Tuesday, November 24, 2015

Anti-money laundering controls in the UK not fit for purpose.

These are the findings of the latest report by Transparency International (TI), a global NGO which monitors issues pertaining to financial and economic crime.

Their latest report entitled “...Don't Look, Won't Find: - Weaknesses in the supervision of the UK’s anti-money laundering rules...” spells out in sparse terms the inadequacies of the UK anti-money laundering regime.

The findings of the TI report make for sorry reading. I set them out here;

A system not fit for purpose:
  • Poor oversight - The majority of sectors covered in this research are performing very badly in terms of identifying and reporting money laundering. Major problems have been identified in the quality, as well as the quantity, of reports coming out of the legal, accountancy and estate agency sectors. One supervisor even admitted it carried out no targeted AML monitoring at all during 2013.
  • Lack of transparency - 20/22 supervisors fail to meet the standard of enforcement transparency demanded by the Macrory standards of effective regulation.
  • Ineffective sanctions - Low fines, in relation to the amounts being laundered, failing to be effective deterrents. Of the 7 HMRC regulated sectors, that includes estate agents, the total fines in 2014/15 amounted to just £768,000.
  • Independence questioned – Just 7/22 supervisors control for institutional conflicts of interest, whilst 15 are also lobby groups for the sectors they supervise.
The research highlights that:
  • A third of banks dismissed serious money laundering allegations without adequate review
  • In the accountancy sector, at least 14 different supervisors have some responsibility – leading to widespread inconsistency and variations.
  • In property, only 179 cases deemed suspicious by estate agents in 2013/14.
  • Just 15 suspicious cases reported through art and auction houses.
Regular readers of this blog will know that I have long been warning of the unenforced regime of money laundering controls in this country, and the risks we run by allowing a vast amount of foreign black money to have unrestricted access to the UK’s institutions.

The present state of affairs identified by TI is merely a restatement of what has been the status-quo for a long time, but the UK Government adamantly refuses to take the necessary steps to enforce the laws on the prevention and forestalling of money laundering effectively, as she has done since the laws were originally introduced.

It is all part of that classical degree of hypocrisy and mendaciousness which attaches to British attempts to regulate its financial industries, and which follows a long historical pedigree.

Back in the day when the original Financial Services Act of 1986 was being discussed, the City of London experienced a collective crisis of conscience when Margaret Thatcher declared that she wanted to see a regime of financial regulation introduced to ‘police the City’.

Thatcher was agnostic as to what form of ‘policing’ this should take, but she did not want the cost of the new regulations to fall on the shoulders of the tax-payer.

She was a committed disciple of the Hayekian principles of the ‘Enabling State’, and she could not understand why the City could not regulate itself.

She was therefore reassured when a group of City grandees came together to identify a method whereby the function of financial regulation would be undertaken by the City on behalf of itself.

Thatcher fell for the proposal outlined, hook, line and sinker, and the City then began a hugely concerted effort to concoct a plan which would possess all the imagery of being a regulatory organisation, but one which, in practice, would be little more than a huge talking shop..

The original architects of the plans realised that in order to get approval to be able to operate the new regime of ‘self-regulation’, they would have to make the edifice look as if it intended to operate effectively.

So a modicum of money was set aside by the City fathers to start to create the new animal, and the various financial interest groupings  were sent away to come up with proposals for a Self Regulating Organisation (SRO) model which would be agreeable to their members.

What this failed to take into consideration was the degree of self-interest and special pleading which different financial groups were capable of generating, and it quickly became very clear that the different groups of City players could not and would not operate together in a concerted manner.

The Bank of England was a regulatory entity in its own right and as it had existed since God was a little boy, (well, since 1694 anyway) and it had no intention of being aligned to any other group or body.

The Stock Exchange also let it be known that it had no intention of sharing a platform with any of the lesser breeds, while the Stock Brokers and Stock Jobbers who worked there all joined an organisation called The Securities Association (TSA).

They in turn refused to have anything to do with those men and women who engaged in various forms of Investment Management, Fund Managers etc, who in turn joined up with a new body called IMRO or the Investment Managers Regulatory Association.

They in their turn considered themselves to be a rather snooty crowd, who did not want to be associated with those dreadful mechanics who engaged in the rather mundane and arcane practices associated with developing Life Assurance and Unit Trust products. These chaps were left to join LAUTRO, which stood for the Life Assurance and Unit Trust Regulatory Organisation.

The wide-boys who traded the esoteric products and contracts in the markets which were beginning to be known as derivatives, joined the Association of Futures Brokers and Dealers (AFBD), while those who sold Life and Pensions products, whom nobody else wanted to have any association with at all, became members of the Financial Intermediaries, Managers and Brokers Regulatory Association or FIMBRA.

The whole Tower of Babel existed under the supervision of an umbrella organisation called the Securities and Investments Board, (SIB).

It will come as no surprise to anyone to realise that within a relatively short space of time, it became absolutely clear that not only did this monstrous edifice not work effectively as a regulating entity, but that it was not intended so to do.

Every entity had its own rule book and series of procedures, as well as competing and conflicting disciplinary codes. Members were only subject to the rules of their own organisations, enforced through their contractual relationship.

It didn’t take long to realise that The City had used its genius for giving all the impressions of complying with the laws in public while derogating from them in private. There were far too many competing interests, overlapping fields of jurisdiction, differences in regulatory interpretation, deviations in policy issues, and generally, a complete failure to create a model which could and would work in harmony in order to regulate the City effectively.

This did not happen by accident, it was a deliberate and cynical policy, undertaken by powerful City figures, to create a monster which would never be capable of concerted best practice.

It was done to head off and then dilute the effects of the demands for financial regulation, and it entrenched a group of City interests, giving them remote control over the day-to-day operation of the financial regulatory regime.

Within a matter of years the whole rotten edifice had to be swept away, and a new model put in its place, with a new set of legal provisioning and new entities used to control its players, when new Act was introduced in 1990.

Even then, the earlier models had captured the various memberships, and now financial regulation was entrapped in a monstrous edifice of immovable rules and regulations.

The overriding failure was to create a single supervising body with simple rules which could have brought its influence to bear on all the market participants, subjecting them all to a simple but tough regime of market supervision. That failure has been complemented down the years and is now replicated in the ridiculous and pathetic failures of first the Financial Services Authority, and now the Financial Conduct Authority.

The same was true for the implementation of the rules and laws dealing with money laundering.

I have an interest to declare here as I was very much personally involved with the introduction of the new laws dealing with Money Laundering from the start, and I wrote the first legal text book which was published on the same day as the new Act came into force, April 1st 1994, an apt day in some ways!

I now realise that my colleagues and I who worked so assiduously to help educate and advise the financial sector on the new laws, were guilty of a modicum of naivety in our approach to the new laws.

Most of us who advised on the new laws and regulations were lawyers, working in partnership with police agencies, and we had all had long experience of the problems associated with trying to identify and determine the legal ownership of sometimes vast sums of money, during the course of our investigations.

Despite all our entreaties, the banks remained resolutely silent and were remarkably unhelpful in our work, claiming the sanctity of the client’s right to confidentiality.

The new laws were intended to provide a way to cut through this Gordian knot, to give the cops the information they needed to catch the criminals, while protecting the reputation of the bankers at the same time, by providing them with a defence against civil suit at the hands of their clients for passing on information to the Police.
We, the police and prosecutors had grown so used to hearing the protestations of the bankers that really they wanted to help us, but their hands were tied by the law, that we genuinely believed if a way could be found to give them a defence against civil suit, they would be as good as their much protested word, and become more cooperative with us!

Of course, we had fallen into the trap that the City players had set for us!

They had no intention of passing information to the Plods, particularly as it was well known that any institution that did play that game would lose clients hand over fist.

Why would any bank with a regular source of money about which no questions needed to be asked, suddenly want to start asking the very questions which nobody but the cops wanted answers to?

The other factor we had not considered, and of which it is only now that I finally have come to realise the reality, is that in truth, the Government did not want these laws being implemented too closely. either.

When you govern an entity like the City of London, with its vast association and relationship with the global off-shore secrecy banking havens, you begin to see the huge amount of black and dubious money which comes washing through the City institutions every day of the year.

This money possesses huge benefits for this country and if the price to pay for its continued arrival is that a blind eye is turned to its sources and the laws designed to prevent it from coming, then the blind eye will be turned.

Let me explain!

It is only recently that, in mulling over some of my old adventures and experiences, that I have recalled some of the more esoteric moments of my career.

The original money laundering law was intended to deal solely with the proceeds of drug trafficking. Generally speaking, even most banks (until HSBC broke the mould), turned their noses up on the proceeds of drug trafficking. Drugs were generally considered to be grubby, and bad for business, and most institutions had little qualm about trying to keep drug money out of the system.

The original law, was derived from a Directive issued by Brussels, the EU Money Laundering Directive, and all members states had to comply with its implementation by a fixed date. So the UK had no choice than to enact a new law dictated by the EU.

We are all familiar with the level of agreement that most British institutions have with EU pronouncements, but nevertheless, the UK was bound to implement the terms of the Directive by April 1994.

So work was being undertaken to draft and bring a act to the Statute Books which would meet the needs of the EU.
At the same time, in the USA, our American cousins were playing with the idea of extending the implications of anti-momey laudering laws to the proceeds of all criminal behaviour, nit just drug trafficking, and it was becoming clearer and clearer that the UK would undoubtedly follow suit, to keep in lock step with our US cousins!

As the time came for the new laws to be implemented, we were already being drawn into conversations and discussions about what we would come to call ‘All Crimes Money Laundering’..

The problem with this provision was that the proceeds of ‘All Crimes’ included money from Tax Evasion, capital flight mechanisms, and other criminal activities, fraud, theft, corruption, City crimes, etc, etc.

This kind of money, and particularly capital flight and tax evasion from other countries made up a vast sum of available investment capital, and the banks liked this kind of money very much indeed.

Would they declare it under the new regulations?

What was becoming clearer was that H.M.Government was also beginning to have doubts and second thoughts about the wisdom of these laws. It is of interest to note that once the laws were implemented, no agency was designated as having the power to enforce the regulations. It was as if HMG did not want the laws to be regulated too closely or too effectively. It was enough to have the laws, we didn’t have to be assiduous in enforcing them!

Sound familiar!

As part of the public awareness educative process, I, with a few others travelled the country giving public lectures on the implications of the new laws. One of my fellow-speakers was a rather oleaginous character from H.M.Treasury.

One night we were giving a presentation in Manchester in the Free Trade Hall!

After the opening comments, the floor was invited to ask any questions that might be bothering them.

A portly financier  stood up and said; ‘Do any of these laws and provisions have anything to do with the issues of tax and/or revenue matters generally.’

Our friend from the Treasury indicated he would answer this, and with breathtaking insouciance he said that these laws would have nothing whatsoever to do with tax or revenue matters. This answer seemed to appease the audience who soon drifted off home.

On our way South to London in the train, I asked my colleague about this question, and I asked him why he had lied so blatantly, as we all knew that tax evasion and uauthorised tax avoidance would be caught up in the new provisions.

His answer was a masterpiece of Whitehall wabble-babble.

He said; “...The word ‘lied’ is a very strong word. I was just being economical with the actualite. See it like this. If the market believes that tax matters are caught by the new provisions,  they will dig their heels in, and mount such a backwoods revolt that we will not get the legislation through in this parliament. This will create a problem for us in Brussels, and set us against the Commission, particularly as we have run out of time to implement this law and we will be in default and subject to default actions. My masters do not want that so I have had to be a little judicious with the truth in order to get the people in the hall to sign up...”

If ever there was a piece of legislation that nobody wanted, it has to be the anti-money laundering laws. They are routinely ignored, as we have seen when HSBC laundered billions of dollars of Mexican drug money and no-one did anything about it.

Our laws have been implemented in such a hap-hazard and piecemeal fashion, again with overlapping agencies seeking to implement the rules, so that like the early days of financial regulation, we have no-one who takes full responsibility for the whole market sector. For years, no-one would take charge of enforcing the Regulations and even today, they are not properly policed.

Yet again, we have laws which, frankly, are not intended to be obeyed, and successive Governments have routinely turned a blind eye to the implications of any failure to enforce them.

Perfidious Albion ideed!


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