Why are banks refusing to disclose suspicious activities?

"...Some banks appeared unwilling to turn away, or exit, very profitable business relationships when there appeared to be an unacceptable risk of handling the proceeds of crime. Around a third of banks, including the private banking arms of some major banking groups, appeared willing to accept very high levels of money-laundering risk if the immediate reputational and regulatory risk was acceptable..."

This is the opening paragraph of the FSA's report of June 2011, entitled  "...Banks’ management of high money-laundering risk situations..."

It helps to explain most succinctly why banks are refusing to disclose suspicious activities. They are not making disclosures to law enforcement because they are making huge sums of money from the practice of money laundering, no matter how high the risk to the individual bank may be.

What this tells us immediately is that banks and those who manage them, and this decision has to be taken at a very senior level indeed within the organisation,  have made a conscious choice to wilfully ignore a very important piece of legislation which is deemed vital to help law enforcement fight the activities of major criminals, drug traffickers, fraudsters and terrorists. I challenge them to say it isn't so, because I know it is.

This is a very simple issue. The law is there to require banks and financial institutions to disclose their suspicions of criminal wrongdoing  if and when they notice financial activities which are clearly out of the normal or usual range of their clients activities, being carried on, and for which there is no reasonable explanation.

 It is not an onerous duty, and merely requires the completion of a form spelling out certain information about the client and the activity which is then passed on to the relevant law enforcement agency. Such information is vital to an intelligence-led police agency, seeking to do its best to combat organised crime and terrorism, and it is mandated in law. It is a legal duty, for which criminal sanctions can apply for a wilful failure to meet the relatively simple requirements enacted in law.

We are all familiar with the myriad of cases of single women who have been imprisoned for claiming welfare benefit, but failing to inform the relevant authorities of the existence of a man who may stay with them on occasions in their home. These women lose everything, including their liberty, merely for giving in to the desire for some ordinary human contact and love, and our society punishes and marginalises them in the cruellest ways imaginable. They go to prison and their children go into care, and every time this piece of social calumny occurs, the Judge trots out the usual routine message that he is passing a custodial sentence to send a message that benefit fraud will be taken seriously.

I am unaware of many financial practitioners who may have received a prison sentence for failing to disclose relevant information of suspicions of criminal activity which may have come to their attention, and herein lies one of the major failings of the law, because it discriminates against the weak and the powerless and it favours the rich and powerful.

When it comes to money laundering and compliance with a simple piece of regulation, it is an issue which is completely ignored by the FSA, the regulatory agency with the responsibility to ensure that financial institutions are complying with this law. The FSA have taken their collective eye off an important element which is vital for ensuring that the money laundering regime in the UK is enforced strictly and fairly, as a result of which, the banks completely ignore the demands of the law.

You might be forgiven for thinking that it is not the FSA's responsibility to regulate bank's compliance with the Money Laundering Regulations, but it is written into the Financial Services and Markets Act 2000.

Section 6 of the Act is clear. It states that one of the FSA's responsibilities is;

The reduction of financial crime.

(1)The reduction of financial crime objective is: reducing the extent to which it is possible for a business carried on—

(a)by a regulated person, or

(b)in contravention of the general prohibition,

to be used for a purpose connected with financial crime.

(2)In considering that objective the Authority must, in particular, have regard to the desirability of—

(a)regulated persons being aware of the risk of their businesses being used in connection with the commission of financial crime;

(b)regulated persons taking appropriate measures (in relation to their administration and employment practices, the conduct of transactions by them and otherwise) to prevent financial crime, facilitate its detection and monitor its incidence;

(c)regulated persons devoting adequate resources to the matters mentioned in paragraph (b).

(3)“Financial crime” includes any offence involving—

(a)fraud or dishonesty;

(b)misconduct in, or misuse of information relating to, a financial market; or

(c)handling the proceeds of crime.

(4)“Offence” includes an act or omission which would be an offence if it had taken place in the United Kingdom.

(5)“Regulated person” means an authorised person, a recognised investment exchange or a recognised clearing house.

I have highlighted the relevant elements that apply to money laundering, and I have included the element at sub-para 4 which includes offences committed outwith the United Kingdom. Regular readers of this blog will remember how a senior City Grandee tried to claim that it was not the FSA's duty to regulate an HSBC bank in Mexico. This sub-section shows how wrong he was!

I will demonstrate later how the FSA are still trying to squirm out of their responsibilities for this requirement!

The requirements to disclose suspicious disclosures, later suspicious activities, were first enunciated in 1994. The banks all complained loudly and long about this requirement, because, as they tried to argue, it ran directly counter to their traditional privilege of keeping their clients affairs confidential. The British Home Affairs Committee which looked into the proposed changes in the law needed to implement the soon to be enacted European Money Laundering Directive, realised that something had to be done to make it easier for banks to make disclosures of their suspicions of criminal transactions, but without rendering themselves to be sued for breach of confidentiality.

Remember, at this time the only offence which was being considered to be covered by the money laundering law, was the proceeds of drug trafficking, which was becoming a significant issue in UK law enforcement.

The duty to disclose suspicions to law enforcement was enacted as a defence for bankers against any subsequent allegation that they had been knowingly engaged in the laundering of the criminal proceeds of such a drug offence. So where a banker made a disclosure of his suspicions to the relevant police agency, he could not subsequently be prosecuted for any money laundering offence related to those proceeds, because he had alerted the authorities to their potential existence.

The banks were hoist on a petard of their own construction.

They had previously declined to pass police information without the need for a cumbersome legal procedure to obtain an obscure Court Order, all the while maintaining their absolute willingness to cooperate with police enquiries, save only for the prohibiting effect of the confidentiality clause in their contract with their client.

In one stroke of the pen, the banks were relieved of that burden and the obstacle of client confidentiality was removed, in cases where the bank was making a bona-fide disclosure of their suspicions of criminal money in the client's account.

Perhaps unsurprisingly, very few disclosures arrived at the relevant police agency, indeed it quickly became obvious that the banks were very reluctant to make any disclosures at all. Whether this was born out of a sense of willing disbelief that their clients might be up to no good, or because, as I have always suspected, the banks never had any intention of talking to police in the first place, and resisted becoming suspicious, is merely a matter for conjecture. We do know that within a relatively short time, Parliament had to enact an amendment which made it mandatory for employees in the banking community to pass suspicions of criminal conduct to police, where the knowledge or suspicion came to them during their ordinary duties in the bank.

Nevertheless, the disclosure requirement still operated as a defence to any subsequent criminal charge, so the point is that any banker who does not make the relevant disclosure, can if an offence is subsequently brought against the client of the bank,  be prosecuted for willing involvement in the unlawful activity.

The point is you would think that any banker, coming face to face with such an eventuality, would want to make a disclosure to the police, in order to benefit from the defence provision, but for some reason, we know that banks are still very resistant to making any kind of realistic disclosures to the Police, and we need to understand why that is.

We only have the banks' actions and conduct to measure this particular failing, it's not as if they make a virtue out of telling us their reasons for flouting the law.

We can rely to some extent on their own words, as where I was invited to address the Group Heads of AML in a number of major banks in London, and they made their feelings about the AML regime perfectly clearly, they think it is a waste of time, effort and money!

They will all say, if asked, that their institutions spend a great deal of time, effort and money complying with the AML requirements, but in reality, their efforts are little more than window dressing, and they do not go near the implementation of the core requirements of the legislation. As the Group Head of one of the most egregious banks in London for money laundering said to me at the dinner, '...It's a total waste of time and money and I am not going to bother worrying about passing detailed transaction disclosures to the police....'

This man also gave me the answer to the second part of the riddle, because when I asked him if he was not worried about being dealt with for failing to do the job properly, his answer was that '...no-one gets dealt with for this issue, so he wasn't going to worry about it...'

I think that is where we have it in a nutshell.

The banks don't want to pass information about clients' affairs to the police, because they are making a great deal of dirty money out of the practice, but they believe that if the word gets round their client base that they are too compliant with the law on passing incriminating information to the police, then they will lose client share, and thus, client money.

The FSA don't regulate the financial sector's compliance with the AML Regulations or the substantive law sufficiently, to make their presence a real threat which has to be acknowledged, and as a result, the banks rest content that they don't have to do too much to comply.

So, they don't bother to train their staff in compliance skills, they don't train them how to properly analyse computer-generated alerts, they don't teach them how to maintain an effective client surveillance database which might be capable of recalling previously unusual episodes, they simply do the least possible to get a tick in the box from a complacent regulator, and they carry on as if nothing was happening.

The end result is a situation where a great deal of shareholders' money gets spent in creating the impression of compliance with the AML laws and regulations, but where, in reality, it is business as usual when the dirty money comes rolling in.

How else can you explain what happened at HSBC, when the 'Laundering Bank', (for that is how we must now christen it), went ahead and created a deliberate money laundering structure in Mexico, and used it for facilitating the movement of Mexican drug money belonging to the drug cartels?

This wasn't an accident, you don't let things like this occur without anyone noticing. It was deliberate and it was a business case decision, and they got away with it, because no-one in HSBC was sentenced to any term of imprisonment.

And why did they not get prosecuted here in the UK? Because the FSA has now made a conscious decision that they are not going to do anything about money laundering cases.

Earlier I set out the terms of Section 6 of the Financial Services and Markets Act which empowers the FSA to act in money laundering cases. Following the LIBOR scandals, the House of Commons Treasury Select Committee has criticised the FSA for their failings in dealing with relevant elements of  regulatory responsibility. The FSA has sought to rebut those criticisms, and what follows is taken from their report. The Select Committee's feelings are reported in the bold type.

"...The FSA has an obligation under section 2(1)(b) of FSMA to discharge its functions in the way in which it considers most appropriate for the purpose of meeting its regulatory objectives. Under section 2(2)(d) the reduction of financial crime is one of these objectives. Financial crime is defined in section 6(3) as including not only misconduct in relation to a financial market but also any criminal offence of fraud or dishonesty. The FSA took a narrow view of its power to initiate criminal proceedings for fraudulent conduct in this case. (Paragraph 202)..."

The FSA's response (in italics) states:

38.  The FSA has extensive powers to investigate specified offences, both regulatory and criminal (as set out in FSMA). These powers of investigation do not, however, extend to other offences not specified in FSMA such as theft, fraud and false accounting. The police and the SFO do have powers to investigate these offences so we cannot use our powers specifically to obtain material relevant to these offences.

This is not strictly accurate, indeed it is not true, the FSA have perfectly ordinary common law powers, the same as possessed by the Police and that feature has been made perfectly clear to the FSA by the Courts, and I don't know why they keep on trying to assert the contrary. On 29th July 2010 the Supreme Court confirmed FSA’s power to prosecute money laundering offences.

The Court of Appeal decision in R v Rollins, concerned a prosecution by the FSA for insider dealing and money laundering.  In that case, the Court of Appeal confirmed the FSA’s power to prosecute offences beyond those expressly set out in the Financial Services & Markets Act 2000 ( “FSMA”), including money-laundering offences under the Proceeds of Crime Act 2002 (“POCA”).  That decision was subsequently appealed and on 28 July 2010, the Supreme Court unanimously dismissed the appeal.

The Supreme Court observed the FSA’s objects include carrying out any functions conferred on it by statute.  FSMA sets out the FSA's functions and objectives, which includes acting in a way that it considers most appropriate to meet its regulatory objectives, including the reduction of financial crime.  In this regard, it has powers of prosecution.

The Court noted that as one of the FSA’s functions was to reduce financial crime, “Parliament would not have intended to deprive the FSA of the power to prosecute for offences of financial crime (of which sections 327 and 328 of POCA are examples)”.  If the FSA was limited to prosecuting solely the offences listed in section 402, this would be an “inefficient and unsatisfactory way of prosecuting crime”; there was no need to infer that Parliament intended to limit the FSA’s power in this way.

The FSA continued;

39.  We may of course discover evidence of these more general offences whilst conducting investigations under the powers set out in FSMA. For example, we may discover evidence of fraud whilst investigating whether a regulatory breach has occurred, or a market abuse offence has been committed. In these circumstances, there is a well established procedure for discussions to take place between the FSA and the SFO or other prosecutors about how to deal with that evidence. This is in accordance with the Prosecutors' Convention, to which both the FSA and the SFO are signatories. Such discussions might lead to the SFO opening its own investigation.

Well, yes indeed, they might do. But they might just as easily not take place. Pigs might fly, turkeys might vote for Christmas, but unless the FSA are going to be more willing to share their evidence with other agencies, it is unlikely that many prosecutions will flow. What happens if the specific case does not fit in with the SFO's terms of operation, as where the sums involved are under £2 million?

Let us just say that the FSA do not think they take a narrow view of their powers. Others might disagree with them!

The bottom line here however, is that the FSA clearly want as little to do as possible with the AML requirements, so as far as prosecuting financial institutions for breaches of the Money Laundering Regulations are concerned, we must all get used to the idea that such an event will be a triumph of hope over experience.

All the time the banks know they will not be called to account for failing to deal with the money laundering regulations properly, they will continue to permit vast amounts of criminal money to enter their books by money laundering for drug traffickers, tax evaders, thieves, fraudsters and terrorists. It's not rocket science, it's just the way it is!