"...If the UK FCA financial crime supervision team deals with around 100 cases a year of "ML risk &/or serious weaknesses in firms’ AML controls" why have there been so few enforcement actions..?"

Timon Molloy, editor of Money Laundering Bulletin has asked this question on his website, and I will try and provide one interpretation.

When we examine the way in which the anti-money laundering regime has been implemented, it is very clear that since its very first beginnings, no-one has ever bothered to take ownership for its overall implementation and administration.

From the passing of the first Act in 1994, no-one stepped forward to accept the responsibility for ensuring that the rules and regulations were enforced.

The important thing to remember about the AML laws is that they are composed of two distinct but parallel sets of provisions.

First, there are the laws themselves, which define what a person or an institution can and cannot do with regard to the handling of criminal money.

These laws did not cause too many difficulties in most cases, because they were enforced by the police and the relevant criminal justice authorities, the Crown Prosecution Service, the Director of Public Prosecutions, and the Customs and Revenue Authorities.

But, at the same time, there existed a set of Regulations, which set out how institutions should conduct themselves and what they needed to do to ensure 'best practice' compliance with the laws.

Any failure to comply with the important inner core set of the Regulations carried penal sanctions and were criminal offences, and it was these provisions that were the key to ensuring a standard of 'best practice' was implemented and adhered to.

The two sets of legal requirements ran in tandem with each other, and the aim of the Regulations was to impose a unified standard of conduct which could be adopted to ensure a seamless level of national compliance.

One of the biggest problems associated with the anti-money laundering legislation was the provision which required a person to disclose to the relevant lawful authority (the police in the UK in the relevant criminal intelligence agency), and suspicion they might have that the money they were handing might have come from a criminal origin.

There were a series of sensible regulations which existed to help institutions ensure a practicable response to this requirement, and the Government had every confidence that the law would be complied with in a sensible and practicable manner.

They had every right to make this assumption, because for years, the banks had been telling the law enforcement authorities that they would have loved to share sensitive information with the police, except that the civil law on client confidentiality prevented them from providing the police with any information at all.

The provisions of disclosure of suspicions were implemented specifically and deliberately to help the banks get over this concern, and they provided the banks with a specific defence to being sued for breach of confidentiality, where they made a bona-fide disclosure of their suspicions to the police.

What no-one had foreseen was that the banks had been telling lies all the time, and had absolutely no desire or intention of ever passing any incriminating evidence to the police under any circumstances.

Within a few months of the new anti-money laundering regime having been introduced, the battle-lines between the law enforcement agencies and the financial sector had already been firmly drawn in the sand. The concerns centered around the meaning of the three words ‘suspicious’, ‘transaction’ and ‘disclosure’.

Put at its simplest, the dispute arose around the number of suspicious disclosures that were being made by the regulated sector to the police, and in return, the quality of ‘feed-back’ which was largely not being provided by the police intelligence agency in return.

There was a considerable degree of misunderstanding among both the financial sector as well as the public as to the nature of the responsibilities under the legislation, for reporting suspicious transactions.

The police began to become concerned at the paucity of the level of disclosures being made to them, and the word began to spread among the law enforcement agencies that the financial sector weren’t really taking the problem of disclosure as seriously as they should.

It was also becoming much clearer that one of the reasons behind the lack of urgency seemingly being expressed by the financial sector was that no-one among the financial regulatory sector appeared to be willing to take on board the responsibility to grasp the nettle of ensuring compliance with the Money Laundering Regulations, or indeed, check, during a routine compliance visit, what their regulated members were doing with regard to the anti-money laundering law. The law, to all intents and purposes, was being routinely flouted, by both the vast majority of the regulated sector, and routinely ignored by their regulators.

In a report I wrote for the UK’s contribution to the Financial Action Task Force’s annual methodology report in 1998, I reported a series of quotations from City individuals I had interviewed for the purposes of gathering background information for the document. Their observations were quite clear, and throughout my interviews, the same phrases kept re-appearing from those I interviewed.

‘These laws cannot be that serious, no-one bothers to enforce them’! (LIFFE market local).

‘I can’t remember anyone asking me to show them any evidence of my client identification procedures. It’s as if they don’t want to know’! (Futures trader with small specialist broking company).

‘I think if somebody went to prison, we’d all sit up and take notice. But the fact is that nobody wants to see London lose its place in the world market, and they certainly aren’t going to start worrying about a bit of funny Russian money coming in’! ( LIFFE floor trader).

‘I do ask to see evidence of client identification, but if I am told that the introducing broker has done his homework, as long as someone is happy to sign off on that, then it's none of my concern. I don't get paid to turn away business'’ (Medium-sized broker’s compliance officer).

‘If the regulators started getting heavy with us about the regs, we’d comply a bit better. Not a lot though, because they are all crap! As it is, SFA don’t give a damn! They never ask to see the paperwork, all they care about is seeing the right signatures on the right forms. Most of them are so dumb, they wouldn’t know what they were looking at, anyway’. (Young desk trader in a busy futures’ dealing operation).

‘Of course I am laundering money. I’ve got to be. Nobody does these kinds of trades in this time scale, and at these volumes, and loses as much money as some of these guys do, without having a reason for doing it. Anyone can get on the wrong end of a trade, from time to time, but you make damn sure you don’t make the same mistake again. These guys are just moving around huge sums of other people’s cash, and they are willing to pay for the privilege’. (Forex dealer in a small private client firm).

‘Look, if anyone asks me, I’ll deny I said this to you on a stack of bibles, but what do you think we do for a living. Someone wants to move some money, and I am there to help them. It doesn’t happen all the time, most times we’re just taking positions. Anyway, all this stuff you are asking cannot be that important, even the regulators don’t ask about it’. (Same Forex dealer)

What became abundantly clear in the interviews was that there was a general acceptance that the Money Laundering Regulations were not only not being enforced, but that those with responsibility for their regulation, the Securities and Futures Association, did not seem to care about their enforcement.

Whether or not the SFA accepted that it did have regulatory responsibility for the enforcement of the provisions of the Money Laundering Regulations, the market and those it regulated in other areas believed it had such a responsibility!

Nevertheless, it became clearer that the lack of regulatory oversight had become a major issue, as far as guaranteeing ‘best practice’ was concerned, and the putative new regulator, the Financial Services Authority (FSA), was required by government to take on board the need to develop a new approach towards the regulation of this area of the market. But it took the fallout from the General Abacha affair to make the London market and those who regulated it to realise that the level of anti-money laundering compliance had been allowed to become derisory.

In an article I published in Money Laundering Bulletin in April 2001 entitled “Too Little – Too Late” – ‘The FSA’s response to the Abacha looting’, I reported;

‘…The FSA identified 42 personal and business bank accounts in the UK linked to the Abachas. These were held at 23 banks, including UK banks and London branches of foreign banks. The regulator said it had ordered seven banks to tighten their controls or face unlimited fines and public naming later this year when the regulator is given new powers to tackle money laundering…’

Extracted from the front page article of the Financial Times of 9th March 2001, these words demonstrated more clearly than anything else how and why the parlous state of non-compliance with the Money Laundering Regulations had been allowed to get to the state it had in the UK by the new millennium.

When the Abacha state looting story first broke, the immediate response of the UK authorities was to drag their heels and to look for every possible excuse to undertake a damage-limitation operation. In a typical financial establishment response to a whiff of scandal, the usual apologists were wheeled out to claim that the City of London was one of the cleanest financial centres in which to do business.

The FSA was finally persuaded to mount an investigation, although their immediate response, and without examining the full facts, was to opine that the amount of money under suspicion was not as great as others claimed, an illuminating illustration of an intention to mount a fearless and searching investigation.

Finally we had the findings of the FSA’s researches, and a very sorry tale they told. The regulator had established that a number of UK banks had failed to comply with the following requirements when opening accounts.

Overseeing the opening of accounts by higher risk customers

Verifying the identity of beneficial owners of companies

Finding out the source of customer’s wealth

Following guidelines on the reporting of suspicious transactions

Setting up adequate record retrieval and retention systems

Avoiding over reliance on introductions by existing clients.

This state of affairs then continued throughout the FSA's stewardship of the financial sector. What marked out their regime of control was a concerted unwillingness to take any responsibility for ensuring that the Money Laundering Regulations were properly enforced and supervised.

So now, the new Financial Conduct Authority finally has a defined policy requirement to implement the Money Laundering Regulations.

In their Annual Report for 2013, they state;

"...The Financial Services Authority (FSA) had a statutory objective to reduce the extent to which it was possible for a financial business to be used for financial crime. We do not have a freestanding objective to reduce financial crime, but reducing the extent to which firms can be used for financial crime is a priority as part of our objective to enhance the integrity of the UK financial system. All firms authorised under FSMA are required to take steps to reduce the risk that they may be used for financial crime..."

That may be all very well, but these are very specific weasel words designed to obfuscate and to disguise the real end-product of their regulatory ambitions which is to do a lot of talking and report writing and chatting to other regulators in sunny palm-fringed jurisdictions, while not doing very much to enforce the law, which they appear to be saying is not their objective.

They hope to achieve this, so they say, by the use of specialist teams;

"...The specialist supervision team supports the firm supervisors in a number of ways. Some of this work is highly resource-intensive, while other issues need much less specialist input. The types of specialist support include:

•           Dealing with cases of money laundering risk and/or serious weaknesses in firms’ anti-money laundering controls (around 100 cases a year).

•           Conducting Systematic Anti-Money Laundering Programme (SAMLP) assessments of major banks. The SAMLP has been running since early 2012 and currently covers 14 major retail and investment banks operating in the UK. These reviews are intrusive, involving detailed testing and extensive interviewing of key staff responsible for the bank’s business, for implementing anti-money laundering processes and for AML controls. We often visit branches, as well as the operations of UK-incorporated firms outside the EEA, where they are required to operate UK-equivalent AML standards. We have so far assessed and visited five UK banks and conducted overseas work in Switzerland, Singapore and India for three of them.

•           Carrying out thematic reviews on high risk issues, assessing around 20 firms each time.

We usually publish these reviews, assessing how well firms in general identify and mitigate the money laundering risks they face, as well as guidance on good and poor practice. Our recent thematic work on AML includes: Banks’ management of high money laundering risk situations (June 2011); Banks’ defences against investment fraud (June 2012); and Banks’ control of financial crime risks in trade finance (July 2013). In addition, we are due to publish a review of AML and anti-bribery and corruption controls in asset management firms later this summer.

•           Assisting with the financial crime aspects of firm risk assessments carried out by firm supervisors..."

If anti-money laundering requirements are going to be effectively enforced then all this talk of thematic reviews and SAMLP assessments, and swanning around in foreign countries will pale into insignificance, when set against the willingness of the FCA to bring positive criminal action against those institutions which fail to comply with legal requirements. That will be the acid test, but don't hold your breath, there is too much waffle in this report to give any comfort that they will actually grasp the nettle and prosecute for wilful failure to comply with the law.

As we have already seen with HSBC, the banks took a positive business case decision to ignore the realities of the AML laws and Regulations, no-one was prosecuted for the bank's wholesale money laundering operations for the Mexican drug mafias; and my own experiences as a consultant have confirmed the degree of contempt in which the AML regime is held by bankers.

There has never been any stomach for undertaking any formal positive law enforcement action against the banks in this area of operation, and it looks very much as if the same attitude still prevails.