The different tactics that are used to launder money create different practical problems for law enforcement: Examine the extent to which UK and International Law overcomes these problems?

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Money laundering is giving oxygen to organised crime.”

Introduction

Money laundering is one of the most controversial crime in this century. The aim of money laundering is to change the true ownership of the illegal act and make it looks like it comes from a legitimate source.[1]There are several different tactics that are used to launder money, from the traditional methods such as smurfing, until the most recent methods, such as using the offshore company. As of the complexity of the money laundering process, the enforcement of the law could be very problematic. There are also ambiguities in deciding who has the authority in enforcing AML law. Law enforcement, such as financial institutions and lawyers, often faces a difficult decision either to enforce the AML or protecting its client and institution. It could be argued that the UK and international law has explicitly prohibited money laundering and classify very detail what is include as a crime. However, to what extent it has overcomes the problems of money laundering does not rely on the law. Instead, it relies on the enforcement of the law, rather than the establishment of the law itself.

Different Tactics of Money Laundering

In order to tackle money laundering, the law must be able to capture each stage of the laundering process.[2]Three-stage process of money laundering are; placement, layering, and integration.[3]The first stage is placement, it is the process of placing cash either through financial institutions or legal sector. Some of the most common ways of placement include smurfing. The second stage is layering, this is where the cash is pass through more complex transactions and often involves trans-border jurisdiction.[4]Integration is the last stage, on this stage, the cash is invested in legitimate funs or assets.[5]As of the recent development of law and regulations surrounding AML, placement stage is the riskiest stage for the launderer.[6]Starting from the second stage onwards, the process of money laundering is difficult to trace. There are many tactics that are used to launder money, some of the traditional methods would be, by using casinos or buying property in another state. The new methods of money laundering involve a wide range of activity, from the development of technology, such as the use of cryptocurrency until the use of an offshore company, in which leads to tax evasion. Each of the crime in the process might involve the act of fraud, drug trafficking and could lead to a bigger problem such as terrorist financing.

One of the methods of money laundering worth discussing is the use of an offshore company in which leads to tax evasion. An offshore company is associated with tax havens, it is the creation of a company in a jurisdiction that does not impose a tax or impose a very minimum tax. Tax avoidance is legal, but ethically questionable, meanwhile tax evasion is illegal.[7]There is a slippery slope between tax havens and tax evasion, and there is a slippery slope between tax evasion and money laundering. One of the most recent scandals is Panama Papers, which was the leak of documents from a firm called Mossack Fonseca that shows their clients were able to avoid tax as well as launder money.[8]The scandal has increased the awareness of money laundering, tax evasion and terrorist financing in the international level.[9]

The recent development of AML law in the UK has extended the definition of money laundering ‘to include activity directed towards the disposal of money which is the product of tax evasion’.[10]For instance, the Criminal Finances Act 2017, has included the involvement of tax evasions as a financial crime under money laundering.[11]Another example would be the amendment Section 93 (A) of the Criminal Justice Act 1988 that amend in 1994, in which describes the definition of ‘criminal conduct’.[12]This description of criminal conduct could be applied to money laundering. It could also be argued that ‘if one substitutes the words ‘tax evasion’ for ‘criminal conduct’ the legislation loses none of its application’.[13]To emphasised, although it is not the same, the linked between money laundering and tax evasion is clear. ‘Almost all undeclared income from crime is taxable’.[14]Hence, people that laundered money are basically committed to a tax offence, and those who committed to tax offence have a high potential to commit money laundering offence. As of the recent development on the legislation covering tax offence, it would be intricate to commit tax evasion without also committing money laundering offence.[15]

The Anti-Money Laundering Laws and Difficulties Surrounded the Enforcement of the Law

  • UK Law on Anti-Money Laundering

The first AML legislation in the UK was covered under the 1986 Drug Trafficking Offences Act.[16]Since then, the laws have been widely expanded to criminalise other criminal offences that involve in the process of money laundering.[17]Some of the most recent and important AML legislation in the UK are; the Proceeds of Crime Act 2002[18], the Terrorism Act 2000[19], Money Laundering Regulations 2007[20]and Criminal Finance Act 2017[21]. Another UK legislation on AML fall under the European Union (EU) Directive. The First Directive in combating money laundering was established in 1991.[22]This could be classified as international law, however, because of the characteristic of EU Directive, in which has to be applied to each states party domestic legislation, this also falls under the classification of the UK law. The first EU directive on money laundering contributes to the birth of the Criminal Justice Act 1991, the Drug Trafficking Act 1994, and the Money Laundering Regulations 1993.[23]It is important to note that to combat money laundering at the domestic level, implementing customer due diligence is essential.[24]This is protected in the UK law under Regulation 20 (1) (a) of the MLR 2007.[25]

The UK legislation has a wide meaning of what is classified as a crime under money laundering. Money laundering offences include; involvement in the proceeds of crime[26], failure to report offences[27], and tipping off[28]. The POCA 2002 has widened the classification of crime in money laundering.[29]For instance by including the offence of concealment, in which includes, ‘conceals, disguises, coverts, transfer, and removes criminal property’ from the UK.[30]Moreover, some of the legislation have also cover certain related financial crime associated with money launderings, such as fraud, drug trafficking, terrorist financing, and tax havens. For instance, none of the words in the EU Directive was found in excluding tax havens from the list of prohibited crimes.[31]As it was discussed in the previous section, the same goes to the UK domestic legislation as it was based on the EU Directive.[32]Additionally, the word of ‘criminal conduct’ in the UK legislation also extends to the tax offences committed by British citizens outside the UK jurisdiction and hence could be prosecuted under the UK law.[33]

However, some of the law could be challenging to implement. For instance, the failure to disclose offence under section 330 POCA 2002, requires institution or individual to report any knowledge or suspicious knowledge to any activity associated with money laundering.[34]This could be a problem for some professionals such as bankers and mainly solicitors, due to its duty to keep client information confidential. Another problem raised is that money laundering, although fall under criminal law classification, requires a different type of skills and tools to proceeds this crime under criminal law. The problem with money laundering is the fact that there is no direct victim. Hence, it is difficult to proceeds this crime as criminal law. Moreover, police and underbodies that tend to deal with criminal law are trained to deal with crimes that involve victim, while the victim of money laundering is unclear. Money laundering is a different kind of crime in which require a different type of skills.

  • International Law on Anti-Money Laundering

Different tactics of money laundering are often caused a cross border transactions, meaning that to enforce the law in one jurisdiction only is not enough. There are several international treaties that was established by the United Nations to combat money launderings, such as the 1988 UN Vienna Convention on Illicit Traffic in Narcotic Drugs and Psychotropic Substances.[35]This convention was later become a foundation of the Financial Task Force (FATF).[36]FATF was created in 1989 by the G7 Paris summit, by the time of its establishment, it creates 40 recommendations to combat money laundering[37]and it was then revised in 2003.[38]Since the creation of FATF in 1989, it has become one of the key international actors in combating money laundering. The term of money laundering is also written in the UN Convention against Transnational Organised Crime and the Protocols Thereto.[39]Under Article 7 (b), each state party shall ensure that ‘law enforcement and other authorities dedicated to combating money-laundering’.[40]The treaty also covers ‘the conversion or transfer of property’ as well as ‘the concealment or disguise’ under Article 6 (1) (a). The fact that this treaty has 189 states party, shows the seriousness of states in combating money laundering. The treaty itself has shown the existence of international law on AML, in which each money laundering activity is classified as a crime under international law. However, it is important to note that although the treaty that was signed by the parties are technically legally binding, international AML efforts has to be complemented by the national/domestic law enforcement and obligations.

Furthermore, in order to examine the success of international law on AML, first, it is important to understand the concept of international law in general. International law can only be enforced or legally binding to states through consent. The barrier with this is the fact that gaining uniformity of the laws among states and getting through states consent for the enforcement is remain challenging.[41]An international institution such as FATF capability is limited by only being able to produce soft law.[42]As of this, the work of domestic legislation in covering extra-territorial jurisdiction, play a more important role in the enforcement of the law. The principle of this is touched in Article 6 of the EU Directive, related to passing the information from one state authority to the other state authority.[43]The work of extra-territorial jurisdiction could work effectively when the money laundering crime is classified under criminal law, as this would allow states to apply the principle of nationality to prosecute a committed crime.[44]Nonetheless, the efficient work of domestic legislation in combating money laundering, such as the POCA 2002 in the UK that covers the removal of criminal property from the UK as an offences of money laundering[45]play an important role to improve the cooperation among states on the enforcement of AML in international law.[46]In other words, the success of international AML law enforcement also relies on the capability of domestic law to enforce AML within its jurisdiction. It goes back to each state responsibility and capability in enforcing AML in their jurisdictions. International law sets standards and norms for combating money laundering, but the success of law enforcement in international AML ultimately depends on states.[47]

  • Final Analysis: Has the Law and Regulations overcome the Practical Problems for the Enforcement of the Law on AML?

‘AML law has brought a very serious criminal offence into existence without a clear idea of what was wrong with it’.[48]This creates practical problems in the enforcement of the law. The different methods of money laundering make it difficult for law enforcement to trace the nature of the crime. As of the use of technology, offshore company, and other methods of money laundering, both domestic law, and international law enforcement face a complex challenge in finding the main actor of the crime. Even the most effective law and regulations can only stop the launderers in the stage of placement. In the placement stage, in most developed states, it is very possible to detect the launderer because of the recent developments of AML law and regulation that makes it possible for government and private sector to detect the launder.[49]However, this only works in developed states, many developing states still face difficulty in implementing international standards of AML. This statement is supported by the fact that developing states tend to adopt a policy that seems useful but not functioning very effectively due to minimizing material costs.[50]

Meanwhile, one could argue that the law is not a problem as the legislation both in the UK and international level is evidently clear in prohibiting the act of money laundering. The recent legislation, such as POCA 2002 and Criminal Finance Act 2017, has created a more wide scope of what is classified as money laundering, and it indicates that future regulations might and would likely be the same. However, there is lack of clarity in deciding who has the right authority and obligation to enforce the law. This could be government, bankers, financial institutions or lawyers, but there is no one specific actor. It is a coalition of all, which could be very problematic in practice. Furthermore, the ability of the regulator to enforce AML law and proceeds it through criminal proceedings is continuously still under challenge.[51]There is no clear evidence that the institutions are trustworthy in delivering the AML law enforcement. In other words, it relies on people morality as well as the institution morality. Which in itself could be another problematic situation.

Not to mention that the institutions that have the ability to become the ‘watcher’ of the launderers, such as bankers and solicitors, are those who are also the targets of the launderer. It could be seen from the Panama Papers example that lawyers have the potential to facilitate money laundering to their clients.[52]This, other than the cause of immorality, is also because of their privilege and obligations to remain silent on client confidential information. Although this is protected under section 330 (6) (b), (10), (11) and section 342 (4) of POCA 2002[53]it is still problematic in practice. At the same time, while many argued that financial institution has the main responsibility to tackle money laundering[54], whether or not they could be trusted is the more important question. The scandal of HSBC in which allowed billions of pounds to be laundered in the bank from illegal drugs and Standard Chartered in 2012, that gave facility to launder billions of pounds to an institution in Iran[55], shows that even the authority that supposed to tackle money laundering is not capable of delivering their duty.

Another question rise from Financial Conduct Authority (FCA), previously known as the Financial Services Authority (FSA). The FSA has the right authority, not just to make rules in the field of money laundering, but also to investigate, enforce the law as well as prosecute those who breach the AML regulations.[56]Interestingly, the FSA main focus is to impose sanctions on those who commit the crime, other than seeking criminal prosecutions.[57]Example of this could be seen from the HSBC scandal in which none was prosecuted. To some extent, this is related to states not wanting their major financial institutions to face prosecutions and bankruptcy, as this could put states economy at stake and lead to a financial crisis. Again, this question the integrity of the money laundering authority in implementing AML.

Eventually, there is little evidence that shows, both domestic and international level of AML, has worked effectively to minimize criminals obscuring their illegal sources.[58]Like climate change, money laundering is a ‘wicked problem’. The way it needs to be solved is not the same as a normal criminal crime. To be able to follow the trail of money laundering, law enforcement officials must recreate the money laundering scheme.[59]This could be accomplished by using sting operations. As money laundering is a very complex crime, sting operations are the appropriate way to shatter the crime. It allows law enforcement to set its own timeline in the operation, as well as taking necessary evidence at the exact same time when it happens.[60]It also gives the opportunity to interact with the suspect of crime.[61]In the US, the Money Laundering Act involves certain provisions that condone and to some extent facilitate sting operations.[62]If other states are providing the same protection in their jurisdictions for the sting operations, with cooperation among states in the international level, money laundering could be tackled. Until then, numerous amount of law and regulations will only be able to proceeds the crime in the placement stage, and not when it comes to the layering and integration stage.

Conclusion

In conclusion, the UK and International law in combating money laundering have overcome the practical problems of the different tactics in money laundering, to the extent of creating a standard in what is prohibited under money laundering crime. The UK law, including POCA 2002, Criminal Finance Act 2017 and Money Laundering Regulations 2007, and the international law, have explicitly stated the prohibition of crime under, and related crime to, money laundering. The law includes a wide and specific definition of what is constitute as money laundering. From attempting to committing, until suspecting. Although the establishment of the law in both domestic and international level play a part in setting the standard of Anti-Money Laundering, the effectiveness of the work of the enforcement official such as financial institutions and lawyers play a more important role in deciding to what extent the different tactics of money laundering could be overcome. The findings of this essay found that the law enforcement official, such as bankers, financial institutions and lawyers, still face difficulty in enforcing the law. This is due to various reasons, one of the examples is a legal professional privilege, in which in contradict with the term of ‘failure to report offences’[63]. Nevertheless, even if there is no barrier from the law enforcement officials to enforce the law, the crime itself is very complicated in nature to be solved. It requires a more complex problem-solving method, such as sting operation, to eradicate the crime of money laundering.


[1]Robert Rhodes and Serena Palastrand, ‘Analysis: A Guide to Money Laundering Legislation’ (2004) 8 Journal of Money Laundering Control 9

[2]Selina Keesoony, ‘International Anti-Money Laundering Laws: the problems with enforcement’ (2016) 19 Journal of Money Laundering Control 130

[3]Rhodes and Palastrand (n 1)

[4]Legal Sector Affinity Group, ‘Anti-Money Laundering: Guidance for the Legal Sector’ (Legal Sector Affinity Group 2018)

[5]ibid

[6]Legal Sector Affinity Group (n 4)

[7]Arthur Seldon (ed), Tax Avoision: The Economic, Lgela and Moral Inter-relationships between Avoidance and Evasion(The Institute of Economic Affairs 1979)

[8]BBC News, Panama Papers Q&A: What is the scandal about? (6 April 2016) <https://www.bbc.co.uk/news/world-35954224> accessed 25 March 2019

[9]Ballard Spahr LLP, “Panama Papers” Law Firm Annouces Its Closure Due to Fallout from Massive Data Breach(15 March 2018) <https://www.moneylaunderingnews.com/2018/03/panama-papers-law-firm-announces-its-closure/> accessed 27 March 2019

[10]Peter Alldridge, What Went Wrong With Money Laundering Law?(Palgrave Macmillan 2016) 69

[11]Criminal Finance Act 2017

[12]Criminal Justice Act 1988, amendment 1994

[13]Martyn Bridges, ‘Tax Evasion – A Crime in Itself: The Relationship with Money Laundering’ (1996) 4 Journal of Financial Crime 161 164

[14]Alldridge (n 10) 69

[15]Alldridge (n 10)

[16]Drug Trafficking Offences Act 1986

[17]Nicholas Ryder, ‘The Financial Services Authority and Money Laundering: A Game of Cat and Mouse’ (2008) 67 Cambridge Law Journal 635

[18]Proceeds of Crime Act 2002

[19]Terrorism Act 2000

[20]Money Laundering Regulations 2007

[21]Criminal Finance Act 2017

[22]Directive 91/308/EEC of the Council of the European Communities of 10 June 1991 on prevention of the use of financial system for the purpose of money laundering [1991] OJ L166/77

[23]Legal Sector Affinity Group (n 4)

[24]Keesoony (n 2)

[25]Money Laundering Regulation 2007, art 20 (1) (a)

[26]Proceeds of Crime Act 2002, s327-s329

[27]Proceeds of Crime Act 2002, s330-s332

[28]Proceeds of Crime Act 2002, s330-s332

[29]Keesoony (n 2)

[30]Proceeds of Crime Act 2002, s327

[31]Bridges (n 13)

[32]ibid

[33]Bridges (n 13)

[34]Proceeds of Crime Act 2002

[35]United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (adopted 20 December 1988, entered into force 11 November 1990)

[36]Legal Sector Affinity Group (n 4)

[37]Financial Action Task Force, ‘The Forty Recommendations of the Financial Action Task Force on Money Laundering’ (1990) 

[38]Edward Krauland and Aaron Hutman, ‘Money Laundering Enforcement and Policy’ (2004) 38 Int’l Law 509

[39]United Nations Convention against Transnational Organized Crime, UNGA Res 55/25 (adopted 15 November 2000, entered into force 29 September 2003)

[40]UNGA Res 55/25, art 7 (b)

[41]Keesony (n 2)

[42]ibid

[43]Directive 91/308/EEC of the Council of the European Communities of 10 June 1991 on prevention of the use of financial system for the purpose of money laundering [1991] OJ L166/77, art 6

[44]Guy Stessens, Money Laundering: A New International Law Enforcement Model (Cambridge University Press 2000)

[45]Proceeds of Crime Act 2002, s327

[46]Keesony (n 2)

[47]ibid

[48]Alldridge (n 10) 33

[49]Andres Rueda, ‘International Money Laundering Law Enforcement & the USA Patriot Act of 2001’ (2001) 10 Minch. St. U. Det. C. L.J. Int’l L. 141

[50]J.C. Sharman, ‘Power and Discourse in Policy Diffusion: Anti-Money Laundering in Developing States’ (2008) 52 International Studies Quarterly 635

[51]David Kirk, Challenges Countering Fraud, Money Laundering and Bribery in the Financial Sector between 2020 and 2030 (2018) <https://www.fca.org.uk/publication/research/challenges-countering-fraud-money-laundering.pdf> (accessed 12 April 2019)

[52]Ballard Spahr LLP (n 9)

[53]Proceeds of Crime Act 2002

[54]Keesoony (n 2)

[55]ibid

[56]Ryder (n 17)

[57]ibid

[58]Sharman (n 50)

[59]Rueda (n 49)

[60]ibid

[61]Rueda (n 49)

[62]ibid

[63]Proceeds of Crime Act 2002, s330-s332

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“The only way to stop the flow of this dirty money is to get tough on the bankers who help mask and transfer it around the world. Banks themselves don’t launder money, after all: people do.”

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