Money laundering - Cycle of crime

Are the money laundering regulations working, asks Wilf Altman.

Britain's performance on money laundering is to be assessed next year by the Financial Action Task Force, an inter-governmental policy-making body to combat money laundering and terrorist financing. Potentially suspicious transactions reported by professional firms, banks and businesses handling large sums of money showed a 10-fold increase in the last five years from 18,400 in 2000 to just under 200,000 last year. The difficulty, as former home secretary David Blunkett noted, is that 'organised criminals are more organised than we are'.

These results are a minor reflection compared to the awesome scale of money laundering by organised criminal gangs here and in many parts of the world. An updated report on global money laundering - Dirty Dealing by Peter Lilley - reveals that last year the Metropolitan Police identified at least 193 organised criminal networks in London. Another report identified professional groups operating as sophisticated multinational businesses, individual crime families and disorganised gangsters.

Washing whiter

Both criminal launderers and terrorist groups are increasingly using alternative methods, such as the internet, in place of traditional banking routes to launder and distribute their funds. The new world of electronic commerce, Lilley warns, has at the moment no monitoring or controlling mechanism in respect of money laundering.

Moreover, banks are no longer needed to make fund transfers. You can do it from your personal computer using electronic cash on a peer-to-peer basis without the need to involve traditional financial institutions.

Electronic money is theoretically available anywhere in the world to be sent anywhere else in the world. At the beginning of the 21st century, criminals may have finally found the new technological detergent that washes whiter.

'Everything the money launderer needs is now available online: he can open a bank account; order an international business company; enrol in a multitude of stock trading schemes; communicate by anonymous email; trade using electronic cash systems that are already available; funnel money through online casinos and betting shops; buy houses online; open his own offshore or online bank. There is very little if anything at all at present that can halt or restrict washing in space.'

At the heart of all money laundering legislation, Lilley cautions, is the total need for training. Not just on a one-off basis but an ongoing basis to keep staff up to date, and especially as part of an induction programme for new employees. The UK as a major financial centre is a prime target for money launderers. There is more than a hint that money laundering is taking place on a fairly significant level as a result of the size, sophistication and reputation of the country's financial sector.

Money laundering in relation to illegal drugs has been a criminal offence since 1986. More recent regulations apply to banks, bureaux de change, money transmission companies, lawyers, accountants, estate agents and dealers in high value goods, such as art, cars and jewellery.

If you are an estate agent and a wealthy Russian wants to buy one of your expensive properties in central London, do you risk offending him by asking difficult questions that might cause him to pull out of the deal? London and Switzerland both share the problem of organised crime from Russia, using laundered funds to acquire works of art, plans, precious metals and properties.

Tactical change

The point is that the greater the international regulatory effort aimed at banks to identify and prevent laundering, the more criminals will look for other market tactics. For instance, money laundering based on barter happens across the world in diverse transactions involving agricultural produce, securities, credit cards and glass. No wonder the late Al Capone once said he was surprised that so many people turned to crime when there are so many legal ways to be dishonest. The basic tenet of all anti-money laundering legislation and regulation is the need for customer identification at the beginning of any financial relationship. But how is the garage owner, estate agent or art dealer to suspect involvement in money laundering or other criminal activity? How is the bank to suspect the funds being banked when these are of normal proportions?

There are dozens of ways of raising suspicion, like reluctance to provide information, such as address, company and business activities. But will a trader really carry out a kind of diligence test for what may be fairly normal transactions, even when they do involve fairly large sums?

Training staff to be on their guard and to comply with regulations is another matter. Obviously they need to know what money laundering is: how to ask customers the right questions, when to be suspicious. Regular compliance training and reviews are clearly important.

Very little seems to have changed in tightening money laundering regulations in the last few years. Lilley quotes the case of Consuelo Marquez, an investment representative with Lehman Brothers between 1996 and 2000, who pleaded guilty last year in a Manhattan Federal Court to conspiring to launder about $11m (£5.9m) in drug proceeds for a former Mexican state governor who in turn washed the drug money for a dangerous drug baron (now in jail).

Marquez provided an ideal method for washing this dirty drugs money.

The daughter of Mexican immigrants, she was raised in Manhattan, graduated in 1985 with a degree in European studies and worked in London and New York and then for a Mexican company with a New York office. At Lehman Brothers she set up numerous brokerage accounts in the name of British Virgin Island shell companies and deposited millions of dollars of narcotic profits in these accounts.

Lehman Brothers should have known about the activities of its customers and at least suspected that the funds involved represented drug money being laundered.

Know your customer

In December 2002, the Royal Bank of Scotland was fined £750,000 by the Financial Services Authority for money laundering control failings. According to the FSA, the bank 'failed to obtain sufficient Know Your Customer documentation adequately to establish customer identity, or to obtain such documentation in an unacceptable number of new accounts across its retail network in early 2002'.

Bankers, lawyers, accountants and other professional service providers still get some of the blame for money laundering - sometimes unknowingly, sometimes by turning a blind eye to what is happening. We are far from winning the war, or why is the annual value of hard drug trafficking in the UK so high? Why are there so many organised crime groups successfully operating in Europe using the techniques and practices of sophisticated multinational corporations? How can an established Wall Street financial institution be used to launder millions of Mexican drug money?

Dirty Dealing: The untold story about global money laundering, international crime and terrorism, by Peter Lilley, is published by Kogan Page price £12.99.

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