mythology of money laundering compli-ance and it will take a lot to suggest a different approach.

Indicating that so much has been committed to this particular approach, it would be dif-fi cult to consider alternative structures for dealing with money laundering, betraying some-thing of a “ sunk cost bias ” towards the status quo . This position is somewhat reinforced by the observation of Interviewee 1 that “ KYC is not an effective deterrent to criminals from using the banking system … this obsession with KYC does not bear fruit ” ; observations that appear consistent with the fi ndings of Gill and Taylor (2002) .

There is limited information available in the public arena concerning the amounts being spent by fi rms on compliance. Pricewaterhouse Coopers LLP (2003) noted that fi rms tend not to sepa-rately identify costs of money laundering from general costs of compliance and, if identifi ed, they are seldom included in public fi nancial statements. In part, this might arise from problems over interpretation, for example, should a high fi gure be seen as evidence of high levels of com-pliance or of corporate ineffi ciency and waste (someone else achieves the same for less). Kochan (2005) noted that HSBC spends £ 400m annually on compliance [presumably all types] but that such compliance activity does not itself translate into criminal prosecutions as “ electronic fi nan-cial systems move too quickly for hide-bound compliance ” . Interviewee 3 noted that

Financial institutions spend £ 80 million on money laundering compliance com-pared with an estimated £ 5 million spent on this activity by the police. Firms are told that money laundering is the highest priority – they then report information into NCIS 6 and the police for whom this type of crime has a very low priority.

More telling is the observation of Yeandle et al. (2005, p. 4, p. 6 ) that

“The U.K. has approached a ‘ tipping point ’ where past, current and future costs of [AML] legislation are perceived to be greater than the benefi ts ’ ’ and “ increasing the level of expenditure on the regulatory environment is not likely to yield great effectiveness in deterring money laundering.”

Looking at the results from the pilot questionnaire, there was broad agreement with the statement “ The focus on achieving compliance is so great that it is easy to miss money laun-dering activity ” . 7 Perhaps this is not surprising when van Duyne (1998, p. 370) notes little evidence that increasing costs (via increased regulation) has a deterrent impact of the amount of crime, “ it is business as usual ” ; a position supported by Alldridge (2003, p. 17) , who asks if the risk of detection and subsequent prosecution through the existing penal law codes is

6 As from the beginning of 2006, NCIS became part of SOCA (Serious Organised Crime Agency). 7 Five scored this between 2 and 3, one at 5 and only one strongly disagreed with the statement. Findings by Gill and Taylor (2003b, p.211) noted that “ 47.9 % [of their respondents] indicated that the regulatory burden was ‘ out of step with the money laundering risk ’ ” .


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an insuffi cient deterrent to the would-be criminal, what additional deterrent impact does AML legislation make on the criminal decision?

The “ benefi ts ” of legislation

The Government justifi es its extensive use of legislation on the basis that effective AML measures helps to make the U.K. less attractive to potential launderers “ protecting the fi nan-cial sector from operational and reputational risks ” ( HM Government, 2000, p. 1 ). Indeed, as shall be seen, much is made of the importance of the “ integrity ” of the fi nancial system.

From an economic perspective, the justifi cation for regulation can be evaluated from a cost / benefi t basis. There have been a number of government impact studies in relation to AML legislation that purport to apply these principles; unfortunately they tend to contain naive assessments of cost and little in the way of quantifi cation of any benefi t.

The compliance cost assessment note to the Money Laundering Regulations (HM Treasury, 1993) indicated total costs for the fi nancial services sector from implementing the regulations would be an initial £ 30m with recurrent costs of £ 20m per annum (paragraph 14). No attempt was made to quantifying benefi ts, noting simply: “ there will be benefi ts to business from reducing their vulnerability to money laundering ” (paragraph 12).

The impact assessment in relation to the Second Money Laundering Directive considered the costs and benefi ts arising from the incremental changes associated with extending the regulations to money service businesses indicating the “ additional costs of the regulatory regime to be relatively small ” with projected total sector costs per year of £ 5 – £ 7m. With respect to benefi ts, it was noted, “ society will be the main benefi ciary of the new regime, as a result of the more effective combating of money laundering and the criminal activity that underlies it ” ( HM Treasury, 2001, p. 9 ).

The third impact assessment ( HM Treasury, 2003 ) focused on the amendment to the Money Laundering Regulations of 1993 and 2001, needed to implement the requirements of the Second Money Laundering Directive by extending the coverage to include new professions and activities beyond the fi nancial sector. It was noted that the purpose of regu-lation was to “ change the economics of crime by increasing both the costs and the risks of laundering ” (paragraph 48). Costs of the preferred option 2: the “ functional approach ” , were identifi ed as being between £ 80 and £ 100m for the legal and accounting professions, with a further £ 10 to £ 15m initial costs and £ 5 to £ 7.5m in recurrent costs for estate agents. The paper did note (p. 63): “ These fi gures are substantially larger than the initial RIA which estimated such costs would be between £ 8 and £ 16m ” . Benefi ts are simply a “ reduction in money laundering activity ” (paragraph 49). Refreshingly the paper does acknowledge that:

The ideal measure of success would be the quantifi able reduction of money laun-dering that is attributable to these anti-money laundering measures. However, it is diffi cult both to quantify the amount of money laundering activity given that by its very nature it is clandestine and to quantify the deterrent effect of anti-money laundering procedures on criminal activity ( ibid . p. 11).

Interestingly, the authors do state “ the main intermediate, quantifi able benefi ts of the proposed options … would be an improvement in the intelligence available to law


194

enforcement and prosecutors ” , interpreted as an increase in suspicious activity reports (SARs) with particular focus on those from lawyers and accountants; it being anticipated that these reports would generate an associated increase in criminal convictions, the value of criminal assets seized and disruptions to criminal activity.

Ultimately, the increase in the number and quality of SARs will provide the best single measure of success, given that prevention and deterrence activity is hard to quantify, and thus SARs will indicate the regulated sector ’ s awareness and activity in combating money laundering ( ibid . p. 11).

The most recent of the assessments was undertaken for the Third Money Laundering Direc-tive (HM Treasury 2005). This document (paragraph 96) notes the benefi ts to the regulated market as “ Increasing further the integrity of the sector ” . It also highlighted the expected “ in-crease the quality of suspicious activity reports ” and the anticipated associated increase in the number of convictions and asset seizure. 8 Costs were estimated as between £ 5 and £ 46m per annum, depending on the extent to which fi rms were already compliant with existing guidance.

From the foregoing, it is evident that the costs of compliance fall onto the fi nancial sector and related professions while the benefi ts tend to fall to law enforcement and the govern-ment in general. A noticeable feature is the importance placed on the “ integrity ” of the fi nancial system (as an ultimate and totally unquantifi able output) and reliance on the “ sec-ond best ” measures of effectiveness – an increase in SARs, prosecutions and asset recovery. Attempting to fi nd valid measures of performance is not new, the FATF (2001) considered SARs in the light of a number of other variables seen to provide evidence of effective com-pliance, including the number of prosecutions and asset seizure orders.

While such a positive approach lends itself to quantifi cation, by defi nition it fails to con-sider any non-quantifi able impact such as the regulatory burden of ineffi cient legislation. This paper looks, therefore, at each of these different measures of effectiveness to see if (despite their shortcomings) they jointly provide “ justifi cation ” for money laundering legis-lation. 9 As already noted, use has been made of responses to a small questionnaire and subsequent interviews conducted with a range of representatives from both the fi nancial and law enforcement sectors. These interviews covered issues with respect to effectiveness, costs and benefi ts of the regime but also enabled the subject of integrity and reputation to be explored. Data on SARs, prosecutions and asset recovery have been obtained from the U.K. Home Offi ce and from other U.K. Government published sources. It is acknowledged that the fi ndings are of a preliminary nature and, rather than answering questions, tend to point the way forward to further work that might usefully be undertaken.

Justifi cation one – issues of reputation

Governmental efforts to counter money laundering have been concentrated on the fi nancial sector and much is made of the importance of integrity, as the effective functioning of

8 Although Levi and Reuter (2006, p. 335) note that “ expectations of high prosecution and / or criminal asset yield from SARs may be unrealistic, even without ‘ defensive reporting ’ ” due to diffi cultly in evaluating the reason for the suspicion without interviewing and hence “ tipping off ” the subject. 9 An obvious short coming of this work is that it does not offer alternative measures of effectiveness.


195

fi nancial markets is considered to be highly dependent upon reputation. The IMF have long held the belief that money laundering can “ harm the soundness of a country ’ s fi nancial sec-tor as well as the stability of individual fi nancial institutions ” ( Schott, 2006, p. II-4 ), and that a high degree of co-mingling of contaminated funds within fi nancial institutions will con-tribute to instability in the liability base or unsound asset structures creating systemic risk and monetary instability ( Quirk, 1997 ).

Compliance with AML regulation is justifi ed on the basis that its absence will result in damage to reputation and a consequent withdrawal of business. This line is held even if the involvement of the institution is to all intents and purposes unintentional. As a subjective concept, however, there is no accepted statistical method by which reputation, or more im-portantly damage to reputation, may be defi ned and hence measured.

Harvey (2005b) discussed intangible benefi ts to reputation that the compliance function has on the relationship with the customer, with competitors and by defi nition, the outside world and tangible benefi ts arising from the avoidance of penalties imposed by the regulator for non-compliance. Bebbington et al . (2006) note “ reputation is viewed as an intangible asset ” (p. 4) and “ It is important to note that reputations are based on perceptions and are thus inherently subjective ” (p. 5). The expectation is that loss of reputation will result in some tangible costs being incurred, this might result from a withdrawal of deposits or of shareholder support and subsequent negative impact on the share price, supporting the notion put forward both by Bebbington et al. (2006) and van Duyne et al. (2005) that reputation may be viewed as an asset of the bank.

Responses to the pilot questionnaire noted strong agreement with the statement “ the major risk arising from money laundering is risk to our reputation ” 10 and a “ secure reputa-tion ” was seen to fl ow as a benefi t from compliance with money laundering legislation (Respondents C and A). 11 Interviewee 4 noted “ reputational benefi ts are huge ” . And “ repua-tional costs [Paine Webber and Bank of Scotland were both cited as having lost business as a result of the regulatory fi nes] provide suffi cient incentive to comply ” . Interviewee 3 noted that “ much compliance activity is driven by fear rather than by benefi ts to the fi rm ” .

Interviewee 7 had a great deal to say on the issue of reputation:

public sanction and reputation damage is enormous … it focus[es] the minds of managers on the undesirability of FSA enforcement – investigation is very time consuming – 18 months and that is a huge cost to business. If it goes wrong there is a six fi gure fi ne. Financial institutions rely on having a good name; within [name of bank] this would be viewed as extremely damaging and serious. … this would have a huge impact irrespective of whether we lost customers as a result.

This cost in terms of management time is also highlighted by Levi et al. (2003, p. 14) . If the potential damage to reputation is seen as so signifi cant, one might have expected to

fi nd evidence of a “ virtuous cycle ” in compliance – in which banks compete to be the “ most compliant ” , with normal profi t-maximizing fi rms being prepared to spend on AML compli-ance up to the point that the costs incurred are equal to the value placed by the fi rm on its reputation. Further, as part of its stakeholder management, this information would be made

10 Three scored it a 1, three scored it a 2 and one a 3. 11 Respondent E noted the reputation was in relation to standing in the eyes of the regulator.


196

public as an enhancement to reputation. Evidence, however, does not seem to support this hypothesis. Harvey (2004) surmised that this might be explained by fi rms viewing compli-ance as an external cost – outside the immediate control of management. The risk for the regulators, however, is that events actually manifest as the opposite to this scenario – with fi rms competing to achieve minimal compliance and gain competitive cost advantage in do-ing so ( Masciandaro and Filotto, 2001, p. 135 ).

It is curious to note that while respondents noted the signifi cance of reputation as a rea-son for spending on AML compliance, this does not seem to be linked in any way to the need to manage public / stakeholder perception of AML measures through disclosure in annual reports and accounts. This appears to lend support to the “ communications gap ” identifi ed by Yeandle et al. (2005, p. 50) surrounding the lack of public perception of the importance of AML activity initiated by fi nancial institutions. This may be due to two separate ele-ments; fi rstly, banks are reluctant to disclose the amount of funds being spent on compli-ance; and secondly, they tend to be reluctant to share any information on compliance with their competitors. Interviewee 7 noted “ people in compliance are reluctant to share informa-tion directly with one another in case they give something away ” . Interviewee 1 noted

“ In the past we were prepared to spend on compliance but it is now like an es-calator – constantly going up. People are starting to say you must take your foot off the gas. This was driven by reputation risk but evidence is that fi nes do not damage reputation. Reputation risk was only the fear of being fi ned ” . Further this interviewee noted that “ no mention or statement of money laundering activity is included in the annual report. We do not wish to draw attention to the amounts be-ing spent on compliance as this would result in a small revolt internally” and more telling “ the BBA would have to drive any disclosure of costs but … it does not have the appetite to do this are they are too much in pocket with the statutory authorities – they seem to produce more demand for compliance ” .

It is possible that this links to the comments by Kochan (2005) that emphasizing expenditure on compliance (being good for reputation) is actually detrimental due to the implied cost overheads carried by the institution. In other words, the negative “ costs ” out-weigh the positive “ reputation ” . Interviewee 6 commented:

“Financial institutions agree there is a need to reduce money laundering but the costs of doing this should be within reason” and that “Government should pick up the cost. It is diffi cult for a profi t oriented institution to carry these costs.”

Interviewee 7 noted that “ demands of money laundering are immense and it is harder to cope with the costs of compliance ” and “ the level of rigour disregards how little is achieved by obtaining the required information … identifi cation does not provide a barrier to crime ” . Adding further “ given that applying money laundering rules in full does not stop fi nancial crime it is unreasonable to require such a level of perfection ” .

Van Duyne et al. (2005) present a convincing argument that bank losses have been due to unethical behaviour (operational risk cases) rather than being the result of an exclusive infl ux of “ crime-money ” and suggest that “ integrity of the fi nancial system ’ ’ can be aban-doned as “ mere rhetoric ” . They do not deny its importance, as all fi nancial systems depend on trust “ integrity of fi nancial institutions remain of predominant importance, not because


197

of the colour of money, but because of the trust bestowed by customers ” (p. 124), but that this, signifi cantly, includes the honest person and criminal alike ( Harvey, 2005b ). Thus, money laundering will only become a public issue when customers lose money, 12 until that point, there is no “ perceptible victim with whom to empathise ” ( Alldridge, 2003, p. 13 ). 13

Money laundering is not on the radar for the general public and this simple fact might well explain the complete lack of public reaction to the fi nes metered out by the FSA. A full list of fi ned banks appears in Table 1 , although it should be noted that all these institutions (apart from NIIBL) have been fi ned for non-compliance and not for money laundering. In the event that little was said, or indeed that there was no reaction to the news then perhaps there is nothing to link non-compliance with reputation risk. In this regard, it is interesting to observe the comment by Interviewee 3 “ the risks arising from failure to comply are the fi nancial hit of regulatory damage and the smaller reputation damage ” .

Justifi cation two – SARs

The volume of SARs has been used as a performance measure by both the government and by the industry as evidence of effectiveness by the former and compliance by the latter ( Harvey, 2004, 2005a ). Van Duyne et al. (2005) note that emphasis on increased number of SARs has been quietly set aside as it became evident that the geometric rise in numbers merely refl ected the extension of legislation rather than resulting from more vigilant and effective compliance activity. They further argue that the call for the ever widening powers fails to balance law enforcement interests with the costs of regulatory compliance. The move to “ unpaid policemen ” ( Levi and Reuter, 2006 ; Gill and Taylor, 2003b ; Interviewees 1, 3 and 6) has resulted in a culture of compliance (referred to as “ fear driven ” by Interview-ees 6 and 3), that is, risk avoiding and over-reporting “ clogging the system with tens of thousand never-to-be-proceed reports ” ( Gill and Taylor, 2004 ) while a “ revenue oriented law enforcement ” means that targets are set for revenue recovery – not as a means to tackle crime but in order to shore up the fi scal probity (pp. 24, 26, 27). Despite the fact that the authors are drawing from their experiences of the Netherlands this provides an equally accurate refl ection of the U.K. situation.

The rising number of SARs is clearly illustrated in Figure 1 ; compiled using data sup-plied by the U.K. Home Offi ce (see Table 2 ). There is evidence of the impact of both extend-ing legislation 14 and of the tendency for institutions to adopt a defensive approach reporting the unusual rather than truly “ suspicious ” ; an observation also made by Levi and Reuter (2006) and Gill and Taylor (2003a ) . “ fi rms are reporting to cover their own backs ” (Inter-viewee 3) and, more concerning, “ we have targeted a growth in suspicious transaction

12 The distinguishing feature of the case of BCCI, which is perhaps the one most openly associated with money laundering, was that the customers lost money as a result of fraud committed by its directors, not as a result of the laundering. 13 Although Reuter and Truman (2005, p. 60) argue “ Banks … are quasi-public utilities, and the public does not want them to be directly involved in handling dirty money ” . 14 The majority are still fi led by banks (67.4 % in 2005) with 6.3 % from building societies, 7.2 % from accountants and 5.5 % from the legal profession.


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reports as an output. This focus on driving up the level of referrals was a result of being told by the FSA that for a bank of our size we were not reporting enough ” (Interviewee 1 also reported in Harvey. 2005a ). Indeed, banks can see “ no downside in reporting too much ” ( Economist, 2004 ). Recognizing this shortcoming, emphasis has been switched from

Table 1 Institutions found to be failing to apply anti-money laundering regulations

Date Institution Reason Sanction

Nov 2005 Investment Services UK Ltd (ISUK) Bond Broker

Failure to control its business effectively in relation to anti-money laundering systems and controls

£ 175,000

Sept 2004 Bank of Ireland Breaches of AML requirements £ 375,000 April 2004 Raiffeisen Zentralbank

Ö sterreich (RZB) Breach of money laundering rules £ 150,000

Jan 2004 Bank of Scotland (now HBOS)

Breach of money laundering rules £ 1,250,000

Dec 2003 Abbey National plc Breach of money laundering rules £ 2,000,000 Aug 2003 Northern Bank Limited Inadequate KYC and identity

verifi cation £ 1,250,000

Dec 2002 Royal Bank of Scotland PLC

Breaches of money laundering rules – inadequate KYC and record maintenance

£ 750,000

May 2002 Northern Ireland Insurance Brokers Limited (NIIBL)

Involvement in fi nancial crime including money laundering

No longer able to carry out any form of regulated activity and closed down in May 2003

Aug 2001 Paine Webber International (U.K.) Limited

Serious compliance failures including inadequate controls to prevent money laundering (KYC, record keeping and staff training) (Imposed by SFA)

£ 350,000

Source : FSA Press Releases (various) Fines levied to date are for failing to apply anti-money laundering regulations (apart from Northern Ireland Insurance Brokers). According to the PIU (2000, p. 3) there were no convictions prior to 2000.

SARs made to NCIS

0

50000

100000

150000

200000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005Year

Nu

mb

er

Figure 1 . Number of disclosures made to NCIS 1995 – 2005 (year ending 31 March).


199

volume to effectiveness measured in terms of both criminal prosecutions and subsequent asset recovery.

Justifi cation three – prosecutions

The U.K. Government has begun to monitor the number of prosecutions as a measure of the effectiveness of AML activity, anticipating a positive correlation between disclosures and prosecutions. Interviewee 8 noted that they would “ look at the number of people who have been prosecuted as indicative of the effectiveness of local regulation ” . Data have been ob-tained from the Home Offi ce on numbers of prosecutions and convictions related to money laundering under the Drug Traffi cking Act 1994; the Criminal Justice Act 1988 and the Proceeds of Crime Act 2002. Totals are shown in Figure 2 (plotted against the number of SARs), with data supplied in Table 3 .

Obviously, an increase in prosecutions might be expected, it is, however, more relevant to look at the conversion rate of prosecutions into convictions as an indicator of the quality of evidence (assuming that the prosecutions arise as a result of the SAR system). There is no clear trend evident from the data shown in Tables 3 and 4 , although the conversion rate tends to be well under half with an average of 41 % . This would appear to support the observations of Reuter and Truman (2005) in relation to conviction rates in the U.S., “ most launderers face a low risk of getting caught ” (p. 59). It also bears upon earlier fi ndings by Gill and

Table 2 Number of disclosures made to NCIS 1995 – 2005 (year ending 31 March)

Year 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 (P)

Total 11,289 12,750 15,007 13,710 16,125 14,148 14,129 15,115 18,447 29,976 56,023 94,708 154,536 180,374

U.K. Government Home Offi ce, data for 2005 is a projection based on returns to August.

Prosecutions, Convictions and SARs

0

100

200

300

400

500

600

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Year

020,000

Num

ber

of S

AR

s

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

Prosecutions Convictions SARs

Num

ber

Pro

secu

tions

or

conv

ictio

ns

Figure 2 . Money laundering prosecutions, convictions and SARs (1992 – 2004).


200

Taylor (2003a) and Harvey (2004) that institutions are surprised by the lack of prosecutions for money laundering given their diligence in reporting. Respondents to the pilot survey noted agreement with the statement “ it is surprising that there are not greater numbers of prosecutions for money laundering with the U.K. ” 15 It is also instructive to note the com-ments from Interviewee 1 that application of Know Your Customer (KYC) had failed to unearth any large money laundering cases with those that had been found resulting from the intelligence operations of the U.K. Customs and Excise Department. That said, the number of both prosecutions and convictions has risen (principally refl ecting the introduction of the Proceeds of Crime Act) and there is evidence of positive correlations between prosecutions, convictions and SARs. 16 However, it is important to note, again from Table 4 , that the actual number of prosecutions per SAR currently stands at 0.35 % 17 (averaging 0.4 % for the period), signifi cantly smaller than the 6 % reported by Levi and Reuter (2006, p. 343) . 18 Convictions per SAR in 2004 stood at 0.13 % , having increased from 0.07 % in 1992.

Table 3 Money laundering prosecutions and convictions 1993 – 2004

Legislation Numbers 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

s49 – 53 Drug Traffi cking Act 1994 (previously s14 Criminal Justice (international Cooperation) Act 1990 (s49) and s24 and 23A of Drug Traffi cking Offences Act 1986)

Prosecuted Convicted Conversion rate (%)

8 4

50.0

15 5

33.3

26 3

11.5

21 5

23.8

48 28 58.3

35 16 45.7

87 30 34.5

79 26 32.9

91 43 47.3

129 40 31.0

80 50 62.5

43 28 65.1

Criminal Justice Act 1988 (s93A – 93D) as amended by the Criminal Justice Act 1993 (s29 – 32)


3 0 0.0

11 8

72.7

28 15 53.6

17 10 58.8

39 9

23.1

50 24 48.0

91 32 35.2

127 46 36.2

131 58 44.3

95 49 51.6

Proceeds of Crime Act 2002 (s327 – 334)


87 409 15 125 17.2 30.6

Total for all legislation

Prosecutions 8 15 29 32 76 52 126 129 182 256 298 547 Convictions 4 5 3 13 43 26 39 50 75 86 123 202

Source : U.K. Government Home Offi ce.

15 Six scoring from 4 and above with only 1 indicating disagreement (6). 16 R 2 statistics for SARs and Prosecutions and SARs and Convictions are 0.92 and 0.91, respectively.

18 They note “ At least 6 % of a sample of SARs … resulted in a ‘ positive law enforcement outcome ’ (i.e., prosecu-tion, confi scation, cash seizure etc.).

17 Although prosecutions per SAR have increased from 0.10 % in 1992 to 0.35 % in 2004.


201

Tabl

e 4

Mon

ey la

unde

ring

dis

clos

ure,

pro

secu

tion

and

effe

ctiv

enes

s 19

92 – 2

004

19

92

1993

19

94

1995

19

96

1997

19

98

1999

20

00

2001

20

02

2003

20

04

Pros

ecut

ions

11

8

15

29

32

76

52

126

129

182

256

298

547

Con

vict

ions

8

4 5

3 13

43

26

39

50

75

86

12

3 20

2 SA

Rs

11,2

89

12,7

50

15,0

07

13,7

10

16,1

25

14,1

48

14,1

29

15,1

15

18,4

47

29,9

76

56,0

23

94,7

18

154,

536

Con

vers

ion

rate

(p

rose

cutio

ns in

to

conv

ictio

ns)

(%)

72.7

50

.0

33.3

10

.3

40.6

56

.6

50.0

31

.0

38.8

41

.2

33.6

41

.3

36.9

Ass

ets

reco

vere

d £ m

a 5.

68

5.67

6.

40

6.30

10

.59

14.9

3 19

.31

29.5

2 23

.52

25.2

3 47

.00

54.5

0 84

.44

Rec

over

y pe

r SA

R £

50

3.14

44

4.71

42

6.47

45

9.52

65

6.74

10

53.3

0 13

66.7

0 19

53.0

0 1

275.

00

841.

70

838.

94

575.

39

546.

40

Pros

ecut

ions

%

SAR

0.

10

0.06

0.

10

0.21

0.

20

0.54

0.

37

0.83

0.

70

0.61

0.

46

0.31

0.

35

Ass

ets

reco

vere

d pe

r pr

osec

utio

n £ m

0.51

64

0.70

88

0.42

67

0.21

72

0.33

09

0.19

64

0.37

13

0.23

43

0.1

823

0.13

90

0.18

36

0.18

29

0.15

40

Sour

ce : F

AT

F, U

.K. G

over

nmen

t Hom

e O

ffi c

e an

d A

sset

Rec

over

y A

genc

y.

a Dat

a re

fer

to o

vera

ll to

tals

for

ass

et r

ecov

ery

rece

ipts

into

the

Con

solid

ated

Fun

d fo

r fi n

anci

al y

ears

.


202

Justifi cation four – asset recovery

A further indicator of the effectiveness of SARs might be provided by the number of confi sca-tion orders made and the resulting value of proceeds recovered. Interviewee 8 commented that “ effectiveness of law enforcement is measured by prosecutions and by assets restrained ” . Data for asset recovery are shown in Table 4 for the period 1992 – 2004 and has been compiled from the FATF, U.K. Home Offi ce and from the Asset Recovery Agency. The table provides details of asset recovery in sterling millions but also expresses this amount relative to the number of SARs and prosecutions. Figure 3 illustrates the correlation between the assets recovered and the volume of SARs, 19 although asset recovery should also be set in the context of the number of SARs and, as illustrated in Figure 4 in recent years especially, the amounts per SAR are not particularly noteworthy, having averaged (2002 – 2004) just £ 654 per report. Recovery per prosecution has also fallen signifi cantly, averaging £ 0.173m for the same period.

Obviously, these are “ back of envelope calculations ” but it does bring into question the whole issue of effi ciency of the “ second best ” indicators. Noting the caveats over measuring money laundering, the Customs and Excise department have estimated the volume of mon-ey laundering in the U.K. as between £ 19 and £ 48b with a “ best guess ” of £ 25b ( NCIS, 2003, p. 53 ). There is no evidence how this fi gure was derived, however, it was endorsed by Interviewee 8 “ estimates from Customs in the U.K. would be reasonable ” . Transparency International (2003 p. 5) quote Home Offi ce estimates that laundered funds amount to 2 % of GDP, or about £ 18b. Assuming the fi gure of £ 25b is per annum, the government is on average (2002 – 2004) recovering £ 62m and while this is a marked improvement over prior years it only equates to 0.25 % of estimated laundered funds. Not surprisingly, employment of confi scated assets to fund investigations was supported by Interviewee 8 who comment-ed, “ A signifi cant amount is spent on investigation ” , “ prosecutions are very costly ” and “ [name of force] uses confi scated funds to support investigation ” . That said, The Economist (2005) , drew attention to the fact that POCA has not proved cost-effective commenting “ It

Assets Recovered and SARs

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004Year

Nu

mb

er o

f S

AR

s

0

10

20

30

40

50

60

70

80

90

£ M

illio

ns

SARs Assets recovered

Figure 3 . Assets recovered in £ m and SARs (1992 – 2004).

19 The correlation coeffi cient was 0.92.


203

seems odd that such powerful tools are uncovering so little cash ” , indeed it would appear to have been most unsuccessful.

Concluding remarks

This paper noted the diffi culty in establishing whether the diligent application and enforce-ment of rules and regulations has any appreciable impact on money laundering activity and, therefore, sought to evaluate the effectiveness of the “ second best ” measures of reputation, SARs, prosecutions and asset recovery.

Evidence presented reinforces the importance of reputation to institutions as a reason for absorbing the cost of AML compliance but that money laundering does not appear to be an issue of public concern. The rise in the number of SARs has been refl ected to some extent through increases in the numbers of both prosecutions and convictions; however, it is noted that while both prosecutions and convictions per SAR have increased they do remain at extremely low levels. The same observation is true of asset recovery. The question is to what extent do 669 convictions for money laundering offences and the recovery of £ 327.41m (gross) in assets over a period of 12 years justify the rigour and detail implied by the current “ fear-driven ” approach to compliance that rather than being risk based has resulted in a “ slavish adherence to rules ” .

Cost of implementing these controls is not inconsequential. With so much invested over the past decade, not surprisingly, the compliance machinery has become self-perpetuating as a major benefi ciary, along with the agencies that have been put in place to enforce the legislation, making it diffi cult to advocate alternatives.

However, regulation creates externalities and a sub-optimal solution, in the event there is no clear association between compliance and reduction in money laundering, it might be argued that a welfare superior solution would be removal of government intervention and subsequent regulation by the free market. This argument is more compelling when it cannot be demonstrated that benefi ts exceed costs; that the removal of regulation would actually impact on the amount of money laundering activity; or that, as noted by Alldridge, the entire banking system would collapse through failure to regulate against laundering (2003, p. 39).

Regulated by the free market, banks would have an incentive to avoid for themselves as-sociation with criminal funds and “ unsavoury clients ” as other legitimate clients would shift monies to non-contaminated banks resulting in loss or depreciation of the bank ’ s reputation.

Asset Recovery in Terms of SARs and Prosecutions

0

500

1000

1500

2000

2500

1992

Rec

over

y pr

SA

R £

Rec

over

y pe

r pr

osec

utio

n £m

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004Year

00.10.20.30.40.50.60.70.8

Recovery per SARAssets recovered per

prosecution £m

Figure 4 . Value of assets recovered per SAR ( £ ) and per prosecution ( £ m) (1992 – 2004).


204

Lomax (1987) cited in Franks et al. (1998, p.1548) makes a most salient observation “ the only major threat to the future health of the fi nancial services industry is that of excessive or inappropriate legislation ” .

References

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Alvesalo , A . and Tombs , S . ( 2005 ) Evaluating Economic Crime Control? Security Journal . Vol. 18 , No. 4 , pp 7 – 15 . Bebbington , J . , Larringaga , C . and Moneva , J . M . ( 2006 ) Corporate Social Reporting and Reputation Risk

Management . Unpublished mimeo . Boorman , J . and Ingves , S . ( 2001 ) Financial System Abuse, Financial Crime and Money Laundering – Back-

ground Paper . Monetary and Exchange Affairs and Policy Development and Review Department, February 12th, IMF Washington .

Economist ( 2004 ) Coming Clean . 10 October . Economist ( 2005 ) When Policing Doesn ’ t Pay . 17 March . FATF ( 2001 ) Review of FATF Anti-Money Laundering Systems and Mutual Evaluation Procedures 1992 – 1999 ,

16 February. Available at: http://www.fatf-gafi .org . Franks , J . R . , Schaefer , S . and Staunton , M . ( 1998 ) The Direct and Compliance Costs of Financial Regulation .

Journal of Banking & Finance . Vol. 21 , pp 1547 – 1572 . Gill , M . and Taylor , G . ( 2002 ) Tackling Money Laundering: The Experiences and Perspectives of the U.K.

Financial Sector . A report by the Scarman Centre, University of Leicester, Summer . Gill , M . and Taylor , G . ( 2003a ) Can Information Technology Help in the Search for Money Laundering? The Views

of Financial Companies . Crime Prevention and Community Safety: An International Journal . Vol. 5 , No. 2 , pp 39 – 48 .

Gill , M . and Taylor , G . ( 2003b ) The Risk-based Approach to Tackling Money Laundering: Matching Risk to Products . Company Lawyer . Vol. 24 , No. 7 , pp 210 – 213 .

Gill , M . and Taylor , G . ( 2004 ) Preventing Money Laundering or Obstructing Business? Financial Companies ’ Perspectives on “ Know Your Customer ” Procedures . British Journal of Criminology . Vol. 44 , No. 4 , pp 582 – 594 .

Harvey , J . ( 2004 ) Compliance and Reporting Issues Arising for Financial Institutions from Money Laundering Regulations: A Preliminary Cost Benefi t Study . Journal of Money Laundering Control . Vol. 7 , No. 4 , pp 333 – 346 .

Harvey , J . ( 2005a ) An Evaluation of Money Laundering Policies . The Journal of Money Laundering Control . Vol. 8 , No. 4 , pp 339 – 345 .

Harvey , J . ( 2005b ) Controlling the Flow of Money-Laundering or Satisfying the Regulators . In van Duyne, P., von Lampe, K., van Dijck, M. and Newell, J. (eds) The Organised Crime Economy: Managing Crime Markets in Europe . Tilburg, The Netherlands: Wolf Legal .

H.M. Government ( 2000 ) Recovering the Proceeds of Crime . A Performance and Innovation Unit Report, June, Chapter 9, London. Available at: http://www.ncis.gov.uk/publications.asp .

H.M. Treasury ( 1993 ) Money Laundering Regulations: Compliance Cost Assessment . 28 July, London . H.M. Treasury ( 2001 ) The Money Laundering Regulations 2001, Final Regulatory Impact Assessment . London . H.M. Treasury ( 2003 ) Full Regulatory Impact Assessment: Money Laundering Regulations 2003 . London . Johnson , J . ( 2001 ) Australia: Attitudes to Extending the Scope of Anti-Money Laundering Legislation . Journal of

Money Laundering Control . Vol. 5 , No. 1 , pp 16 – 24 . Kochan , N . ( 2005 ) The Washing Machine , Observer, 5 June . Levi , M . ( 2003 ) Following the Criminal and Terrorist Money Trails . In van Duyne, P., von Lampe, K. and

Newell, J. (eds) Criminal Finances and Organising Crime in Europe . Nijmegen, The Netherlands: Wolf Legal Publishers .

Levi , M . and Gilmore , W . ( 2002 ) Terrorist Finance, Money Laundering and the Rise and Rise of mutual Evaluation: A New Paradigm for Crime Control? European Journal of law Reform . Vol. 4 , No. 2 , pp 337 – 364 .

Levi , M . and Reuter , P . ( 2006 ) Money Laundering . Crime and Justice . Vol. 34 , pp 289 – 376 . Levi , M . , Morgan , J . and Burrows , J . ( 2003 ) Enhancing Business Crime Reduction: U.K. Directors ’ Responsibilities

to review the Impact of Crime on Business . Security Journal . Vol. 16 , No. 4 , pp 7 – 27 .


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Lomax , D . ( 1987 ) Financial Markets after the Financial Services Act, Butterworths, London . Masciandaro , D . ( 1998 ) Crime, Money Laundering and Regulations: The Microeconomics . Journal of Financial

Crime . Vol. 8 , No. 2 , pp 103 – 112 . Masciandaro , D . and Filotto , U . ( 2001 ) Money Laundering Regulations and Bank Compliance Costs: What do

Your Customers Know? Economics and the Italian Experience . Journal of Money Laundering Control . Vol. 5 , No. 2 , pp 133 – 145 .

NCIS ( 2003 ) U.K. Threat Assessment Threat Assessment of Serious and Organised Crime . U.K. Government. Available at: http://www.ncis.gov.uk/publications.asp .

PricewaterhouseCoopers LLP ( 2003 ) Anti-money Laundering Current Customer Review Cost Benefi t Analysis . Report prepared for the FSA, May .

Quirk , P . ( 1997 ) Money Laundering: Muddying the Macroeconomy . Finance and Development . pp 7 – 9 , March, IMF, Washington .

Reuter , P . ( 2000 ) Transnational Crime: Drug Smuggling . Paper presented at the Conference on Transnational Crime, University of Cambridge, January, cited in van Duyne, P., Groenhuijsen, M. and Schudelaro, M. (2005) Balancing Financial Threats and Legal Interests in Money-Laundering Policy. Crime Law and Social Change , Vol. 43, pp 117 – 147 .

Reuter , P . and Truman , E . ( 2005 ) Anti-Money Laundering Overkill? It’s Time to Ask How Well the System is Working . The International Economy . Winter 2005, pp 56 – 60 .

Schott , P . ( 2006 ) Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism , 2nd Edition. Washington: IBRD/IMF .

Transparency International U.K. ( 2003 ) Clean Money, Dirty Money: Corruption and Money Laundering in the U.K. . Policy Research Paper 002, June .

van Duyne , P . ( 1998 ) Money-laundering: Pavlov’s Dog and Beyond . Howard Journal of Criminal Justice . Vol. 37 , No. 4 , pp 359 – 374 .

van Duyne , P . ( 2003 ) Money Laundering Policy. Fears and Facts . In van Duyne, P., von Lampe, K. and Newell, J. (eds) Criminal Finances and Organising Crime in Europe . Nijmegen, The Netherlands: Wolf Legal Publishers .

van Duyne , P . , Groenhuijsen , M . and Schudelaro , M . ( 2005 ) Balancing Financial Threats and Legal Interests in Money-Laundering Policy . Crime Law and Social Change . Vol. 43 , pp 117 – 147 .

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Appendix A

Relevant AML legislation

Year Legislation

1986 Drug Traffi cking Offences Act 1986 1987 1988 Criminal Justice Act 1988 (ss 93A – 93D) 1989 Prevention of Terrorism (Temporary Provisions) Act (ss 11 – 13) 1990 JMLSG produced fi rst Money Laundering Guidance Notes Criminal Justice (International Cooperation) Act 1990 1991 First European Union Money Laundering directive (EU Council Directive 91/308/EEC 10

June 1991), designed to given legal force in the U.K. to the EATF ‘‘40 recommendations’’ 1992 1993 First EU Money Laundering Directive implemented in U.K. through 1993 Criminal

Justice Act and through the 1993 Money Laundering Regulations introduced July (SI 1993/1933)

1994 1st April, AML legislation in place as 1993 regulations effective. Drug Traffi cking Act 1994 (s 49 – 53)


206

Appendix A Continued

Year Legislation

1994 Section 93A to 93D Criminal Justice Act 1988 came into force, February 1995 Proceeds of Crime Act 1995 1996 Criminal Justice Act 1996 1997 20th May Announcement of reform of fi nancial services regulation in the U.K. and the

creation of a new regulator on 20 May 1997. 1998 Criminal Justice (International Cooperation) (Amendment Act) 1998 2000 Financial Services and Markets Act 2000 Terrorism Act 2000 covers terrorist fi nancing 2001 FSA given statutory powers to enforce AML legislation Money Laundering Regulations 2001 (2nd EU Directive) extended (12th November) to estate

agents, solicitors, accountants and money service businesses (bureaux de change, money trans-mission agents and cheque cashing agents)

Anti-Terrorism Crime & Security Act 2001 covers terrorist fi nancing 2001 EU Second Money Laundering Directive (2001/97/EC) 4th December, 2001 (to be

implemented by 15th June, 2003). Financial Services & Markets Act 2000 implemented 1st December 2001

2002 Proceeds of Crime Act (POCA) 2002 (extension to defi nition of money laundering). Combined and simplifi ed the Criminal Justice Act 1996 and Drugs Traffi cking Act 1994

2003 Money Laundering Regulations 2003 implemented EU 2nd Money Laundering Directive 2001 and extension of AML from banks and fi nancial institutions to the wider defi nition of vulner-able activities and professions. Money Laundering provisions of POCA 2002 implemented February 2003

2004 2003 money laundering regulations effective 1st March 2004, implemented through POCA 2002 (Business in the Regulated Sector and Supervisory Authorities) Order 2003 in force 1st March 2004 extended provisions to professions and previously unregulated sectors

2004 The Third Money Laundering Directive was formally adopted on the 26th October 2005 The Third Money Laundering Directive entered into force on the 15th December meaning that

it will need to be implemented by the 15th December 2007

Appendix B

Method and responses

A pilot questionnaire was sent to 16 randomly selected Northern fi nancial institutions in 2003. These included three stock broking fi rms; two insurance companies; fi ve building societies; one independent fi nancial adviser and fi ve banks. The questionnaire was origi-nally distributed by e-mail and was followed up by letter and, where necessary a phone call. A total of seven responses were received as detailed in Table B1 . All selected sectors were represented except insurance and this appears consistent with the results of the survey by Gill and Taylor (2002) , which noted that “ insurance companies proved to be the least re-sponsive … One reason for this … may be that insurance companies perceive the money laun-dering risk as low ” (p. 48).

The questionnaire was sent to compliance offi cers and asked a total of 71 questions that were divided into seven sections. The fi rst two parts of the questionnaire covered


207

demographic information about the compliance offi cer and the institution. The other sec-tions asked for the respondent ’ s views on the following areas: money laundering compli-ance; money laundering in general; KYC and transaction monitoring; reporting; staff train-ing; customer awareness and costs of compliance. Question design was informed by two previous pieces of work: fi rstly that of Gill and Taylor (2002) and secondly that of Johnson (2001) . An initial draft version was amended following advice and feedback from a senior manager in the national fi nancial services practice of one of the main accounting fi rms.

Most sections contained a series of statements and the respondent was asked to indicate the extent that they agreed or disagreed using a simple Lickert scale where 1 was strongly agree and 7 strongly disagree with 8 as don ’ t know. There were also sections in which the respondent was given the opportunity to provide comments and observations and these are reproduced in their entirety in Table B2 below with other selected statements and responses reproduced in this paper. It had been intended to undertake a follow-up questionnaire with a larger number of fi nancial institutions; however, analysis of the responses provided from the pilot study suggested that more could be gained through interview and in-depth discussion to explore some of the issues raised.

Therefore, seven semi-structured interviews were completed as indicated, in Table B2 with representatives of the fi nancial industry, supported by discussion with both the regula-tory body and a representative from a law enforcement agency. These interviews lasted between one and two hours during which respondents were asked their views on money laundering legislation, drawing from the fi ndings of the questionnaires. These interviews covered issues with respect to effectiveness, costs and benefi ts of the regime but also enabled the subject of integrity and reputation to be explored (the latter having been identi-fi ed as a benefi t by the questionnaire respondents).

Pertinent quotes have been taken from the transcripts and included in the paper. However, recognizing that selection of material is at the discretion of the author, quotes produced should be viewed as illustrative points and observations rather than as hard evidence. Effort was made to avoid bias by allowing interviewees scope to present their own opinions; in the absence of undertaking a full coding analysis of the transcripts, what was apparent, how-ever, was strong consistency in the following areas: dissatisfaction with feedback on actions resulting from SARs; the demands of the legislation; its perceived ineffectiveness; and the increasing costs of compliance.

Table B1 Demographic data for respondents to pilot questionnaire

Identifi er Sector Number of employees

Number employed in compliance

Turnover

Respondent A Building society 101 – 1,000 2 – 5 people £ 100m – £ 1bn Respondent B IFA Less than 10 A single individual Not supplied Respondent C Stock broking 101 – 1,000 2 – 5 people Not supplied Respondent D Bank 1,001 – 10,000 2 – 5 people £ 100m – £ 1bn Respondent E Building society 10 – 100 2 – 5 people £ 10 – £ 100m Respondent F Bank 1,001 – 10,000 6 – 10 people Over £ 1bn Respondent G Building society 1,001 – 10,000 2 – 5 people Over £ 1bn


208

Tabl

e B

2 R

espo

nses

to q

ualit

ativ

e qu

estio

ns

Res

pond

ent

A

B

C

D

E

F

G

How

doe

s yo

ur

orga

niza

tion

clas

sify

ris

k fr

om

mon

ey la

unde

ring

Eac

h el

emen

t of

the

ML

so

urce

book

is m

easu

red

for

com

plia

nce

and

scor

ed a

ccor

ding

ly.

The

gro

ss r

isk

is “

alm

ost

cert

ain/

cata

stro

phic

” (l

ikel

ihoo

d an

d ef

fect

) an

d th

e ne

xt r

isk

is

“ pos

sibl

e/ca

tast

roph

ic ”

afte

r co

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ls a

re in

pla

ce

Low

R

isk

from

mon

ey

laun

deri

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giv

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hi

gh p

rior

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s th

is

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atel

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puta

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pact

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elih

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–

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In e

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100

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17 – 2

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etw

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and

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80 – 1

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s w

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CIS

wha

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(or

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).

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tere

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in fi

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Wha

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e of

AM

L r

egul

atio

ns?

Plea

se in

dica

te a

% o

f be

twee

n 0

and

100

50

85

50

50

No

idea

90

70


209

Tabl

e B

2 C

ontin

ued

Res

pond

ent

A

B

C

D

E

F

G

On

aver

age,

cus

tom

ers

are

mad

e aw

are

of

the

exis

tenc

e of

A

ML

reg

ulat

ions

by

(sel

ecte

d fr

om a

list

pr

ovid

ed):

Info

rmat

ion

from

our

org

aniz

atio

n.

Info

rmat

ion

from

the

med

ia.

Pers

onal

ex

peri

ence

. In

form

atio

n fr

om o

ur

orga

niza

tion.

In

form

atio

n fr

om th

e m

edia

Pers

onal

exp

erie

nce.

In

form

atio

n fo

r ou

r or

gani

zatio

n.

Info

rmat

ion

from

th

e go

vern

men

t

Pers

onal

exp

erie

nce.

In

form

atio

n fo

r ou

r or

gani

zatio

n .

Info

rmat

ion

from

th

e go

vern

men

t. In

form

atio

n fr

om

the

med

ia

Pers

onal

ex

peri

ence

. In

form

atio

n fo

r ou

r or

gani

zatio

n .

Info

rmat

ion

from

th

e go

vern

men

t. In

form

atio

n fr

om

the

med

ia

Pers

onal

ex

peri

ence

. In

form

atio

n fo

r ou

r or

gani

zatio

n .

Info

rmat

ion

from

the

gove

rnm

ent

Pers

onal

ex

peri

ence

. In

form

atio

n fr

om th

e m

edia

On

aver

age,

thin

king

of

thos

e cu

stom

ers

who

are

aw

are

of

the

exis

tenc

e of

le

gisl

atio

n, w

hat

obje

ctiv

e do

they

th

ink

it is

ach

ievi

ng

(sel

ecte

d fr

om a

list

pr

ovid

ed)

Com

batin

g or

gani

zed

crim

e.

Com

batin

g co

rrup

tion

No

com

men

t pr

ovid

ed

Com

batin

g or

gani

zed

crim

e.

Com

batin

g co

rrup

tion

Com

batin

g or

gani

zed

crim

e C

omba

ting

orga

nize

d cr

ime

Incr

ease

d fi n

anci

al s

ecto

r tr

ansp

aren

cy

Com

batin

g or

gani

zed

crim

e.

Com

batin

g co

rrup

tion

Mon

ey la

unde

ring

co

mpl

ianc

e im

pose

s re

cord

ing

and

repo

rtin

g ob

ligat

ions

on

fi na

ncia

l in

stitu

tions

. Do

you

thin

k th

ere

is a

ny

evid

ence

to s

ugge

st

that

cus

tom

ers

perc

eive

the

fulfi

lmen

t of

thes

e ob

ligat

ions

as

bei

ng V

aria

ble

from

inst

itutio

n to

in

stitu

tion

with

in th

e re

gion

?

I do

n ’ t k

now

I

don ’

t kno

w

I do

n ’ t k

now

Y

es. T

here

is n

o le

vel p

layi

ng fi

eld.

Fo

r in

stan

ce, w

e in

sist

that

whe

n a

cust

omer

wan

ts

to c

hang

e hi

s/he

r ad

dres

s, w

e se

e do

cum

enta

ry p

roof

–

othe

r ba

nks/

build

ing

soci

etie

s w

ill

acce

pt in

stru

ctio

ns

over

the

tele

phon

e.

Tha

t mak

es a

no

nsen

se o

f K

YC

Yes

. If

a cu

stom

er

obje

cts

to o

ur I

D

requ

irem

ents

they

al

way

s sa

y th

at

othe

r in

stitu

tions

ar

e le

ss r

obus

t

Yes

. Bec

ause

of

the

curr

ent

cust

omer

re

view

and

its

impa

ct o

n th

e tr

eatm

ent

of e

xist

ing

cust

omer

s –

not

all fi

rm

s ha

ve

com

men

ced

a C

CR

I do

n ’ t

know


210

Tabl

e B

2 C

ontin

ued

Res

pond

ent

A

B

C

D

E

F

G

Wha

t tan

gibl

e an

d no

n-ta

ngib

le

bene

fi ts

do y

ou

thin

k ac

crue

to

your

inst

itutio

n as

a

resu

lt of

its

com

plia

nce

with

m

oney

laun

deri

ng?

Tang

ible

: fra

ud p

reve

ntio

n an

d re

gula

tor

satis

fact

ion

(no

fi nan

cial

pen

altie

s) N

on-t

angi

ble:

Pro

tect

ion

of r

eput

atio

n

Tang

ible

: cl

ient

s m

ore

awar

e. N

on-

tang

ible

: up

sets

som

e cu

stom

ers

espe

cial

ly

ours

kno

wn

for

over

20

year

s

Tang

ible

: co

mpl

ianc

e w

ith

our

regu

lato

rs a

nd

secu

re r

eput

atio

n

Ta

ngib

le: r

educ

es

frau

d Ta

ngib

le:

incr

ease

d ex

ecut

ive

focu

s on

fi na

ncia

l cr

ime

gene

rally

. N

on-t

angi

ble

Avo

idan

ce o

f re

gula

tory

in

terv

entio

n –

FSA

Fin

e

Tang

ible

: fra

ud

prev

entio

n A

void

reg

ulat

ory

cens

ure

Do

you

have

any

ot

her

com

men

ts o

r ob

serv

atio

ns th

at y

ou

wis

h to

mak

e w

ith

resp

ect t

o m

oney

la

unde

ring

?

I w

ould

like

to s

ee m

ore

emph

asis

on

elec

tron

ic

iden

tifi c

atio

n pr

oces

ses

and

tran

sact

ion

mon

itori

ng a

nd

a m

ove

away

fro

m d

ocum

enta

ry

evid

ence

whi

ch is

eas

y to

fal

sify

No

com

men

t pr

ovid

ed

No

com

men

t pr

ovid

ed

Too

man

y in

stitu

tions

fa

il to

see

the

link

betw

een

mon

ey

laun

deri

ng a

nd o

ther

fo

rms

of c

rim

inal

ac

tivity

. Oft

en

the

ML

RO

has

no

dire

ct c

onta

ct w

ith

the

Hea

d of

Fra

ud.

Bec

ause

I h

old

both

app

oint

men

ts,

I ca

n bu

ild b

ridg

es

betw

een

anti-

mon

ey

laun

deri

ng c

ontr

ols

and

our

frau

d pr

even

tion

mea

sure

s.

Mor

e jo

ined

up

man

agem

ent w

ould

he

lp!

No

com

men

t pr

ovid

ed

No

com

men

t pr

ovid

ed

Mon

ey

laun

deri

ng is

an

evil

that

nee

ds

to b

e w

eede

d ou

t . H

owev

er,

the

regu

lato

ry

bodi

es d

o no

t pro

vide

su

ffi c

ient

pr

actic

al

impl

emen

tatio

n gu

idan

ce, t

hat

crea

tes

grea

t un

cert

aint

y fo

r bu

sine

ss.


211

Table B3 Interviewees

Identifi er Sector Date

Interviewee 1 Bank 13/07/04 Interviewee 2 Building society 05/08/03 Interviewee 3 Self regulatory body 06/11/03 Interviewee 4 Stock broker 16/07/03 Interviewee 5 Regulator 05/11/03 Interviewee 6 Accounting fi rm 21/05/03 Interviewee 7 Bank 05/11/03 Interviewee 8 Law enforcement agency 14/07/05

ust J How Effectiis evMoney Laundering Legislation?

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Transcript of ust J How Effectiis evMoney Laundering Legislation?