U.K.’s Criminal Finances Bill: Breaking ground in regulation | Wolters Kluwer Financial Services
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  • U.K.’s Criminal Finances Bill: Breaking ground in regulation

    By Nick Kochan

    Published January 05, 2017

    The U.K.’s Criminal Finances Bill will have profound implications for the regulation and the policing of the British economy. In an era when the principle of financial regulation is facing challenges from political change in the United States, the UK has showed that it prepared to strengthen the hand of enforcement and put increasing burden on banks in particular (but the regulated sector in general).

    The key change for financial institutions is the onus on them to assist more closely with the National Crime Agency (NCA) in following up and taking forward money laundering investigations.

    One important development is that banks encountering suspicious transactions can file what Donald Toon, head of the Financial and Cyber Crimes unit of the NCA, calls a ‘SuperSAR’ – which can be lodged with the Financial Intelligence Unit at the NCA. The NCA and Financial Intelligence Unit have worked collectively on the concept, representing the sum of their coordinated research when a suspected money launderer has used accounts in many banks and passed money between them.

    Provisions of the new Financial Crimes legislation will give them greater legal protection when they work together in investigating the money trail and accumulate and share the evidence. The recently-published Criminal Finances Bill, says Toon, will give banks ‘better cover’ to share material and prepare the evidence, in advance of submission.

    This move embodied in the bill represents a critical step forward to greater cooperation between banks on specific cases and an important advance in the role and significance of the NCA’s Joint Money Laundering Intelligence Taskforce (JMLIT).

    The JMLIT operations group – the hub of the organisation – is composed of officers from the NCA, HM Revenue & Customs (HMRC), City of London Police, Metropolitan Police Service, Serious Fraud Office (SFO), Financial Conduct Authority (FCA), Cifas, and vetted staff from Barclays, Santander, Standard Chartered, RBS, HSBC, BNP Paribas, Citigroup, Nationwide, Lloyds, Post Office and JP Morgan.

    The NCA says that the work of JMLIT has led to the arrest of 37 suspected money launderers; the launch of 186 bank-led investigations into customers suspected of money laundering; the identification of 137 suspicious accounts; the ‘heightened monitoring’ by banks of 165 accounts and the closure of 114 bank accounts suspected of being used for the purposes of laundering criminal funds.

    Banks currently share only material on specific cases that has been made anonymous to ensure they cannot be accused of tipping off, something outlawed by current legislation. Once the Criminal Finances Bill is enacted, this mine is removed from the battlefield.

    Toon says, ‘This gives them the cover to do more specific preparation work before coming in with a better developed picture. There are a lot of things we would never hear about because it might look odd to a bank, but they are not clear about why it should be suspicious. Now they can have a conversation with the other banks involved in the chain [of laundering], and actually identify the reasons why they are collectively suspicious about a money- laundering structure.’

    The clause is of particular importance to legal advisers of the cooperating banks, says Toon. ‘They can get comfort from the clauses in the new bill related to JMLIT. What matters is the confidence of the banks and of their legal advisers. They have to be confident that they are not putting themselves at risk. This enables them, very explicitly, to work with other banks and regulators through the JMLIT structure.’

    Targeting of money laundering risks will also be improved through the new closer cooperation between banks. Banks have responded over zealously to the risk posed by nationals of some countries deemed high risk, by closing accounts linked to those countries, and Toon cites the case of Somalia. In fact closer cooperation would enable the institutions to more closely fine tune such de-risking procedures and more accurately move against those clearly identified with suspicious activity.

    He says, ‘there has been an issue about de-risking in the past, of banks closing accounts. Banks need to close accounts on the basis that they have an intelligent understanding of the risk that is posed there. It is about these accounts, these individuals and not anyone who is dealing with a country such as Somalia. Then you reduce the de-risking concern, and you get a more targeted intervention by the banks.’

    Toon allays concern banks may have about the greater cooperation through the new more open JMLIT structure by saying that bank representatives share common concerns about the integrity of the system. ‘These are people whose job it is to keep the system secure, to keep the dirty money out, with specific responsibilities under the law. They are senior managers, money laundering reporting officers for the bank. These are not people who go out and do trading in the markets. These are the people who have a legal responsibility about identification of money laundering risk and the response to it’.

    A further addition to law enforcement’s armoury is the introduction of the Unexplained Wealth Order (UWO). This deals with the problems many countries face of impediments in the country of origin of the suspected money launderer who holds property in the U.K. So when the U.K. NCA presses a country to disclose sensitive material about the owner or his companies, they find a brick wall. The Unexplained Wealth Order outlined in the new bill and initially proposed by Transparency International assists that investigation by requiring owners to explain how they came by the funds to acquire a valuable asset. The International Corruption Unit, which sits inside the NCA, is expected to make most use of the Unexplained Wealth Order, provided for by the new Criminal Finances Bill.

    Toon says the U.K. can challenge the individual owner. ‘What we are doing is switching the burden of proof around. It says you own the property but we can see no basis of funding that enabled you to buy it. So we ask, ‘how did you fund it?’ The power to require an individual to answer this question is granted by an application to the High Court, made by the NCA. Toon says, ‘if they fail to respond we will go immediately for asset recovery. If they do respond, then that informs our ongoing investigation. If their response is subsequently proven to be false, they will have committed an offence because they have lied in response to a High Court order. This is a useful way of getting round a particular problem, which is how to obtain effective evidence from overseas jurisdictions.’

    The bill’s proposal to increase the period allowed to the investigator of a ‘consent’ SAR from the current 31 days to six months allows scrutiny of vague but suspicious information provided by a bank, says Toon. ‘When you are not entirely clear what you have got hold of and you only have a limited amount of information, then you have got to start digging into the background.’

    Correspondence with agencies in some countries is complex, requiring frequent clarifications and explanations. On top of that, letters have to be translated. The UK authorities may also be required to present evidence they have obtained to justify their request in front of a court, so further delaying the information request process. ‘The chance of obtaining relevant information within 31 days is fairly minimal even when you are dealing with most developed jurisdictions.’ He excludes E.U. jurisdictions where information flows more freely.

    Toon continues, ‘If we are talking about an international transaction or accounts which may be owned by international persons or companies, then we need to get behind the transaction itself, we need to be able to go to a court and demonstrate why these funds should be restrained pending a further criminal investigation. Going from zero to the point when we have the material to stand in front of the court in less than 31 days in most international work is extremely difficult. ‘No such delays occur when requests involve terrorism or are very high profile,’ he notes.

    A ‘significant increase’ in the number of investigations will result from the time extension, says Toon, although he would not be drawn on the size of the increase. ‘More cases will be investigated, more assets restrained, more money will be taken off criminals.’ Applications for an extension will need to be made by the investigating agency each month for a maximum period of six months, after which the investigation will have to stop. Toon says, ‘The court will be looking for progress. We will have to show that we are making proper use of the time.’

    While the Criminal Finances Bill will bring in welcome changes, the inclusion of a clause that make ‘failure to prevent tax evasion’ a corporate offence does not go far enough and Toon says that he would support the inclusion of a clause which made ‘failure to prevent economic crime’ a corporate offence. ‘The government has been clear that it should be extended to wider forms of economic crime but you need to be clear about the definition of economic crime such that they would fit with current legislation. How would it fit with the current structure of money laundering responsibilities for example? I think the basic thought is “better right than quick”.’

    An amendment to the bill has been proposed (but not yet accepted by the U.K. Government) by a group of U.K. Members of Parliament which provides for the seizure of property in the U.K. that belongs to individuals and government where human rights are repressed. The particular targets of the amendment – one of a number of Magnitsky laws passed around the world – are individuals that participated in the fraud on the Hermitage Fund in Moscow, the outcome of which was the death in prison of the fund’s lawyer, Sergei Magnitsky.

    About the author: Nick Kochan’s work on banking, financial services and the economy has appeared in The Financial Times, The Observer and The Independent. He is regularly consulted by the BBC and Sky for commentary on economy and financial services. He has established his leadership in the field of compliance and regulation with the publication of his book on money laundering (The Washing Machine, 2006) and more recently on Bribery and Corruption (Corruption: The New Corporate Challenge, 2011). He is presently working on a book about fraud. Nick is a regular contributor to Wolters Kluwer Financial Services’ Compliance Resource Network.



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