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| Fighting money laundering and the financing of terror |
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Finally a chance to make the difference It has now been over eighteen years since the creation of the Financial Action Task Force (FATF) to lead the international fight against money laundering. During that time we have seen a plethora of national and international initiatives to separate the criminal from their ill-gotten gains. Firstly the concentration was on the drugs trade, this then developed to the proceeds of all crimes, from kidnapping to tax evasion. Most recently, following the horrors of 9/11 renewed focus has been placed on halting the funding of terrorists. Yet the questioned remained was all this effort and cost producing the desired results? There is no accurate statistical information on the level of “dirty money”. The IMF estimate that it is between 2%-5% of world’s GDP ($2.1trillion at today’s figures) The UN estimate: $1 trillion laundered annually (just under $2 million per minute). On this basis money laundering is the world’s third largest industry by turnover (after oil & agriculture). If these figures are accurate then the eighteen years of effort has produced, at best, a mediocre result. Whilst there have been some high profile successes these are insignificant given the alleged volumes involved As to the cost, it has been estimated that the annual costs of compliance with the requirements for the US banks alone amounts to more than $3 billion. A KPMG AML survey revealed that operational costs to the finance industry rose by 58% over the period 2004-2007. This excludes some significant fines. For example the USA has imposed fines running into the tens of millions of dollars on institutions found to be in breach of the rules. Does the lack of proven statistical data mean that success is being missed? This is unlikely. On the assumption that any significant reduction in the ability of drug dealers to clean their money will result in their pushing up the price of the drugs they trade (laundering being, in effect, a business cost and seizure a business risk), drug prices on the streets should have risen. They have done the reverse. Nor does stopping the financing of terrorism appear to be any more successful. According to the Sunday Telegraph late last year, the UK was only freezing £500,000 of suspected terrorist cash. Whilst money laundering may run into trillions, the money required to launch a terrorist attack is tiny. The attacks in London will probably have cost under £1000. For the price of a 2p phone call in 1997, the IRA (via a bomb threat) were able to stop the Grand National at Aintree so costing millions of pounds. So how come, with all the resources being devoted to the effort (and please, it is not a “war on…”) are the results so modest? It is for the very reason that so many people have moaned about the controls and checks being imposed on them whenever they open a bank account. Yet, in the era of identity theft, the ability of criminals to use a false identity is comparatively simple. Indeed the rules have, in general, been applied on a mechanical basis with little consideration of the risk actually posed by the customer or the service offered. This is about to change. On the 15th December 2007 the European Third Money Laundering Directive (3MLD) comes into force. 3MLD includes, for the first time, measures to combat terrorist financing. It also contains detailed provisions on 'politically exposed persons' (Peps’) who, by virtue of their position in public life, are vulnerable to corruption. Money laundering obligations are also extended to new areas such as sellers of high value goods and estate agents. Most importantly the Directive places risk assessment and management at the fight of combating money laundering. For low risk customers, products and transactions there is now a simplified due-diligence (SDD). Conversely the Directive contains detailed provisions on enhanced due diligence for high-risk customers and transactions, In Gibraltar the FSC has recently issued fully revised and updated guidance notes for the businesses it licenses. Under these every business relationship must be risk profiled taking into account four risk elements. These are customer, product, interface and country. In essence this means that firms must look at the risk posed on an holistic basis, rather than the traditional purely looking at, for example identifying their customer via passport and utility bill. More importantly greater vigilance will be required on the activities of an account, once opened to ensure it is being used in the manner expected. In relation to the risks posed by products, some such as the use of anonymous or fictitious names are banned. Special provisions now exist for services such as correspondent banking, powers of attorney, bearer Instruments and wire Transfers. Firms will have to document how they mitigate or reduce the risks posed by each of the delivery mechanisms they use, for example where they sell on a non face to face basis such as via the internet or they use introducers. Firms also must document the risks posed by the different countries in which they conduct business. Customers from countries known for high levels of corruption or with other criminal issues will be subject to additional checks This approach puts the burden on the higher risk areas whilst reducing it for the lower ones. The end result should be less bureaucracy for most. To support this greater responsibility is being placed on senior management to ensure that a senior manager is allocated overall responsibility for establishment and maintenance of effective AML/CFT systems of control and that appropriate training is identified, delivered and maintained. Regular information must be made available to senior management and a firm’s risk management policies must be appropriately documented The FSC guidance notes only apply to those for whom it has regulatory responsibility. It is available on the FSC website www.fsc.gi . Regulators with responsibility for others caught under the Directive, such as the Gibraltar Regulatory Authority, are producing their own guidance. To put money laundering volumes into decline will still take considerable effort, but at least after years of expensive false starts, a real possibility of success finally exists.
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