LEGAL AND REGULATORY ASPECTS OF MONEY LAUNDERING AND FINANCIAL CRIME

1. LEGAL AND REGULATORY ASPECTS OF MONEY LAUNDERING AND FINANCIAL CRIME Lecture 1 Joanna Gray LL.B., LL.M. , Professor of Financial Regulation in Newcastle Law School, University of Newcastle upon Tyne, UK.

2. The Nature of “Crime” and “Criminal Law” • Taxonomy of a Legal System such as India or UK : -Criminal Law -Civil Law -Regulatory Law (Statute Based rather than common law)

3. Special features of Criminal Law • Trial process • Evidence Rules • Use of juries (UK)

4. Special features of Criminal Law • Stricter rules of construction in face of legal uncertainty • Sanctions more punitive – deterrent rather than remedial • Human Rights constraints (in UK) apply more rigorously

5. The Multiple Meanings of Financial Crime • Theft (obtaining money or property by deception) – combination of crime and property has always caused lawyers headaches • Illegal or Sharp Practice – according to whose “moral compass” should the law judge this issue?

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

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

8. The Multiple Meanings of Financial Crime • In UK basic fraud law has yet another layer grafted onto it : Fraud Act 2006 • New legislation to deal with ATM fraud, computer phishing in online banking etc etc

9. The Multiple Meanings of Financial Crime • Civil law parallels possible for reparation where criminal offences of fraud committed include : • Deceit • Fraudulent Misrepresentation • Setting aside contract as vitiated by fraud • Breach of Fiduciary Duty • Misfeasance in Public office • Conversion

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

11. The Multiple Meanings of Financial Crime • Tax Evasion • Fraudulent claims for subsidies/entitlements • Corruption – see OECD Convention on Bribery and Corruption see Blackboard International Standards

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

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

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

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

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

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

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

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

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

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

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

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

24. What is commonly meant by Money Laundering? • -Integration – the provision of apparent legitimacy to the financial proceeds of crime by returning them into the economy, at the end of the layering process, as bona fide business funds

25. Why might Money Laundering and Use of Financial System for Terrorist Finance on the increase? • Ironically, the very same things that have enhanced global financial market integration (and as we have seen challenged regulators in their mainstream tasks) have also increased the use of the threat of use of financial system by money launderers and criminals (growth in electronic money/electronic banking, exchange controls lifted etc etc ) .

26. A provocative challenge to law makers, Courts, supervisors and policing agencies • The ingenuity of Money laundering criminals knows no bounds : The only laws that are permanent are the laws of nature. Everything else is flexible. We can always work in and around the laws. The laws change. • (Agha Hasan Abedi – Founder of BCCI Banking group)

27. Relevant International Standard Setters and Key developments Some landmark measures taken at international level 1988 UN Vienna Convention – Illicit Traffic in Narcotic Drugs and Psychotropic Substances 2000 UN Palermo Convention against Transnational Organised Crime

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

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

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

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

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

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

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

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

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