CISI Combating Financial Crime Ed2

Certificate in Combating Financial Crime

Combating Financial Crime Edition 2, April 2013 This learning manual relates to syllabus version 1.0 and will cover examinations from 11 July 2013 to 31 May 2015

Welcome to the Chartered Institute for Securities & Investment’s Combating Financial Crime study material. This manual has been written to prepare you for the Chartered Institute for Securities & Investment’s Combating Financial Crime examination. The manual and syllabus for Combating Financial Crime have been developed in partnership with QCo.

www.qcoholdings.com Published by: Chartered Institute for Securities & Investment © Chartered Institute for Securities & Investment 2013 8 Eastcheap London EC3M 1AE Tel: +44 20 7645 0600 Fax: +44 20 7645 0601 E-mail: [email protected] www.cisi.org/qualifications This is an educational manual only and Chartered Institute for Securities & Investment accepts no responsibility for persons undertaking trading or investments in whatever form. While every effort has been made to ensure its accuracy, no responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the publisher or authors. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the prior permission of the copyright owner. Warning: any unauthorised act in relation to all or any part of the material in this publication may result in both a civil claim for damages and criminal prosecution. A learning map, which contains the full syllabus, appears at the end of this manual. The syllabus can also be viewed on cisi.org and is also available by contacting the Customer Support Centre on +44 20 7645 0777. Please note that the examination is based upon the syllabus. Candidates are reminded to check the Candidate Update area details (cisi.org/candidateupdate) on a regular basis for updates as a result of industry change(s) that could affect their examination. The questions contained in this manual are designed as an aid to revision of different areas of the syllabus and to help you consolidate your learning chapter by chapter. They should not be seen as a ‘mock’ examination or necessarily indicative of the level of the questions in the corresponding examination. Learning manual version: 2.1 (April 2013)

Foreword Learning and Professional Development with the CISI The Chartered Institute for Securities & Investment is the leading professional body for those who work in, or aspire to work in, the investment sector, and we are passionately committed to enhancing knowledge, skills and integrity – the three pillars of professionalism at the heart of our Chartered body. CISI examinations are used extensively by firms to meet the requirements of government regulators. Besides the regulators in the UK, where the CISI head office is based, CISI examinations are recognised by a wide range of governments and their regulators, from Singapore to Dubai and the US. Around 50,000 examinations are taken each year, and it is compulsory for candidates to use CISI learning manuals to prepare for CISI examinations so that they have the best chance of success. Our learning manuals are normally revised every year by experts who themselves work in the industry and also by our Accredited Training Providers, who offer training and elearning to help prepare candidates for the examinations. Information for candidates is also posted on a special area of our website: cisi.org/candidateupdate. This learning manual not only provides a thorough preparation for the examination it refers to, it is also a valuable desktop reference for practitioners, and studying from it counts towards your Continuing Professional Development (CPD). Mock examination papers, for most of our titles, will be made available on our website, as an additional revision tool. CISI examination candidates are automatically registered, without additional charge, as student members for one year (should they not be members of the CISI already), and this enables you to use a vast range of online resources, including CISI TV, free of any additional charge. The CISI has more than 40,000 members, and nearly half of them have already completed relevant qualifications and transferred to a core membership grade. You will find more information about the next steps for this at the end of this manual. With best wishes for your studies.

Ruth Martin, Managing Director

The syllabus was developed in a collaborative venture between the CISI and QCo to CISI standards and format. Reviewer of the Overall Manual Nikos Passas, Chairman QCo Holdings is Professor at Northeastern University in Boston Mass. He specialises in the study of corruption, money laundering, illicit flows, informal fund transfers, white-collar crime, terrorism, targeted sanctions, organised crime and international crimes. He is a prolific author, with more than 140 publications, undertakes expert witness work and consults with law firms, financial institutions, private companies, international organisations and government agencies in all continents. Editor of the Manual and Author of the Section on Corruption Alan Doig is Visiting Professor, Centre for Public Services Management, Liverpool Business School and Hon. Senior Research Fellow, University of Birmingham. Prior to that he was the United Nations Office for Drugs and Crime UNCAC mentor in Thailand, and Resident Adviser for the Council of Europe Prevention of Corruption project for Turkey. He has been Professor of Public Services Management at Teesside Business School and Liverpool Business School, where he ran the Fraud Management Studies Units. Editor of the Second Edition Manual and Co-Author of the section on Combating the Financing of Terrorism David Artingstall is Senior Consultant at John Howell & Co Ltd, specialising in financial crime and regulatory matters. David has previous experience as a terrorist finance investigator at Metropolitan Police Special Branch and also worked at the UK’s Financial Intelligence Unit for several years. Immediately prior to starting his consulting career he was a Technical Specialist in Financial Crime at the Financial Services Authority. Author of the Section on Anti-Money Laundering Jackie Harvey is Professor of Financial Management at Newcastle Business School, Northumbria University and academic leader of the financial management, risk and performance subject area. She sits on the Editorial Board of the European Cross Border Crime Colloquium. Prior to becoming an academic she was Fiscal Policy Adviser to the Ministry of Finance in Belize and also spent ten years working for a major merchant bank in London. Co-Author of the Section on Combating the Financing of Terrorism John Howell established John Howell & Co Ltd, in 1992. He is an expert in financial crime and regulation, and has carried out numerous assignments in this field, particularly in relation to international standards. He carried out the independent review of the implementation of the FATF Special IX Recommendations in EU member states and is the author of the ICC Guide to the prevention of Money Laundering and Terrorist Financing. First Edition Senior Reviewer of the Manual Monica Bond is Principal at Bond Solicitors and MD at Bond Associates, Forensic Accountants. She has specialised in the investigation of money laundering, fraud and corruption cases, often acting as the Expert Witness for the Prosecution/Claimant. She practises as a solicitor, a Chartered Accountant and a Certified Fraud Examiner. Monica authored the first publication in the UK on AML compliance for accountants and is a prolific writer and a regular conference speaker. Bond’s core practice is services to entities in the areas of compliance, investigatory/due diligence and/or recovery. Contributing organisations to the syllabus include: Dubai Financial Services Authority Guernsey Financial Services Commission HSBC Group PricewaterhouseCoopers Cardiff University The manual and syllabus in a collaboration between by the CISI and QCo. For more information about QCo please go to www.qcoholdings.com.

Money Laundering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Terrorist Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Corruption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111

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The Role of the Private Sector

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Glossary and Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273 Multiple Choice Question . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291 Syllabus Learning Map . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 311

It is estimated that this manual will require approximately 70 hours of study time.

What next? See the back of this book for details of CISI membership. Need more support to pass your exam? See our section on Accredited Training Providers. Want to leave feedback? Please email your comments to [email protected]

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Combating Financial Crime .

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Bribery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167

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Predicate and Associated Offences .

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The Background and Nature of Financial Crime

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Chapter One

The Background and Nature of Financial Crime 1. Definitions

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2. International Context

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This syllabus area will provide approximately 12 of the 100 examination questions

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The Background and Nature of Financial Crime

Definitions

1.1

Financial Crime in the Financial Services and Markets Act (FSMA) 2000

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1.

Learning Objective 1.1.1

Know the definition of financial crime in the Financial Services Act 2012

This manual covers the combating of various forms of financial crime, including money laundering (ML), terrorist and proliferation finance, corruption and bribery. In order to set the scene, it will be useful to start with some definitions. Financial crime can be regarded as any crime involving money or other types of asset with monetary value. A formal, general definition of financial crime can be found in the UK’s Financial Services Act 2012, which amended the Financial Services and Markets Act (FSMA) 2000 definition of financial crime to include any offence involving: a. b. c. d.

fraud or dishonesty; misconduct in, or misuse of information relating to, a financial market; handling the proceeds of crime; or the financing of terrorism.

The use of the term to include means financial crime can be interpreted widely under this act to also include, for example, corruption. In November 2012, the Financial Services Authority (FSA), at the time the UK’s financial regulator, produced ‘A Financial Crime Guide for Firms’ which expanded on some of these terms: • Fraud – is a type of financial crime that has an effect on all parts of the economy. It commonly

involves the perpetrator making personal gains, or avoiding losses, through the deception of others. Fraud can take a variety of forms including phishing, skimming, carousel fraud, identity theft and advance fee fraud. It fell within the FSA’s statutory objective of reducing the risk of financial crime. The Financial Conduct Authority (FCA) (see below) retains the same responsibilities under the Financial Services Act 2012. • Market abuse – defined in Section 118 of the FSMA and in the European Union (EU) the Market Abuse Directive (MAD), this consists primarily of insider information and market manipulation. The MAD provides an EU-wide market abuse regime, aimed at reducing the incidence of market abuse (see Chapter 2, Section 2.6).

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• Proceeds of crime – firms and organisations in the financial services industry can be used, wittingly

or unwittingly, by criminals seeking to launder the proceeds of crime (money laundering), thereby concealing the illegitimate origins. Under the FSA 2012, the FCA is charged with reducing the extent to which regulated firms1 are used in connection with financial crime, including money laundering. In April 2013, the FCA and the Prudential Regulation Authority (PRA) replaced the FSA, by virtue of the Financial Services Act 2012. The responsibility for, and work on, financial crime has been taken on by the FCA, under its integrity objective found in the revised Section 1D of the Financial Services and Markets Act 2000 (FSMA). The Act states that the integrity of the UK financial system includes it not being used for a purpose connected with financial crime, as defined above. The definition is similar to the one in previous legislation, so previous FSA guidance and activity remain useful sources, and are used throughout this workbook.

1.2

Money Laundering (ML) in the Proceeds of Crime Act (POCA) 2002

Learning Objective 1.1.2

Know the definition of money laundering in the Proceeds of Crime Act (POCA 2002)

Money laundering (ML) is the process of making dirty money appear clean. Criminals want to make the proceeds of their crimes appear legitimate, so they can be retained and used to fund their lifestyle. The proceeds of crimes such as drugs trafficking, fraud, smuggling or corruption can be huge and the criminals involved must find a way to use the money generated. This is done by disguising the source, changing the form or transferring the money to other locations and jurisdictions. Criminal proceeds may also be used to fund further criminal activity, in which case they may also need to be transferred. The UK’s Crown Prosecution Service (CPS) provides guidance on the interpretation of money laundering as follows: Money laundering is the process by which criminal proceeds are sanitised to disguise their illicit origins. Acquisitive criminals will attempt to distance themselves from their crimes by finding safe havens for their profits where they can avoid confiscation orders, and where those proceeds can be made to appear legitimate.2

1  It is worth noting here the use of the term regulated in the UK context. It is used in relation to those over whom the statutory responsibility regulators, such as the PRA and FCA, exercise. It is also used for those governed by the proceeds of crime legislation, which includes: those engaged in financial services work; bureaux de change and money service businesses; estate agents; casinos; insolvency practitioners; businesses providing accountancy services, tax advice, audit services; legal services relating to financial or real estate transactions; services related to the formation, operation or management of companies or trusts; businesses which deal in high-value goods for cash; and certain activities listed in a schedule to the regulations – see Schedule 9 of POCA available at: www.legislation.gov.uk/ukpga/2002/29/schedule/9 2  www.cps.gov.uk/legal/p_to_r/proceeds_of_crime_money_laundering

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Money laundering is now generally criminalised as a separate offence in jurisdictions around the world. The Proceeds of Crime Act (POCA) 2002 is the act used for this purpose in the UK. Under this, money laundering is defined as doing something which constitutes one of three offences, which broadly speaking cover: • Section 327 – concealing, disguising, converting, transferring or removing criminal property. • Section 328 – entering into arrangements to facilitate the acquisition, retention, use or control of

criminal property. • Section 329 – acquisition, use and possession of criminal property.

1.3

Terrorist Financing (TF)

Learning Objective 1.1.3 Know the United Nations International Convention for the Suppression of the Financing of Terrorism (1999) definition of terrorist financing

Terrorist financing (TF) is the financing of terrorist acts and of terrorists and terrorist organisations generally, even in the absence of links to a particular terrorist operation. It was formally defined by the United Nations (UN) in December 19993 in Paragraph 1 of Article 2 of the International Convention for the Suppression of the Financing of Terrorism, which states that: Any person commits an offence within the meaning of this Convention if that person by any means, directly or indirectly, unlawfully and wilfully, provides or collects funds with the intention that they should be used or in the knowledge that they are to be used, in full or in part, in order to carry out: a. An act which constitutes an offence within the scope of and as defined in one of the treaties listed in the annex; or b. Any other act intended to cause death or serious bodily injury to a civilian, or to any other person not taking an active part in the hostilities in a situation of armed conflict, when the purpose of such act, by its nature or context, is to intimidate a population, or to compel a government or an international organisation to do or to abstain from doing any act. The nine international treaties mentioned in sub-paragraph (a) of the Convention require parties to establish various terrorism offences in their national legislation. In the Convention, funds are defined in Article 1 as: Assets of every kind, whether tangible or intangible, movable or immovable, however acquired, and legal documents or instruments in any form, including electronic or digital, evidencing title to, or interest in, such assets, including, but not limited to, bank credits, travellers cheques, bank cheques, money orders, shares, securities, bonds, drafts [and] letters of credit. Article 3 excludes offences committed within a single state if the alleged offender is a national of that state and is present in the territory of that state (and no other state has jurisdiction), so the Convention does not apply to purely national/domestic offences. 3  International Convention for the Suppression of the Financing of Terrorism – http://www.un.org/law/cod/finterr.htm

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The Background and Nature of Financial Crime

TF will be covered in more detail in Chapter 4 of this manual.

1.4

Proliferation Finance

Learning Objective 1.1.4 Understand the Financial Action Task Force (FATF) provisional definition of proliferation finance

There is, as yet, no universally accepted definition of the financing of proliferation of weapons of mass destruction. The Financial Action Task Force (FATF), an inter-governmental body, which sets international standards relating to money laundering, the financing of terrorism and the proliferation of weapons of mass destruction, has produced two papers on proliferation finance; a Status Report on Policy Development and Consultation in February 20104 and an earlier typology report (June 2008)5. Building on their work in the 2008 paper, the 2010 Status Report included, the following working definition of proliferation finance: The act of providing funds or financial services which are used, in whole or in part, for the manufacture, acquisition, possession, development, export, trans-shipment, brokering, transport, transfer, stockpiling or use of nuclear, chemical or biological weapons and their means of delivery and related materials (including both technologies and dual use goods used for non-legitimate purposes), in contravention of national laws or, where applicable, international obligations. In contrast to the Convention definition of TF in Section 1.3 above, this definition does not refer to knowledge, intention or negligence. However, the FATF stated that these issues should be taken into account when a jurisdiction specifies the responsibilities of financial institutions or a possible criminal offence of proliferation financing.

1.5

Definitions of Corruption

Learning Objective 1.1.5

Understand why definitions of corruption have evolved

There is no universal agreement on a generic definition of corruption. Some organisations seek such a definition; others do so through nominated offences (examples of both are discussed in more detail in Chapter 5, Section 1.1).

4  Combating Proliferation Financing: A Status Report on Policy Development and Consultation, February 2010, http://www. fatf-gafi.org/media/fatf/documents/reports/Status-report-proliferation-financing.pdf 5  FATF Proliferation Financing Report, June 2008; www.fatf-gafi.org/dataoecd/14/21/41146580.pdf

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Historically, as we will examine in more detail in Section 1 of Chapter 5, some behaviour that would now be considered corrupt was normal and accepted practice. In the UK, for example, holders of Crown offices blended their personal and private roles to benefit themselves and others. However, the offence of bribery for personal gain (often committed by a public-office holder being bribed to act in a way contrary to the rules of honesty and integrity) was recognised. Early corruption statutes, such as the 1889 Public Bodies Corrupt Practices Act, focused on such offences, as did the first significant international agreement on corruption the OECD Convention against Bribery of Foreign Public Officials in 1977. The requirement that those who hold public office, whether elected or appointed, do so for the public good, and act and/or make decisions that are in the public interest, is clearly an important aspect of corruption, but may be considered as too narrow. There is a range of decisions or actions that may not be undertaken for direct personal gain, but for other personal, partisan or third-party benefits, and these may not necessarily require the intervention of another party. Thus conflicts of interest, misuse of public resources for personal benefit and trading in influence may also be described as corrupt conduct. Further, the emphasis on public office is seen as not paying sufficient attention to the possibility of bribery on the supply side, from the payer, or from the private sector. In some discussions, half a century ago, corruption was seen to have some pragmatic advantages. Excessive bureaucracy, where facilitation payments (ie, small bribes paid to officials to speed up bureaucratic processes, sometimes also known as ‘speed money’) were seen as an acceptable way of expediting business, encouraged behaviour that is now generally recognised as corrupt (although to this day not all corruption laws criminalise these facilitation payments and in some jurisdictions they have even been regarded as tax-deductible business expenses). Today, however, the prevalence of corruption in less developed countries have come to be seen as a major constraint to both democratisation and economic development, and the commitment to addressing it as evidence of reform and progress among multilateral and bilateral aid organisations. Also, it should be emphasised that the continuing presence of corruption in developed countries is seen as evidence that it is an integral aspect of public life everywhere. Subsequent international conventions covered all these pernicious aspects of corrupt behaviour and imply broad definitions of corruption, usually involving abuse of public and/or private office for personal gain. In the words of World Bank General Counsel, Ibrahim Shihata: Corruption occurs when a function, whether official or private, requires the allocation of benefits or the provision of a good or service. In all cases, a position of trust is being exploited to realise private gains beyond what the position holder is entitled to. Attempts to influence the position holder, through the payment of bribes or an exchange of benefits or favours, in order to receive a special gain or treatment not available to others is also a form of corruption, even if the gain involved is not illicit under applicable law.6

6  World Bank, Helping Countries Combat Corruption: The Role of the World Bank, September 1997, found at: www1. worldbank.org/publicsector/anticorrupt/corruptn/cor02.htm#note1

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The Background and Nature of Financial Crime

1.6

Risk-Based Approach (RBA)

Learning Objective 1.1.6

Know what FATF refers to as ‘the purpose, benefits and challenges of a risk-based approach to combating money laundering and terrorist financing’

The risk-based approach (RBA) is regarded by the FATF as an effective way to combat ML and TF, ensuring that measures taken are appropriate and proportionate to the risks identified. It means that where there are higher risks, jurisdictions should ensure that enhanced measures are taken by financial institutions and other bodies to mitigate those risks. Conversely, where the risks are low, simplified measures may be permitted. This allows resources to be concentrated on the areas where they will achieve most benefit. Thus, the FATF produced its ‘Guidance on the Risk-Based Approach to Combating Money Laundering and Terrorist Financing: High Level Principles and Procedures’ (June 2007)7 in close consultation with representatives of the international banking and securities sectors, and subsequently produced guidance papers for other sectors. The RBA was included in the revision of the FATF’s standards (the Recommendations) in February 2012 and we will cover this in more detail in Chapter 3. The potential benefits and potential challenges, according to the FATF’s guidance, can be summarised as follows: • Potential benefits:

Better management of risks and cost-benefits. Financial institutions and other bodies focus on real and identified threats. Flexibility to adapt to risks that change over time. • Potential challenges:

Identifying appropriate information to conduct a sound risk assessment. Greater need for more expert staff capable of making sound judgments. Regulatory response to potential diversity of practice. Addressing short-term transitional costs.

7  www.fatf-gafi.org/media/fatf/documents/reports/High%20Level%20Principles%20and%20Procedures.pdf

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2.

International Context

2.1

Globalisation and Financial Crime

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The Background and Nature of Financial Crime

Learning Objective 1.2.1

Understand how globalisation impacts on the scale, likelihood and mechanics of financial crime

There can be no doubt that the opening up of international markets and the extension of trade and investment has brought immense economic benefits. One of the single most significant contributors to this was trade liberalisation and the dismantling of restrictive trade policies. The role of technology is significant in this respect, in terms of global communication and electronic forms of commerce. Just as globalisation has made opportunities available for expansion of the legitimate economy, so it has for the illegal economy. In particular, governments have been concerned about the ease with which criminals may be able to form ad hoc networks and operate with the removal of legal and administrative barriers. There is further awareness of the opportunities presented by global communications and the ease with which global financial transfers can be undertaken. As financial activity has become more mobile and supra-jurisdictional, it has raised challenges for nationally focused regulators. The globalisation of legitimate business, and the competition for work around the world, has increased the scope and scale of corporate bribery. This is in part facilitated, as are other forms of financial crime, by the promotion of international economic liberalisation: • the scope for international trade (where, for example, arms manufacturers seek international sales

to maximise the rewards from the development of expensive equipment, whose costs will not be recouped from their domestic market); • the ease and speed of international money flows; • businesses based in countries with tolerant views of domestic corruption. The overall effect of the increasing number of countries engaged in international business in countries with weak regulatory tax, law enforcement or compliance environments is to increase the potential for, or likelihood of, unethical or dishonest conduct. It is presumed that globalisation has created opportunities for organised criminal networks to operate over a far wider geographic area, with the result that traditionally nationally focused law enforcement agencies (LEAs) have, in response, looked to establish co-operative cross-border networks such as Europol (see Section 2.5.2 of this chapter) and the Egmont Group of financial intelligence units, which is described in more detail in Chapter 3.

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It should, however, be pointed out that academic research on the subject of organised crime is not in agreement as to whether criminal operations and organisations have similarly expanded internationally in general terms. Whether this has been the case just in certain areas (such as drugs or human trafficking) it is more noticeable because of investigations or media inquiries, or whether new opportunities have opened up because of developments in technologies and communication media or the expansion of particular fraud methods (for example, the rise of advance fee fraud and boiler room frauds) is still open to debate.

2.2

The Financing of Financial Crime

Learning Objective 1.2.2

Know how types of financial crime are financed

Of the types of financial crime discussed in this manual, money laundering concerns a perpetrator seeking to disguise the source, ownership or location of the proceeds of crime, by concealing or transferring them, or to convert them into funds that appear to have a legitimate origin. The money launderer may or may not be the same person who is also the source of the funds or assets – that is, involved in any preceding criminal activity – and the funding of any aspect of the money laundering process may come from the funds or assets themselves or from the resources of the person involved. Organised crime gangs may recycle funds from successful operations, such as drugs trafficking, to fund other criminal activities. Fraud does not necessarily require financing, since it is often committed by customers, staff, contractors and so on as part of a normal business relationship. Those using false documentation to establish such a relationship do not need significant funding to create this documentation, although the effort involved in long-term systemic fraud can be significant and costly. Some professional fraudsters may use their own funds to create the illusion of a functioning company, and long-term frauds may involve considerable investment before the final fraud. Corruption is likewise often paid for from company or other private resources (and this is why the UN and the Organisation for Economic Co-operation and Development (OECD) Conventions require that states disallow the tax deductibility status for such payments as a business cost). TF may originate from either the proceeds of other crime or from legitimate funds (and TF offences apply to both). The following sources of funding have been seen: • Self-funding by terrorists using their own legally obtained money. The amount of funds necessary

is unlikely to be extensive and, in the case of a spontaneous act, are more likely to be negligible. The exception to this is where a wealthy individual sponsors their own organisation, again with legally obtained funds.

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• Crime is often associated with TF. Low-level fraud, such as welfare benefit, bank, cheque or card

•

•

•

•

fraud has been a frequent method of TF in recent years. Terrorists may have advantages over ordinary criminals in terms of access to weapons, as well as individuals ready to commit acts of violence, and so may also be involved in violent crime such as robbery; or they may use their organisation and infrastructure to control smuggling and drugs operations. Extortion of ‘protection money’ (or illegal taxation) has also been used to raise money for terrorists in many scenarios around the world. State sponsors of terrorism are governments and their agents who provide funds, safe havens, training facilities and other infrastructure for terrorism. State sponsors are able to use privileged public sector channels to support terrorists, taking advantage of treaty entitlements such as diplomatic immunity. Community fundraisers can be used to support terrorist activity rooted in that particular community. Fundraising can take place through such means as collections, the sale of books and DVDs, and events such as dinners or social evenings. Charities and Non-Profit Organisations (NPOs) can be used in TF, either by being a front for TF through the community, or by diversion of funds originally (and legitimately) intended for charitable purposes. Legitimate enterprise can be the source of TF in a variety of ways, via the diversion of products, services, revenue, expenditure and capital in support of terrorist activities. This can be done wittingly by owners or members of staff, without the knowledge of others involved in the enterprise. Legitimate enterprises may also unwittingly fund terrorism by providing credit, which is subsequently diverted.

2.3

Transferring, Storing and Hiding Funds

Learning Objective 1.2.3

Know how funds derived from financial crime are transferred, stored and hidden

One of the first things that a criminal will seek to do with illegally gained assets is to give them the appearance of having been legitimately acquired, if the intent is to use them in legitimate activities in the future. If they are re-invested in criminal activities, there may be no need to do this. Once funds derived from crime appear to be the proceeds of legal activity they can be stored (saved or invested) or transferred (moved into alternative accounts or jurisdictions) at will. There are various routes by which illicit assets may be moved, transferred or mixed with other funds. Similarly there are a range of activities and jobs – such as casinos, real estate, lawyers, accountants and currency traders – that can facilitate the process. The international financial system and global trade are advantageous to the money launderer, as they provide opportunities to transfer funds through different jurisdictions, making them difficult to follow and frustrating investigative efforts.

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The Background and Nature of Financial Crime

The routes are extensive, from converting cash into travellers’ cheques, mingling it with other funds in a cash-intensive business, such as a restaurant, or buying other currencies on the black market, to gambling, or buying and selling high-value items such as jewels. Other routes are to move assets that have been successfully placed in the financial system into or through other jurisdictions, such as offshore finance centres, in order to exploit their confidentiality requirements, or to use informal banking systems to transfer money to other jurisdictions. One example of informal means of moving funds is hawala, a way of transferring value outside the conventional financial system, without using a negotiable instrument. How hawala works was described in a D 2009 report by a House of Lords Select Committe8.

2.4

International Conventions, International Law and Domestic Law

Learning Objective 1.2.4

Understand the difference between international conventions, international law and domestic law

An international convention is a formal agreement between countries which are members of organisations, such as the UN, as to how a particular issue is to be addressed. Being a signatory to a convention is often symbolic, signalling an intention, while ratification is binding, committing the country to the mandatory provisions of the convention at national level. This may involve a requirement that relevant provisions be drafted into domestic legislation or that other measures are taken. Some conventions may claim treaty status between countries which have ratified the convention, even where there is no bilateral (ie, between two particular countries) agreement to this effect. For example, countries traditionally provide mutual legal assistance on the basis of bilateral treaties. Some international conventions provide a legal basis for such co-operation even in the absence of a bilateral treaty. Article 44 of the United Nations Convention against Corruption (UNCAC) states, for state parties (ie, those states which are party to the Convention): ‘If a state party that makes extradition conditional on the existence of a treaty receives a request for extradition from another state party with which it has no extradition treaty, it may consider this convention the legal basis for extradition in respect of any offence to which this article applies.’ International law addresses the conduct of states in terms of state-to-state relations; the offences which states (or states’ officials representing the state) can commit; and who is responsible for adjudication. It is the set of rules by which the relations between states are conducted. Such law is derived from treaties, international customs and general principles of law. Although international law primarily concerns countries, increasingly it can apply to individuals as well – one example of this would be genocide, which is a crime under international law for which individuals can be held liable and tried at the International Criminal Court.

8  www.publications.parliament.uk/pa/ld200809/ldselect/ldeucom/132/13208.htm

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Domestic law is the internal law that applies within a jurisdiction and to the citizens and inhabitants (including legal persons, such as corporations) of the country concerned. It can include law made at the national, state, regional or local level. Domestic law may also include offences committed overseas by a country’s citizens; thus the 2010 Bribery Act states that: ‘a person’s acts or omissions done or made outside the UK would form part of such an offence if done or made in the UK, and that person has a close connection with the UK’.

2.5

Combating Financial Crime in the European Union (EU)

Learning Objective 1.2.5

Understand the work of the European Union in combating financial crime: Eurojust; European arrest warrant (EAW); money laundering directives

2.5.1 Eurojust Eurojust was established in 1999 to promote judicial co-operation in combating cross-border crime. It improves co-operation in investigations and prosecutions between member states of the EU, by facilitating requests for international mutual legal assistance (MLA) and the implementation of extradition requests. At the request of a member state, Eurojust may assist investigations and prosecutions concerning that particular member state and a non-member state, if a co-operation agreement has been concluded, or if there is an essential interest in providing such assistance. Eurojust is a permanent organisation, staffed by national prosecutors, magistrates and police officers of equivalent competence, detached from each member state, according to their own legal systems. It co-ordinates the activities of the national authorities responsible for a particular case and facilitates the collection of evidence under the EU and other international mutual legal assistance arrangements. It is a body with legal personality, which means it is able to conclude formal agreements with other organisations and countries. It has the power to ask competent national authorities to initiate investigations and prosecutions. In order to fulfil its obligations, Eurojust regularly convenes strategic meetings to examine particular criminal justice issues, for example, specific types of offending, such as human trafficking or terrorism. In addition it conducts co-ordination meetings in respect of individual cases. Eurojust’s areas of responsibility include terrorism, drug trafficking, trafficking in human beings, counterfeiting, money laundering, computer crime, crime against property or public goods, including fraud and corruption, criminal offences affecting EU financial interests, environmental crime, and participation in criminal organisations. For other types of offences, Eurojust may assist in investigations and prosecutions, at the request of a member state.

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The Background and Nature of Financial Crime

For information, there is also the European Judicial Network (EJN), which was established in 1998 to facilitate closer co-operation in criminal matters between EU member states. It comprises an informal network of in excess of 200 individuals EU-wide, who have been designated by their country as contact points, the majority of whom are English-speakers. They are generally located in authorities with responsibility for judicial co-operation (eg, Ministries of Justice or prosecuting authorities). The function of each contact point is to: • assist authorities in other member states who are making enquiries as to the legal/practical position

within their own jurisdiction on criminal justice issues; • channel similar requests by the authorities in their own country in respect of other member states.

2.5.2 Europol Europol is the law enforcement agency of the EU, intended to support law enforcement agencies of EU member states, in their fight against international serious crime and terrorism. The 600+ staff at Europol headquarters in The Hague, the Netherlands, have no direct powers of arrest, but support member state law enforcement colleagues, by gathering, analysing and disseminating information and co-ordinating operations. Europol experts and analysts take part in joint investigation teams which help solve criminal cases in EU countries. Europol personnel come from different kinds of law enforcement agencies, including regular police, border police, customs and security services. This multi-agency approach helps to close information gaps and minimise the space in which criminals can operate. Europol liaison officers (ELOs) are based at Europol headquarters. These ELOs are seconded to Europol by the EU member states and non-EU partners to support effective co-operation based on personal contact and mutual trust.

2.5.3 L’Office Européen de Luffe Antifraude (OLAF) Another EU financial crime agency is L’Office Européen de Luffe Antifraude (OLAF), the European AntiFraud Office, which is an independent agency for the investigation of fraud, corruption and any other illegal activity affecting EU financial interests, under the responsibility of the Commissioner in charge of Taxation and Customs Union, Audit and Anti-Fraud. OLAF has the power of access to information and the buildings of the community institutions, with the right to check accounts and to obtain extracts of any document. In addition, OLAF can request, from any persons or organisations spending EU funds, information that it judges useful for its investigations. In accordance with the arrangements laid down in the above-mentioned regulation, it can carry out on-the-spot controls of the economic operators concerned, in order to gain access to information concerning possible irregularities. Currently, OLAF has about 400 personnel, many of whom have backgrounds in national investigative, police and judicial services and experience in investigations concerning complex fraud cases, analysis and evaluation of information, or in support or development of policies in the area of the fight against fraud.

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The Background and Nature of Financial Crime

1

2.5.4 European Arrest Warrant (EAW) The European arrest warrant (EAW), which has been effective from 2004, it is intended to expedite inter-EU state extradition proceedings. If they are punishable in the issuing member state by a custodial sentence, the following offences among others may give rise to surrender: • • • • • • • • • •

terrorism; trafficking in human beings; corruption; participation in a criminal organisation; counterfeiting currency; murder; racism and xenophobia; rape; trafficking in stolen vehicles; and fraud, including that affecting the financial interests of the EU.

The framework decision defines EAW as any judicial decision issued by a member state, with a view to the arrest or surrender by another member state of a requested person, for the purposes of: • conducting a criminal prosecution; • executing a custodial sentence; • executing a detention order.

It can be used to secure the arrest and surrender of an individual in order to conduct a criminal prosecution (in relation to any offence punishable under the law of the requesting state by at least 12 months’ imprisonment) or to execute a custodial sentence or detention order for an individual already sentenced, where a sentence of at least four months has been imposed. The EAW is sent direct from one judicial authority to another, without the involvement of any diplomatic channel or other intermediary. The requesting state does not have to show that there is a case to answer. The merits of the request are taken on trust and there are limited grounds for refusing enforcement. Traditional exceptions for political, military and revenue offences are no longer applicable. The EAW removes the principle of double or dual criminality for the range of offences noted above. This means that it is sufficient that the act that is the subject of the EAW is criminal in the state issuing the EAW and is punishable under the law of that state.

2.5.5 Money Laundering Directives European legislation has been adopted to protect the financial system and other vulnerable professions and activities from being misused for money laundering and financing of terrorism purposes. This has been in response, not only to international requirements and the standards set by the FATF, but also in light of the knowledge that the creation of the single market provides opportunities for criminal, as well as legitimate enterprises, to exploit the financial system, for the purposes of money laundering. Directives require member states to adopt certain measures, by amending national law, if necessary.

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There have been three EU directives on money laundering. The First Directive (91/308/EEC)9 dated 10 June 1991 on Prevention of the Use of the Financial System for the Purpose of Money Laundering was largely focused on drug trafficking and was the mechanism by which the UN Vienna Convention (see Chapter 3, Section 2.2.1) could be brought into EU law. This was amended by the Second Directive (2001/97/EC)10 of the European Parliament and Council adopted in 2001. The purpose of this directive was to expand the scope of the predicate offences, (ie, the underlying criminal activity that gives rise to money laundering) from drugs to all serious offences and to extend the scope of the regulations to a number of non-financial activities, such as bureaux de change and money transmission agents, real estate agents, accountants and legal professionals (incorporating the objectives of the UN Palermo Convention discussed in Chapter 3, Section 2.2.2). Both of these earlier directives were repealed by the implementation of the Third EU Directive on the Prevention of the Use of the Financial System for the Purpose of Money Laundering (2005/60/EC)11 adopted in 2005. The purpose of this most recent directive was to implement revisions made to the FATF Recommendations in 2003. This directive brought TF within its scope as a separate crime, extended obligations to yet more sectors (including trust and company service providers, life insurance and dealers in high-value goods, who deal in cash payments above e15,000), and introduced the RBA to customer due diligence (CDD). In February 2013, the European Commission (EC) adopted a proposal for a fourth directive on the prevention of the use of the financial system for the purpose of ML and TF. The proposal takes into account the revised FATF Recommendations and in particular a more targeted and focused RBA, requiring risk assessments at the European internal market, individual member state and firm level. It also has revised rules relating to customer identification, specifically relating to politically exposed persons (PEPs) and beneficial ownership. Other measures in the proposal will see the gambling sector, not just casinos, brought within scope of the directive and the cash payment threshold reduced to e7,500.

2.6

The Work of the US Authorities in Fighting Financial Crime

Learning Objective 1.2.6

Understand the work of US authorities in fighting financial crime

The work of the US authorities and the reach of their legislation are important well beyond the borders of the US, as they impact on international transactions and institutions in foreign jurisdictions. Given the importance of the US dollar in international trade and financial markets, many foreign financial institutions will find themselves involved with US institutions, and therefore may be subject, to some degree, to US regulations and laws.

9  http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:1991:166:0077:0082:EN:PDF 10  http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2001:344:0076:0081:EN:PDF 11  http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2005:309:0015:0036:en:PDF

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The Background and Nature of Financial Crime

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2.6.1 US PATRIOT Act 2001 Although the US had passed the Bank Secrecy Act in 1970, which required financial institutions to assist in the fight against money laundering, by keeping records of and reporting certain types of transactions, there is no doubt that the ‘Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act’ (better known by its official abbreviated form as the US PATRIOT Act 2001), passed in the aftermath of the terrorist attacks of 11 September 2001, hugely increased the focus on financial crime. It impacts both US institutions and non-US institutions that do business in the US, as it seeks to control access to the US financial system. Some of the key provisions are: • Section 311 – the designation of a country or foreign institution as a primary money laundering

concern and imposing special measures on US institutions doing business with the designated entity. • Section 312 – imposing enhanced due diligence requirements for foreign correspondent accounts (ie, accounts with foreign institutions) and private banking accounts for non-US persons. • Section 313 – prohibition of correspondent accounts for foreign shell banks (ie, those banks that have no physical presence, beyond a so-called brass plate).

2.6.2 International Reach of US Anti-Money Laundering (AML) Laws The US has a wide range of predicate offences, known as specified unlawful activity (SUA) under their anti-money laundering (AML) laws, which were first included in the US Code in 1986. The law impacts on foreign individuals and financial institutions, if a money laundering transaction takes place wholly or partly in the US, or if the foreign institution maintains an account at a US institution. Section 319 of the US PATRIOT Act 2001 allows seizure of equivalent funds from the correspondent accounts of foreign institutions, even if the money representing the proceeds of the SUA is deposited in an account outside the US.

2.6.3 Office of Foreign Assets Control (OFAC) The Office of Foreign Assets Control (OFAC) of the US Department of the Treasury administers and enforces economic and trade sanctions. These sanctions may target terrorists, drugs traffickers, and those engaged in the proliferation of weapons of mass destruction and they prohibit transactions and require the blocking of assets of persons or organisations on lists issued by OFAC. OFAC regulations apply to all US citizens and permanent residents, wherever they are; all persons and entities within the US; and US incorporated entities and their foreign branches.

2.6.4 Foreign Account Tax Compliance Act (FATCA) The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010. FATCA requires foreign financial institutions to report directly to the Internal Revenue Service (IRS) certain information about accounts held by US taxpayers, or foreign companies with substantial ownership in US taxpayers’ hands. These requirements impose special CDD, record-keeping and reporting requirements on foreign financial institutions.

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2.6.5 Foreign Corrupt Practices Act (FCPA) 1977 The Foreign Corrupt Practices Act (FCPA) applies to US citizens, residents and businesses, and to any company listed on a US Stock Exchange. The Act concerns the bribery of a foreign official for the purpose of obtaining or retaining business for or with, or directing business to, any person. Since 1998, the Act has also applied to foreign firms and persons who take any act in furtherance of such a corrupt payment while in the US. The FCPA is covered in more detail in Section 3 of Chapter 6 of this manual.

2.6.6 Federal Sentencing Guidelines The US Sentencing Commission, an independent agency in the judicial branch of the US government, produces the Federal Sentencing Guidelines regarding the appropriate form and severity of punishment for offenders convicted of federal crimes. In our context, the important part of the Guidelines is Chapter Eight, the Organizational Guidelines, which apply to businesses convicted of crime, including financial crimes. The Guidelines allow a potential fine on a company to be mitigated by up to 95% if it can demonstrate that it had put in place an effective compliance programme, assuming that no high-level individuals in the firm were involved in the criminal activity. The Guidelines set out key criteria for establishing an effective compliance programme, which are broad principles, not a detailed model for implementation12.

2.7

Civil and Common Law Jurisdictions

Learning Objective 1.2.7

Understand the difference between civil and common law jurisdictions

1.2.8

Know examples of civil and common law jurisdictions

These two types of jurisdictions reflect two very different legal traditions. The civil law jurisdiction is also termed the civil code jurisdiction and the common law the Anglo-Saxon tradition. The civil law jurisdiction is one where the country has a codified constitution, which lays down general principles, as well as detailed statutory requirements, which are applied by judges. The common law jurisdiction is where the courts interpret the body of law, through leading cases that develop the interpretation and implementation of law in practice.

12  See An Overview of the Organizational Guidelines, US Sentencing Commission, found at www.ussc.gov/Guidelines/ Organizational_Guidelines/ORGOVERVIEW.pdf

18

The Background and Nature of Financial Crime

Examples of Different Jurisdictions

1

2.8

Common law countries tend to be those influenced by the UK legal tradition – examples include Australia, India, Malaysia and the US. The civil law countries tend to be European and those subject to European influences, such as Brazil, Mexico, Russia and Turkey. South Africa and Quebec are examples of mixed jurisdictions13.

2.9

Recovering the Proceeds of Crime

Learning Objective 1.2.9

Understand the role of civil and criminal process in recovering the proceeds of crime

The pursuit and recovery of the proceeds of crime can make a significant contribution to crime reduction objectives, as it sends out a message that crime does not pay, prevents the funding of further criminal activity and decreases the risk of instability in financial markets from criminal assets. Thus methods have to be found to remove criminals’ ill-gotten gains, not just to criminalise the activity of laundering them. Two main processes have arisen – confiscation in criminal proceedings and non-conviction-based confiscation in civil proceedings. Under FATF recommendations, and in accordance with the various conventions mentioned above, countries have adopted measures to freeze or seize and then confiscate proceeds from predicate or money laundering offences, laundered property and property that is the proceeds of, or to be used, in the financing of terrorism. Recognising that part of the money laundering process is also to change the form of assets, the property of an equivalent value may also be confiscated. In criminal confiscation this requires conviction for a criminal offence, with asset forfeiture/confiscation being available as a sanction alongside imprisonment or other punishment. Criminal confiscation requires a conviction to the criminal standard of proof, namely beyond reasonable doubt. It became apparent with experience of operating criminal confiscation regimes that this presented difficulties, for example when dealing with organised crime, where senior figures in criminal organisations kept themselves distant from the criminal activity being carried out. In these circumstances it may be difficult to prosecute the individuals, despite clear evidence that they are living off the proceeds of crime. Certain jurisdictions, such as Italy, Australia, South Africa, Canada and the US, adopted civil confiscation regimes, where it was only necessary to prove the criminal origin of property on the balance of probabilities, not obtain a criminal conviction of the owner of the property. 13  In September 2011, the United Nations Office on Drugs and Crime (UNODC) launched a web-based anti-corruption portal known as Tools and Resources for Anti-Corruption Knowledge (TRACK). The legal library within TRACK includes a detailed list of national laws as they relate to each paragraph of the UNCAC, and includes the legal tradition from which they are drawn – the various legal traditions include, as well as civil and common, Islamic, customary and socialist. The objective of the UNCAC Legal Library is not only to collect national legislation, but also to demonstrate in a practical and user-friendly way how each state has implemented the provisions of the convention and what tasks still lie ahead. UNODC has collected a data set of laws from over 175 states and has conducted a detailed analytical breakdown of how that legislation relates to the provisions of the convention. See also Tetley, W. (1999). Mixed Jurisdictions: Common Law versus Civil Law. www. mcgill.ca/maritimelaw/comparative

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As an example, in the UK the advantage of civil confiscation was recognised in the Cabinet Office Performance and Innovation Unit report ‘Recovering the Proceeds of Crime in 2000’. This led to the introduction of the Assets Recovery Agency (ARA) in the POCA. The ARA had three areas of responsibility: • Confiscation – following a conviction and an order proposed by the CPS to the courts, confiscation

would be enforced by the ARA, whose powers included restraint, customer information orders, account monitoring, and the power of discovery (requiring individuals or organisations to attend for interviews or produce documents). • Civil recovery – this power resided with the ARA, because it did not require a court case. Rather it used the same powers to go to court to request an interim receiver be appointed to quantify and value assets. The report would go back to court for freezing and/or recovery. • Taxation – if the director of the ARA had reasonable grounds to suspect that there was income, gains or profits that were chargeable to the relevant tax and which resulted from criminal conduct, the director then carried out the tax functions that the Her Majesty’s Revenue & Customs (HMRC) would ordinarily carry out. This was not just limited to the proceeds of unlawful conduct but all the defendant’s property. The only difference between the director and the HMRC was that, when the director was carrying out taxation functions, the source of income did not need to be identified. Unfortunately, the ARA met with mixed success and was criticised for the fact that the recovered sums came nowhere near to covering the costs of running the organisation; this ignored the large values that could be attributed to work in progress, ie, cases where the victims of the seizures were still within the (fairly generous) permitted time scales to challenge the seizures in court. Until cases were heard or the right to go to court had been waived, the values of such seizures could not be treated as recovered sums14. Nevertheless, in April 2008, the ARA was absorbed into the Serious Organised Crime Agency (SOCA), although the latter agency has also been criticised over its cost structure15. In June 2011, the government announced that SOCA is to be replaced by a new National Crime Agency (NCA).

14  Sproat, P.A. (2007). ‘The new policing of assets and the new assets of policing: A tentative financial cost-benefit analysis of the UK’s anti-money laundering and asset recovery regime’, Journal of Money Laundering Control, 10 (3), pp.277–299. 15  Rider, B. (2009). ‘Cost-Effectiveness – a two-edged sword!’ Journal of Money Laundering Control, 12 (4), Editorial.

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The Background and Nature of Financial Crime

1

End of Chapter Questions Think of an answer for each question and refer to the appropriate section for confirmation. 1.

What are the main elements of financial crime in the FSMA? Answer reference: Section 1.1

2.

What is money laundering designed to do? Answer reference: Section 1.2

3.

What acts comprise terrorist financing? Answer reference: Section 1.3

4.

What acts comprise proliferation finance? Answer reference: Section 1.4

5.

What are the benefits and challenges of a risk-based approach to combating money laundering and terrorist financing? Answer reference: Section 1.6

6.

How does globalisation facilitate financial crime? Answer reference: Section 2.1

7.

Name four ways of financing terrorism. Answer reference: Section 2.2

8.

To whom does international law apply? Answer reference: Section 2.4

9.

What is the difference between Eurojust and Europol? Answer reference: Sections 2.5.1 and 2.5.2

10.

Who uses the EAW? Answer reference: Section 2.5.4

11.

What do European directives require member states to do? Answer reference: Section 2.5.5

12.

What are three key provisions of the US PATRIOT Act? Answer reference: Section 2.6.1

13.

What is the role of OFAC? Answer reference: Section 2.6.3

14.

What is the main difference between civil and common law jurisdictions? Answer reference: Section 2.7

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2

Chapter Two

Predicate and Associated Offences 1. Predicate Offences

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2. Fraud

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This syllabus area will provide approximately 8 of the 100 examination questions

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1.

Predicate Offences

1.1

The Definition of Predicate Offences

2

Predicate and Associated Offences

Learning Objective 2.1.1

Understand the term predicate offences

A predicate offence is the underlying criminal activity that gives rise to proceeds that may become the subject of a money laundering offence. Without the existence of a predicate offence, there can be no money laundering; however a conviction for the predicate offence should not be required for a conviction of money laundering. On the other hand, in some jurisdictions those convicted for the predicate offence cannot be also convicted of money laundering (so called self-laundering), although the FATF recommends that this should only be the case if it is required by fundamental principles of the law in a jurisdiction. The emphasis on the money laundering offence has often been seen as a means to remove the benefits from crime and thus seek to reduce the level of crime. Money laundering offences also focus on those who may facilitate criminal activity, even though they are not involved in that criminal activity itself, on those who should be aware to avoid involvement in money laundering, and those major criminal figures whose direct involvement in the predicate offence is difficult to prove. The focus on either the predicate offence or the money laundering offence, or both, may be affected by the relative sanctions attached to either. The UK’s Crown Prosecution Service’s approach is that the underlying offence ought normally to be proceeded with, as it represents the conduct which gives rise to the criminal proceedings. Further, it adds: Money laundering and the underlying criminality are separate offences. Money laundering activities should not be seen simply as ‘part and parcel’ of the underlying criminality. As the courts have often said in connection with theft and receiving – receiving is the more serious offence because, without handlers and receivers there would be no thieves. However, prosecutors should recall that the practice of charging theft and handling in the alternative is followed where the evidence is unclear as to whether the defendant is a thief or a handler. In these types of cases both offences (the underlying crime and the money laundering offence) will be capable of proof.

1.2

Types of Predicate Offence

Learning Objective 2.1.2

Understand types of predicate offence

The predicate offences recognised in a particular jurisdiction’s money laundering laws may be specified in several ways:

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• the all-crimes approach, in which all offences giving rise to proceeds (sometimes called acquisitive

crime) are regarded as predicates; • the threshold approach, in which categories of offences are made predicates, such as serious

crimes, or crimes linked to a threshold, such as the penalty of imprisonment applicable to the predicate offence; • the listing approach, in which a list is made of offences regarded as predicate offences. The FATF states that countries should apply the crime of money laundering to all serious offences, with a view to including the widest range of predicate offences. If countries apply a threshold approach, predicate offences should, at a minimum, comprise all offences that fall within the category of serious offences under their national law, or should include offences that are punishable by a maximum penalty of more than one year’s imprisonment or, for those countries that have a minimum threshold for offences in their legal system, by a minimum penalty of more than six months’ imprisonment. However, whichever approach is taken (and jurisdictions may take a combination of the approaches outlined above), there are some offences that should always be regarded as predicate offences, in accordance with the FATF Recommendations. These are known as the designated categories of offences and they are listed in the glossary to the FATF Recommendations. Terrorism and TF are among these categories of offences.

2. Fraud 2.1

The UK Definition of Fraud

Learning Objective 2.1.3

Know the UK Fraud Act (2006) definition of fraud

Fraud is one of the designated categories of offences, but is not further defined in the FATF Recommendations. Indeed, there is no single accepted, comprehensive definition of fraud, although generally speaking all definitions will contain an element of dishonesty or deceit, and loss or injury. All jurisdictions approach the matter of defining fraud in different ways. We will briefly examine the situation in the UK, which illustrates some of the more common elements, and challenges, of fraud definitions. Until the Fraud Act 2006 was introduced, fraudulent conduct was an offence under an extensive range of specific legislation, while what was normally considered fraud, in its everyday meaning, was dealt with under the various theft acts. Despite revisions, the latter did not cover all eventualities and, after several considerations, the Law Commission returned to the issue of definition in 2002. It stated that the government wanted a law that was: readily comprehensible to juries; is adequate for effective prosecution; is fair to potential defendants; [and] meets the need of developing technology including electronic means of transfer.

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Recognising that there was no straightforward definition of fraud, it recommended that: the offence of fraud would be committed where, with intent to make a gain or to cause loss or to expose another to the risk of loss, a person dishonestly (1) makes a false representation, (2) wrongfully fails to disclose information, or (3) secretly abuses a position of trust. Section 1 of the Fraud Act 2006 introduced a new general offence of fraud and three ways of committing it: • Fraud by false representation requires:

dishonesty; an intent to make gain or cause loss; the person who makes the representation knowing that it is or might be false or misleading. • Fraud by failing to disclose information requires: dishonesty; an intent to make gain or cause loss; failure to disclose information where there is a legal duty to disclose. • Fraud by abuse of position requires: dishonesty; an intent to make gain or cause loss; abuse of a position where one is expected to safeguard another person’s financial interests. Perhaps recognising that legal concepts and constructs can be difficult for the lay person, the UK’s national fraud reporting centre (Action Fraud) has a simpler, practical definition of fraud: Fraud is when trickery is used to gain a dishonest advantage, which is often financial, over another person.

2.2

The Difference Between Fraud and Money Laundering

Learning Objective 2.1.4

Know the relationship between fraud and money laundering and how they differ

Money laundering is the movement, concealment and/or conversion, of the proceeds of crime, including the proceeds of offences of fraud. Since the purpose of most frauds is acquisition of wealth or property, it may be expected that the perpetrator will attempt to disguise illicitly obtained assets and funds. Similarly, in order to undertake money laundering, the perpetrator may possibly undertake a fraud, such as misrepresentation to a bank, as to both their identity and the source of funds, in order to provide a legitimate front for money laundering. Both are concerned with acquisitive crime, but the main difference between the two is that fraud is, by definition, a financial crime concerned with the illicit acquisition of assets, whereas money laundering is the process that seeks to conceal the source of such assets arising from a range of both financial and non-financial crimes such as drugs, human trafficking and corruption. Fraud is just one of the predicate offences for ML, which include many other offences generating substantial proceeds.

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2

Predicate and Associated Offences

2.3

Fraud Classification Systems

Learning Objective 2.1.5

Know the practical application of fraud classification systems

Fraud classification systems are an attempt to structure offences by various factors – such as victim, perpetrator, type, volume, value and occurrence – so that a more systematic approach can be made to the allocation of responsibility, the level of resources and the types of sanctions that may be imposed, as well as to the wider issues of cross-sector or activity fraud and precursor fraud (ie, what types of fraud may be indicative of facilitating other types of fraud or crime). Classifying frauds also helps with risk assessment, improving detection and prevention systems, reporting, measuring losses and auditing. Such systems may be used by regulators or central banks, law enforcement, or the private sector and the nature of the classification will reflect the nature of the bodies using it and their purpose. There are many examples of fraud classification systems. For public authorities, it is important to understand the scale and extent of fraud in order to focus anti-fraud efforts. For example, a UK report noted: There are no reliable data on the scale and extent of fraud. Some elements of fraud have been measured reasonably accurately. A number of estimates of overall fraud have been made by various research organisations but none of these studies is considered reliable and comprehensive by anyone, including their own authors. This is a serious handicap to analysis and policy formulation because we do not know either the amount of harm that fraud causes to the economy and society or where it is most prevalent. Without this information it is difficult to devise options that would improve the response to fraud. It is also difficult to decide the relative importance of tackling fraud compared with other crime or where to target resources. A proper holistic approach to fraud and a national fraud strategy to deliver such an approach would start from a proper exercise to measure the problem.1 In response, the Association of Chief Police Officers (ACPO) in the UK commissioned research and produced a typology that classified fraud by victim sector and sub-sector2: • Private sector: financial services/non-financial services/individuals. • Public sector: national bodies/local bodies/international (but affecting the public) bodies.

Central banks and regulators may ask financial institutions to record and report fraud, either internally or to them, in order to ensure that losses are understood and proper controls are implemented. Consistent categorisation of such reporting is important to obtain meaningful data. For example, the Reserve Bank of India has the following classification of frauds based mainly on the provisions of the Indian Penal Code3:

1 2 3

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Interim Fraud Review (2006). London: Attorney-General’s Office, p.19 ACPO (2007). The Nature, Extent and Economic Impact of Fraud Reserve Bank of India (2010), Master Circular – Frauds – Classification and Reporting

Predicate and Associated Offences

• Misappropriation and criminal breach of trust. • Fraudulent encashment through forged instruments, manipulation of books of account or through

2

• • • • •

fictitious accounts and conversion of property. Unauthorised credit facilities, extended for reward or for illegal gratification. Negligence and cash shortages. Cheating and forgery. Irregularities in foreign exchange (FX) transactions. Any other type of fraud not coming under the specific heads as above.

Similarly, the private sector needs to understand fraud risk and events. A common system used by risk managers, investigators and auditors is one produced by the Association of Certified Fraud Examiners (ACFE), the Uniform Occupational Fraud Classification, also known as the Fraud Tree. This system classifies occupational fraud (ie, fraud using one’s occupation for personal enrichment) into three main categories, corruption and asset misappropriation and fraudulent statements (but for the purposes of this workbook we do not include corruption as fraud). We will consider the other two categories of fraud in more detail in the next section.

Find it yourself Action Fraud has listed a range of frauds available at: www.actionfraud.org.uk/a-z_of_fraud Reserve Bank of India: Master Circular on fraud: http://rbidocs.rbi.org.in/rdocs/Notification/ PDFs/59MCSFR010712.pdf Association of Certified Fraud Examiners Global Fraud Study 2012 at: http://www.acfe.com/ uploadedFiles/ACFE_Website/Content/rttn/2012-report-to-nations.pdf

2.4

Asset Misappropriation and Fraudulent Statements

Learning Objective 2.1.6

Know the difference between asset misappropriation and fraudulent statements

Asset misappropriation fraud happens when people who are entrusted to manage the assets of an organisation steal from it. The UK’s Action Fraud states that it: involves third parties or employees in an organisation who abuse their position to steal from it through fraudulent activity. This type of fraud can be committed by company directors, or its employees, or anyone else entrusted to hold and manage the assets and interests of an organisation. Typically, the assets stolen are cash or cash equivalents, such as credit notes or vouchers. However, the fraud can extend to include company data or intellectual property.

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At one end of the scale, asset misappropriation fraud may be limited to isolated cases of expense fiddling or an employee lying about his or her qualifications to get a job. At the other end, it might involve organised crime groups infiltrating organisations to take advantage of weak processes and inadequate internal systems and controls. Under the ACFE’s classification, asset misappropriation fraud can be broken down into frauds involving cash (through theft of cash on hand, theft of cash receipts, or fraudulent disbursements) and inventory and other assets (through larceny or misuse). It could include any of the following: • • • • •

embezzlement, where accounts have been manipulated or false invoices have been created; deception by employees; false expense claims; payroll fraud, where payments have been diverted or fictitious, ghost employees have been created; data theft or intellectual property theft.

Fraudulent statements involve misrepresenting an individual or company to a third party, including shareholders, by manipulating or concealing material facts, on which others may make financial or other decisions. Under the ACFE’s classification, there are two main types of this fraud, asset/revenue overstatements or understatements. They can include any of the following: • • • •

timing differences; fictitious or understated revenues; concealed or overstated liabilities or expenses; improper asset valuations.

2.5

Types of Investment Fraud

Learning Objective 2.1.7

Understand examples of investment fraud

A very common type of fraud, which can have serious impacts on members of the public, is investment fraud. In general terms, investment fraud involves the misrepresentation of a particular investment to those who hold them or who might wish to invest in them. This can take a variety of forms, from misrepresenting the extent of the underlying risk or the amount of return that the investor will be expecting to make, to an entirely bogus investment opportunity. In many cases, the focus is on apparently legitimate schemes or companies where the investment funds are simply used to pay high rates of return to earlier investors. Barlow Clowes and Bernard Madoff operated the latter approach (usually termed a Ponzi scheme), demonstrating the massive losses that can be incurred from very simple frauds.

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Predicate and Associated Offences

• scammers typically cold-call people and use hard-sell tactics to sell shares in high-risk UK or

overseas-based companies that prove to be worthless; • boiler rooms are usually operated from overseas locations; • the scammers profit by either just taking investors’ money without providing shares or selling the shares to them at highly inflated prices. Action Fraud lists dozens of variants of similar frauds, including:

West African letter fraud

holiday fraud

betting fraud

counterfeit goods fraud

dating fraud

shopping fraud

property fraud;

Ponzi scheme fraud;

pyramid scheme fraud

mobile phone fraud

share sale fraud

fraud recovery fraud

inheritance fraud

mass marketing fraud

bogus tradesmen fraud

holiday club fraud

timeshare fraud

auction fraud

boiler room fraud

bond fraud

business directory fraud

door-to-door sales fraud

doorstep fraud

goods sold as investments

hedge fund fraud

institutional investment fraud

internet auction fraud

market manipulation

property investor scams

All involve persuading people to part with their money for high-yield investments, often with an international dimension, to explain away the absence of the central bank base rates and tax regimes that might make the returns seem unrealistic. The basic fraud is the promise of returns substantially above base rates for those with substantial funds, offered to those who may be elderly or who may consider that they have financial acumen to spot investment opportunities that, however they may be described, end up as too good to be true. One of the latest scams, reported by the UK’s former regulator, the FSA in 2011, is land bank investment fraud4: Land banking companies divide land into smaller plots to sell it to investors on the basis that once it is available for development it will soar in value. However, the land is often in areas of natural beauty or historical interest, with little chance of it being built on. The number of land banking schemes being reported to us has been rising as more people discover they have invested in a plot of land in a green belt, nature conservation, agricultural, brownfield or other protected area. Plots sold recently include one on a site of special scientific interest, one on a 45-degree slope and another without any access to it. Some plots are simply too small to build on. We estimate land banking schemes have cost UK investors as much as £200 million. 4 www.fsa.gov.uk/Pages/consumerinformation/scamsandswindles/investment_scams/land_banking/index.shtml

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2

Another type of investment fraud is the boiler room scam. This, according to the UK’s Serious Fraud Office (SFO), is an operation selling shares to investors in companies which are completely fake or which are not successfully trading, and involves the following:

A number of investment frauds are mass-marketed, exploiting email. In 2006, the Office of Fair Trading (OFT) in the UK noted that: cheap methods of mass communication, such as direct mail, telephone, email and the internet bring great economic benefits, but in the wrong hands they are also tools to perpetrate fraud and deception on a global scale. Mass marketed consumer fraud is a feature of the new globalised economy. It is a huge problem: international in its scope, its reach and its organisation.5 Defining mass-marketed investment fraud as a misleading or deceptive business practice where you receive an unsolicited or uninvited contact (for example by email, letter, phone or advert) and false promises are made to con you out of money, the OFT noted 15 main scams: • • • • • • • • • • • • • • •

prize draw/sweepstake scams; foreign lottery scams; work at home and business opportunity scams; premium-rate telephone prize scams; miracle health and slimming cure scams; African advance fee frauds/foreign money-making scams; clairvoyant/psychic mailing scams; property investor scams; pyramid selling and chain letter scams; bogus holiday club scams; internet dialler scams; career opportunity (model/author/inventor) scams; high-risk investment scams; internet matrix scheme scams; loan scams.

Some of these, such as premium-rate number scams, make their money out of the means itself (ie, the cost of premium calls where the caller will be held on the line for a number of minutes); many others make their money from upfront fees. Known as advance fee frauds, the most common up-front fee scam is often termed the 419 fraud, named after the section in the Nigerian Criminal Code that specifically makes such a fraud an offence and, as such, has been identified as originating among Nigerian professional criminals. It is used today around the world. The basis of the fraud is a letter (or, today, an email) purporting to have identified the recipient as willing to help access money that is locked up as, for example, surplus government funds or bank accounts belonging to people with no traceable relatives, for which an overseas bank account is needed and for which the provider will receive a per cent of the millions of dollars to be transferred. The purpose used to be to acquire bank account details, in order to then execute a fraud against the account, but increasingly this fraud is intended to coax facilitation fees and other expenses – the advance fee – from the victims with the expectation of a share of a large sum of money. This essentially, and ignoring the ‘419’ dimension, is the core of the fraud and relies on the victims’ expectations – the quick win as it has been put – and the ability of the fraudster to persuade the victim to hand over the fee (this is sometimes done face-to-face) in anticipation of the delivery of the larger amount.

5

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Office of Fair Trading (2006). Research on Impact of Mass Marketed Scams. London: OFT. p.6

Predicate and Associated Offences

2.6

Market Abuse

2.1.8

2

Learning Objective Know why market abuse may be considered to constitute or be related to financial crime

As well as seeking to obtain money or other benefit fraudulently from individuals or firms, criminals (and sometimes those working in the financial services) may seek to manipulate financial markets, such as the Stock Exchange, to their advantage, in order to ensure that they gain, usually financially, over other market participants (be they large companies or institutions or ordinary citizens). The collective term for this is market abuse, which consists of both misuse of insider information (insider trading), where people with access to information not yet generally available to others seek to profit from it, and market manipulation, eg, where attempts are made to inflate or deflate share prices through abnormal trading or spreading false information. It can be viewed as being related to financial crime, as the perpetrators will usually seek to exploit their informational advantage to gain financial advantage illegally. Both types of market abuse are listed by the FATF as predicate offences for money laundering. The EU issued a MAD in 2003 (2003/6/EC)6, which provides an EU-wide market abuse regime, aimed at reducing the incidence of this activity. Other regulators around the world have similar provisions, particularly in those jurisdictions with established financial markets. Protecting the integrity of those markets and individuals from possible exploitation in their dealings with professional market participants is vital. According to the FCA7, the seven types of behaviour that can amount to market abuse are: • insider dealing – when an someone in possession of inside information deals, or tries to deal, on • • •

• • •

the basis of that information; improper disclosure – where an insider improperly discloses inside information to another who could unfairly profit from it; misuse of information – behaviour based on information that is not generally available but would affect an investor’s decision about the terms on which to deal; manipulating transactions – transactions and orders to trade that give false or misleading signals or secure the price of a financial instrument at an artificial level (eg, buying large numbers of shares to drive up the price); manipulating devices – transactions or orders to trade that employ fictitious devices (eg, by concealing ownership); dissemination of information likely to give false or misleading signals (eg, using the internet to spread false rumours about a company, which affect its share price); and distortion and misleading behaviour – behaviour that gives a false or misleading impression of either the supply of, or demand for an investment; or behaviour that otherwise distorts the market in an investment.

6 ec.europa.eu/internal_market/securities/abuse/index_en.htm 7 www.fsa.gov.uk/pages/About/What/International/pdf/MAD%20(PL).pdf. The FSA Factsheet: Why market abuse could cost you money, June 2008, published on FCA website at http://www.fca.org.uk/your-fca/documents/fsa-market-abusefactsheet

33

There is further elaboration of the types of behaviour that might amount to manipulation. The MAD permits market behaviour that might otherwise be viewed as manipulation, if the conduct in question is an accepted market practice in the market concerned and if there are legitimate reasons for behaving in that way.

2.7

The Sarbanes-Oxley Act

Learning Objective 2.1.9

Know the main provisions of the Sarbanes-Oxley Act (2002)

While the UK experienced a number of corporate scandals in the early 1990s, and moved forward primarily through self-regulation (through the Combined Code) and professional standards (such as the audit guidance from the Financial Reporting Council (FRC) and the Audit Standards Board), the US took a much more prescriptive approach in relation to audit and financial reporting, following a number of US corporate scandals, which cost investors billions of dollars when share prices collapsed and led to a loss of confidence in the markets. Two of the most infamous scandals are Enron and WorldCom: Enron, once the seventh-largest US corporation, which employed over 25,000 people, filed for bankruptcy in 2001. Enron had massive liabilities, amounting to billions of dollars, that it had been able to hide using high risk accounting techniques and special purpose entities. WorldCom grew to be the second-largest US telecommunications carrier. During the 1990s, its stock price rose from $1.28 a share to $51 a share, but in 2002 it too filed for Chapter 11 bankruptcy. While Enron hid debt, WorldCom hid operating expenses, using different accounting tricks, including counting at least $3.8 billion in operating expenses (mostly the cost of using other companies’ phone lines) as capital improvements. The intention of the legislation subsequently introduced was to make directors personally responsible for the company’s financial statement, ensure auditor independence and criminalise abuse. Passed in 2002, the Sarbanes-Oxley Act (properly termed the Public Company Accounting Reform and Investor Protection Act but all too frequently abbreviated tight down to ‘SOX’) is mandatory for all US companies, and overseas companies or their subsidiaries incorporated in the US. The most important sections are8: 301 302 401 404 409

establishment of audit committees, responsible for overseeing complaints handling, relating to accounts, audit and controls; regular, accurate financial reports signed off by those who have also reviewed and reported on the organisation’s internal controls in the reports, together with information on any frauds; the nature of the financial reports must be comprehensive and include off-balance-sheet information; organisations must publish descriptions of their internal controls, and their effectiveness in their annual reports, which must be signed off by the auditors; organisations must publicly report any material changes to their financial status and activities;

8 www.soxlaw.com

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Predicate and Associated Offences

severe sanctions for destroying and/or hiding records needed for an investigation (similar penalties apply to auditors who fail to follow the requirements to safeguard their paperwork); 906 severe sanctions for false sign-offs; 1107 severe sanctions for interfering with or retaliating against whistleblowers who: provide to a law enforcement officer any truthful information relating to the commission or possible commission of any federal offence. The Act also created the Public Company Accounting Oversight Board (PCAOB), established by Congress to oversee the audits of public companies, in order to protect the interests of investors and further the public interest in the preparation of informative, accurate and independent audit reports9. The board also oversees the audits of broker-dealers, including compliance reports filed pursuant to federal securities laws, to promote investor protection. Accounting firms must register with the Board, which also establishes auditing and related professional practice standards and has the power to inspect accounting firms and discipline those found to be in non-compliance.

2.8

Tax Evasion and Avoidance

Learning Objective 2.1.10 Know the difference between tax evasion and tax avoidance

The fundamental difference between evasion and avoidance is one of legality. Tax avoidance is the legitimate arrangement of one’s financial affairs, to minimise the amount of tax that is payable. This is usually carried out in consultation with financial advisers and uses legitimate forms of tax shelter. Tax evasion is illegal and involves the deliberate attempt to misrepresent the true financial picture in order to avoid payment of any form of tax, for which the individual or company is normally liable. Tax evasion, sometimes referred to as ‘tax fraud’, is a criminal offence in the UK. In February 2012, the FATF added tax crimes (related to direct and indirect taxes) to the designated categories of predicate offences for money laundering. Direct taxes are those paid direct to the government, such as income or corporation tax, whereas indirect taxes are imposed on a transaction (for example, sales or value-added tax). This is not to say that governments accept the former and just focus on the latter. For example, in March 2011, the UK’s HM Treasury and HMRC announced that10: tax avoidance represents a significant part of the UK tax gap. Unlike evasion, it is not in itself illegal, but it involves using the tax law to get a tax advantage that Parliament never intended. It frequently involves contrived, artificial transactions that serve little or no purpose other than to reduce tax liability. And it enables some taxpayers to gain an unfair advantage, undermining confidence in the tax system.

9 www.pcaobus.org 10 HM Treasury/HMRC. (2011). Tackling Tax Avoidance. London: HM Treasury

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2

802

The response was to be a simplification of the tax system: ...to eliminate avoidance opportunities at the outset, rather than tackling risks once they have materialised. That is at the heart of the Government’s new strategic approach. Wherever possible, this Government will prioritise robust design of policy and legislation, underpinned by clearly stated policy objectives. The aim is to maximise prevention of avoidance, reducing the need for immediate changes to legislation once an avoidance risk has arisen, or for HMRC to challenge avoidance once it has happened. A few months earlier, in September 2010, HM Treasury announced that it intended to make it harder for individuals and companies to avoid tax and that it was: working to prevent tax avoidance before it happens. Funding will be available for: a more robust criminal deterrent against tax evasion – HMRC will increase the number of criminal prosecutions fivefold; a crackdown on offshore evasion with the creation of a new dedicated team of investigators to catch those hiding money offshore; and deployment of dedicated tax experts to extend HMRC’s coverage of large businesses, focused on providing resources to tackle high-risk areas.11

11 www.hm-treasury.gov.uk/press_46_10.htm

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Predicate and Associated Offences

End of Chapter Questions

1.

What is a predicate offence? Answer reference: Section 1.1

2.

Does an offender have to obtain money under the fraud act to commit an offence? Answer reference: Section 2.1

3.

What are the three main types of offence under the Fraud Act? Answer reference: Section 2.1

4.

Name five types of private sector fraud. Answer reference: Section 2.3

5.

Name four types of asset misappropriation. Answer reference: Section 2.4

6.

Can investment frauds derive from legitimate activities? Answer reference: Section 2.5

7.

What is market abuse? Answer reference: Section 2.6

8.

What is the purpose of criminalising market abuse? Answer reference: Section 2.6

9.

Name four requirements under the Sarbanes-Oxley Act. Answer reference: Section 2.7

10.

What is the difference between tax evasion and tax avoidance? Answer reference: Section 2.8

2

Think of an answer for each question and refer to the appropriate section for confirmation.

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Chapter Three

3

Money Laundering 1. Background

41

2. International Anti-Money Laundering (AML) Standards

50

3. The Financial Action Task Force (FATF)

57

4. The Role of Other Bodies

72

This syllabus area will provide approximately 16 of the 100 examination questions

40

Money Laundering

1. Background 1.1

The Money Laundering Process 3

Learning Objective 3.1.1

Know the stages of the money laundering process: placement; layering; integration

The term money laundering is derived from the fact that it describes the activity – illegal or dirty money is put through a cycle of transactions, or washed, so that it comes out at the end of the process as what appears to be clean or legal money. It is thought to have originated in the US, as a term used to describe the Mafia’s attempts to launder illegally acquired funds through cash-intensive laundry businesses. The term money laundering has long existed as a colloquial paraphrase without there being any attempts, until relatively recently, to give the term a formal definition, as we discussed in Chapter 1. As another example, the United Nations Office on Drugs and Crime (UNDOC) provides the following definition: Money laundering is the process that disguises illegal profits without compromising the criminals who wish to benefit from the proceeds. In essence, the objective of money laundering is to make money obtained through criminal activity, such as supplying illegal drugs, look as if it has been gained through legal activity. Money laundering is generally described as comprising a three-stage process, the purpose of which is to remove the proceeds of a criminal activity from the predicate offence, through a series of stages that disguise the audit trail. The end result is that the proceeds of illegal or criminal activity are transformed into apparently legitimately acquired funds. The appearance of legitimacy is achieved through exploitation of normal financial transactions and can involve moving money across different jurisdictions, as well as across different types of financial instruments. The three stages involved are: • placement (getting illegal cash proceeds into the financial system); • layering (disguising the origin of the proceeds through a series of transactions); and • integration (re-introducing the now apparently legitimate funds into the normal economy).

Not all of these stages may be present in any given example of money laundering activity, for example, in a financial fraud the proceeds are often already in the banking system, so there is no need for placement. However, this model has proved to be a useful way of practically thinking about how money laundering takes place. The three stages are covered in more detail in the next section.

41

One of the most frequently used images of the money laundering process is the diagram from the UNDOC website.

Source: UNODC: The Money Laundering Cycle http://www.unodc.org/unodc/en/money-laundering/ laundrycycle.html

Find it yourself Some helpful information regarding money laundering typologies can be found at: www.egmontgroup.org/library/download/21. This is a compilation of 100 cases of money laundering taken from Egmont Group Members’ FIUs. www.fatf-gafi.org/dataoecd/32/31/43948586.pdf. This is a selection of case studies from the FATF that illustrate the risks associated with business transactions, within the securities sector.

1.1.1 The Three Stages of Money Laundering Placement Placement describes the initial placement into the financial system of the cash proceeds derived from an original illegal activity; the launderer’s first objective will be to convert the original proceeds of crime into a form usable in the financial services sector, for example, by depositing the money into a bank. Sometimes, to avoid arousing suspicion and bank reporting requirements, the launderer will deposit small amounts into various different banks where the amounts are just under the threshold for cash transaction reports required to be filed by the financial institution. This is known as smurfing and, by placing small amounts, is designed to avoid the reporting requirements.

42

Money Laundering

From the perspective of the criminal the placement stage is probably the most visible of the transactions and the one at which he is at most risk of being discovered. Much of the anti-money laundering (AML) framework is focused upon prevention of this stage.

Layering The second stage in the money laundering process is layering. Once funds are in the financial system, the purpose of layering is to conceal their origin or ownership further, removing them from identification with the launderer and hence disguising any audit trail. This is achieved through a series of ostensibly normal business transactions in which the funds may be converted into a different form (eg, into different currency or types of asset or investment) and/or placed in a different location. One of the easiest methods involves electronic fund transfers, in which funds can be swiftly moved through a variety of bank accounts. It may be that funds are moved into offshore bank accounts. Criminals may therefore establish legal entities, in whose name they will open bank accounts to receive the money from their illegal activities. These could be partnerships, private companies or even offshore trusts. The development of online banking, smart cards and electronic cash have all created additional money laundering opportunities. Another method may involve over- or under-invoicing of commercial transactions. In the simplest of money laundering situations, there need not be an identifiable layering stage. On the other hand, in large criminal organisations, it can be a continuous process and there are precedents that can involve timescales of many years.

Integration The final stage of the process is integration, which describes the point at which the money is now apparently legitimate. This is important as, once achieved, it implies that the criminal is able to spend the money in the legitimate economy without fear of arousing any suspicion. This may involve either spending on normal goods and services (often funding a luxurious lifestyle) or investment to generate legitimate income or provide a front for further money laundering activities (or in some cases both).

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3

Another common method is to use a legitimate business that might be expected to generate a large amount of cash. For example, a taxi company typically receives a large number of cash payments and this could be used as a front for the laundering activities, by using this business’s bank account to deposit the illicit funds passed off as income from (non-existent) customers. This is sometimes referred to as ‘secondary deposit placement’.

1.2

Detecting Money Laundering

Learning Objective 3.1.2

Understand how the stages of the money laundering process are detected

The development and application of AML systems can be rather like driving a car by only looking in the rear-view mirror. Given the dynamic nature of criminal activity and the time taken for policy change to be implemented, it is inevitable that policies, laws and regulations tend to be always implemented or adjusted in response to, rather than in anticipation of, money laundering methods. Thus, despite ensuring adherence to compliance requirements, professionals should always bear in mind that conventional approaches or best practice solutions may not be infallible. Money launderers will seek to exploit whatever opportunities and vulnerabilities present themselves and have the advantage over those seeking to detect and prevent their activities. However, the three-stage model outlined above can be used to think about the challenges faced by money launderers and how they overcome them, which in turn can inform the systems and controls required by financial institutions and others whose services and products may be misused by criminals. It has long been recognised that, by working in partnership, the public and private sectors can combine to increase the chances of money laundering being detected or prevented. Section 1.6 of Chapter 1 considers the importance of the RBA and in their first Recommendation the FATF stress the importance of risk assessments by both public authorities at the national level, which will identify the threats (such as the nature of the most prevalent forms of money laundering in the jurisdiction), and by private sector firms, which will identify the vulnerabilities they have (such as products or services that are very attractive to money launderers). In order to detect money laundering, various obligations derived from the FATF Recommendations have been placed on the most vulnerable sectors. These obligations, usually implemented through national law or regulations, have been designed to cover the most obvious vulnerabilities, identified from many years of studying examples of money laundering. We will cover the recommendations and the obligations on firms in Section 3 of this chapter, but for now it is important to understand how these requirements actually relate to the prevention and detection of money laundering, rather than just treating them as challenges in compliance. Institutions covered by these obligations are required to have in place policies, systems and procedures that enable them to do various things. Firstly they need to be able to verify the identity of their customer (this is also commonly known as Know Your Customer (KYC)). More recently, international standards have moved towards a wider appraisal of the risks associated with a particular customer, and this is referred to as Customer Due Diligence (CDD); the lack of a formal definition for KYC has led to various interpretations being put on the breadth of its meaning and inconsistencies exist. Evolving good practice ideally should be to equate CDD with KYC.

44

Money Laundering

Companies governed by the regulations are also required to obtain information about the nature and purpose of the business relationship that they will be entering with the customer. CDD includes understanding the business of the customer, so that the institution is aware of the normal businessrelated transactions and account activity that is expected. In the UK the term used officially is normally customer and that applies regardless of how firms normally refer to their business relationships; so clients, counterparties and other terms used in the market on an everyday basis all end up being customers. Identifying and verifying who their customers are and what types of business they are undertaking, allows firms to detect some of those using false identities, or companies with no legitimate purposes, with whom they should not enter into business relationships or transactions, preventing any proposed money laundering activity. Of course, it is recognised that criminals will always find ways to use convincing false identities and that legitimate companies may come to be misused over time, so although CDD is probably the most important and best way to detect and prevent money laundering at the customer take-on stage, other defences also have to be constructed. In order to detect money laundering being carried out by their customers, firms should implement a transaction and account monitoring programme, be it system based or otherwise; such monitoring is a mandatory requirement in the UK. This monitoring is conducted according to the RBA, with low risk customers, whose transactions are routine, being monitored less rigorously than those who pose a higher risk of money laundering. CDD is vital here in being able to categorise the risks posed by different customers. Such monitoring will seek to identify both placement (for example, cash deposits by a customer who doesn’t normally handle cash) and layering transactions (for example, series of transactions that are outside of the expected profile of the customer and make no economic sense, but appear designed to disguise the origins of the funds). Many large institutions now employ sophisticated automated transaction monitoring systems, which can monitor the many thousands or millions of transactions they undertake on a daily basis. Any monitoring system, whether manual or automated, must take into account the nature of the business of the firm, the frequency and size of transactions, and the type and location of their customers. Having identified activity or transaction outside the norm for a particular customer, institutions will need to decide if it is truly suspicious (ie, indicative of money laundering on an objective level, but not requiring actual proof) and report their suspicions to the authorities, in the shape of the relevant national Financial Intelligence Unit (FIU). It is highly unlikely that any one institution, such as a bank, will see all the stages of the money laundering process, but by combining reports of suspicions from several firms, along with other closed information, such as law enforcement records, the FIU can identify money laundering activities, which can then be investigated and prosecuted.

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3

Essentially, CDD is based upon the institution identifying the customer and verifying their identity, using information that is obtained from a reliable independent source, hence the use of passports, driving licences and utility bills. It also requires that the company takes adequate steps to establish the identity of the ultimate beneficial owner, if that person is different from the customer, such as in the case of a trust arrangement or a company owned by nominees.

There is some debate over the efficacy of the reporting regime, particularly in view of the costs of compliance. On the one hand it is possible to argue that the same due diligence approach reduces the risk of fraud and client default risk and helps to protect against reputational damage. However, there are others who argue that the costs are disproportionate. For example, Professor Jackie Harvey1 reported on interviews with a range of officials responsible for the process in firms (in some countries, including the UK and the UAE, these are known as Money Laundering Reporting Officers (MLROs)) and quoted one of the respondents: stopping money laundering is a worthwhile and worthy objective but it has implications in terms of costs and the requirement to hire additional resources. Demands of money laundering are immense and it is harder to cope with the costs of compliance and that the level of rigour disregards how little is achieved by obtaining the required information. In their 2011 Global Anti-Money Laundering Survey, KPMG found that costs of AML compliance had risen by an average of 45% in the previous three years, with enhanced transaction-monitoring being the main reason for the increase in expenditure.

1.3

The Proceeds of Crime Act (POCA) 2002

Learning Objective 3.1.3

Know these associated activities as defined by POCA 2002: concealment; arrangements; acquisition, use and possession; failure to disclose; tipping-off

We have examined the process of money laundering in its various stages (placement, layering and integration) in Section 1.1 and obligations imposed on certain firms to attempt to detect and prevent it in Section 1.2. Of course, once detected, it should be investigated and prosecuted. From the 1970s onwards, it was recognised that special laws, starting with drugs trafficking and moving over time to a wide range of offences, would be required to investigate and prosecute money laundering. Money laundering offences are based on international conventions, which we will cover in Section 2.2 of this chapter, but for the time being this quote from the UK’s CPS indicates the range of activities that need to be criminalised: acquisition, use, possession, disguise, concealment, conversion, transfer or removal from one country to another of the benefit of any criminal conduct can be money laundering. Even an attempt to do any of these things, or becoming involved in an arrangement which facilitates them, can constitute a money laundering offence.2 To illustrate how these activities can be made criminal offences, we will look at the relevant part of the UK’s Proceeds of Crime Act (POCA) 2002, which had a major impact upon the regulation of money laundering through the creation of separate offences (and which has been amended several times since its enactment in order to keep it current with both the risks of money laundering and the practical challenges it poses).

1 2

46

Harvey, J. (2008). ‘Just How Effective Is Money Laundering Legislation?’ The Security Journal, Vol. 21, pp.189–211 Crown Prosecution Service (2008). ‘Money Laundering Offences – Part 7 Proceeds of Crime Act 2002 updated 06/02/2008’: Proceeds of Crime Act Money Laundering Offences: Legal Guidance, available at: www.cps.gov.uk/legal/p_to_r/proceeds_ of_crime_money_laundering.

Money Laundering

These concern the following:

Similar offences exist in other jurisdictions and it is important to be aware of the specifics of the applicable legislation. Firms operating across international borders often have challenges of slightly differing legislative and regulatory requirements, in the different jurisdictions in which they operate.

1.3.1 Concealment Section 327 makes it an offence to conceal, disguise, convert, transfer or remove criminal property from the UK. Concealing or disguising criminal property includes concealing or disguising its nature, source, location, disposition, movement or ownership or any rights with respect to it. Thus if an accountant advises a client about moving funds, in order perhaps to minimise tax liabilities, they could be guilty of an offence if they knew or should have suspected that the money constituted the proceeds of criminal activity.

1.3.2 Arrangements Under Section 328, a person commits an offence if they enter into or become concerned in an arrangement which they know or suspect facilitates (by whatever means) the acquisition, retention, use or control of criminal property by, or on behalf of, another person. Continuing our example, if the accountant knew that the arrangements they were making constituted the use of criminal proceeds and that their execution would facilitate money laundering, and if they take no action, they could be liable for prosecution under this section. (In 2010, in the UK, a Court of Appeal case3 held that, to commit the offence of entering into an arrangement under Section 328 of POCA 2002, the arrangement must relate to property which is already criminal, at the time the arrangement takes effect). A challenging part of this section is what constitutes suspicion, and this is simply because it is a very subjective concept and as such difficult to prove. In general, those covered by the regulations should be aware of any clients who come with unusual instructions, who perhaps have large cash transactions, or are unusually secretive. It must be noted, however, that there has been a tendency towards defensive reporting, whereby transactions that might be more unusual are reported as suspicious, simply to avoid the possibility of being prosecuted. This is because facilitating can have a very wide range of interpretations – for an accountant these could include, for example, simply giving financial advice, making arrangements to move funds across different client accounts, or preparation of the client’s financial statements.

3

R v Geary [2010] EWCA Crim 1925

47

3

• Concealment (Section 327). • Arrangements (Section 328). • Acquisition, use and possession (Section 329).

1.3.3 Acquisition, Use and Possession Section 329 makes it an offence to acquire, use or have possession of criminal property. The offence requires knowledge or suspicion that the property is criminal, thus protecting innocent third parties who have acquired criminal property in good faith. There are a number of concerns for practitioners in relation to this section of POCA 2002, primarily arising from the wide definition of criminal activity and how far back it can reach. It is immaterial whether the criminal conduct occurred prior to the act becoming law, so long as the laundering act takes place after commencement of the act. The penalty (Section 334) for contravention of any of the offences contained within Sections 327 to 329 is imprisonment for up to 14 years, a fine (no amount specified) or both. It is a defence to any of the above offences to make an authorised disclosure or suspicious activity report (SAR) through the firm’s MLRO). Such disclosure can either be before or after the transaction event. If it takes place prior to the transaction, the MLRO must obtain appropriate consent (usually from the UK’s FIU at the SOCA) and be given authority to proceed with the transaction.

1.3.4 Failure to Disclose and Tipping-Off As the example above made clear, although the offences relating to money laundering activity are primarily designed to capture those criminals laundering the money, it is perfectly possible for financial institutions, professional advisers and other firms to fall foul of them as well, if they do not apply the diligence and vigilance required of them and become part of the activity. Turning a blind eye is no longer a defence. Beyond this liability, certain failings within firms can be deemed sufficiently serious for them to be made criminal activity too. Again we can illustrate this by looking at the relevant sections of the UK’s POCA.

Failing to Disclose The importance of reporting suspicious activities to the authorities is such that not only do provisions have to be made to allow this (by overriding a duty of confidentiality a bank may owe to its customer, for example), but also to make it a positive duty, through criminal sanctions for failing to disclose. The UK’s CPS provides the following guidance for the interpretation of Section 330 of POCA4. It places a duty on employees in a business in the regulated sector (ie, a sector that has a supervisory or other appropriate regulatory regime – such as the banks) to make reports where they know or suspect that another person is engaged in money laundering and where (even if they do not know or suspect) they have reasonable grounds for knowing or suspecting that a person is engaged in money laundering. The reasonable grounds for knowing or suspecting standard (ie, a should have known or negligence test) is new. The rationale for this is that a higher standard of diligence is expected in anti-money laundering prevention in the regulated sector, where comprehensive preventative systems (in line with international standards), are required to be in place. These include requirements to have in place internal systems for reporting and control, and education and training programmes.

4 www.cps.gov.uk/legal/p_to_r/proceeds_of_crime_money_laundering/#S330_Failure_to_disclose

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Money Laundering

Section 331 is directed at the activity of the nominated officer (essentially the MLRO) in the regulated sector if they fail to disclose to SOCA, as soon as is practical, the information made available to them under Section 330 where they know or have reasonable grounds to suspect money laundering is taking place. This reflects the situation in large firms, where employees make internal reports to the MLRO, who then investigates and decides whether there is suspicion that needs to be reported.

Tipping-Off Money laundering investigations can take a long time to come to fruition and may require months or years of covert investigation. It is important that the suspects do not become aware of the investigation, as they may take steps to place their criminal property beyond the reach of the authorities. It is necessary, therefore, for SARs (and the fact that they have been made at all) to remain secret from the subject of the report or a third party. It is also possible that firms may become aware of law enforcement investigations – for example, a bank may be served with a court order, by the police, requiring them to reveal details of their customer’s transactions. In these circumstances too, it is necessary for the investigation to be kept from the subject. These matters are regarded as so important that criminal offences are created to prevent so-called tipping-off. POCA contains two offences of tipping-off and prejudicing an investigation for those in the regulated sector. Section 333A (1) deals with disclosing that an internal or external SAR has been made, if that disclosure might prejudice any investigation resulting from the report. Section 333A (3) creates an offence to disclose that a money laundering investigation is taking place or being contemplated, if the disclosure is likely to prejudice the investigation. There is a broader offence of prejudicing an investigation by disclosing information about it, which can be committed by those outside the regulated sector, contained in Section 342 (1) of POCA. Section 333A (4) of POCA details the penalties for transgression of the tipping-off provisions as being imprisonment for a period of up to two years, or an unspecified fine, or both, if the offence is committed in the course of employment in a firm whose business falls within the scope of the Money Laundering Regulations 2007. For those outside the regulated sector, prejudicing an investigation carries a maximum term of imprisonment of five years.

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As such, Section 330 makes it an offence for a person, who through the course of their business obtains knowledge, or who has reasonable grounds to suspect that money laundering is occurring, not to disclose their knowledge or suspicions.

2. 2.1

International Anti-Money Laundering Standards International Agencies

Learning Objective 3.2.1 Know the role of international agencies in combating money laundering: United Nations Office on Drugs and Crime (UNODC); International Monetary Fund (IMF); World Bank

The global nature of money laundering requires a co-ordinated response from international agencies. Whilst each describes the support and other interventions that they are able to offer as part of their wider mandate, they all focus on the international standards response contained in the FATF Recommendations (see Section 3 of this chapter), which comprise so-called soft law and represents the international standard for more concrete measures and best practices for AML/combating the financing of terrorism (CFT) efforts.

2.1.1 The United Nations Office on Drugs and Crime (UNODC) The UNODC was one of the first international organisations to be involved in global AML activity, primarily because the first attempts to deal with money laundering were linked to drug trafficking activity. UNODC came into being as the secretariat created to support the Commission on Narcotic Drugs (CND) that has established in 1946 by the Economic and Social Council of the UN as the central policy-making body in drug-related matters (although its wider mandate is far more than just money laundering, or indeed drugs, embracing amongst other things human trafficking, wildlife crime, piracy and corruption). The UNODC’s involvement has as its global programme’s broad objective5: …to strengthen the ability of member states to implement measures against money laundering and the financing of terrorism and to assist them in detecting, seizing and confiscating illicit proceeds, as required pursuant to UN instruments and other globally accepted standards, by providing relevant and appropriate technical assistance upon request. The UNODC received its mandate through the UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances of 1988.6 This convention provided the first international legal instrument to criminalise money laundering. The UNODC’s mandate was broadened from drugs to cover all serious crime through the 1998 political declaration together with the AML action plan measures adopted by the UN General Assembly (UNGASS) at its 20th special session held in the same year.

5  www.unodc.org/unodc/en/money-laundering/index.html?ref=menuside 6  www.unodc.org/pdf/convention_1988_en.pdf

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Money Laundering

Through the global programme, UNODC encourages states to develop policies to counter money-laundering and the financing of terrorism, monitors and analyses related problems and responses, raises public awareness about money laundering and the financing of terrorism, and acts as a co-ordinator of initiatives carried out jointly by the UN and other international organisations.

Find it yourself Full details of the UN Global Prevention of Money Laundering (GPML) Mandate are available at: www.unodc.org/documents/money-laundering/GPML-Mandate.pdf

2.1.2 The International Monetary Fund (IMF) The articles of agreement for both the IMF and World Bank were drawn up as part of the Bretton Woods Agreement in 1944, as part of the arrangements for post-war reconstruction. The original mandate for the IMF7 was to oversee the international monetary system, in order to ensure exchange-rate stability and importantly to encourage the dismantling of trade restrictions that were seen to hinder economic growth. The IMF had a natural position in terms of AML/CFT because of its unique oversight of the financial systems of its member countries, particularly through its detailed Article IV consultations8 that are carried out with each of its member countries, on a regular basis. The IMF incorporates AML/CFT assessments, supported through AML/CFT technical assistance as part of its routine activities. In particular, it considers member countries’ compliance with the international standards developed by the FATF (see Section 3 of this chapter) and provides technical assistance on how to improve compliance regimes. AML/CFT assessments are now a mandatory part of every financial sector assessment programme (FSAP)9 and offshore financial centre (OFC)10 assessment. In brief, the three main areas of the work undertaken by the IMF in this area are: • Assessments – this comprises an evaluation of the financial sector strengths and weaknesses

assessment and includes an assessment of the jurisdiction’s AML/CFT regime. Such assessments measure compliance with the FATF’s 40 Recommendations applying the same methodology, as used by the FATF, the FATF-style regional bodies (FSRBs) and the World Bank. • Technical assistance – along with the World Bank, the IMF provides substantial technical assistance to member countries on strengthening their legal, regulatory, institutional and financial supervisory frameworks for AML/CFT; and

7 8 9 10

Information about the history of the IMF is available at: www.imf.org/external/about/history.htm See www.imf.org/external/pubs/ft/aa/aa04.htm , which explains the requirements of Article IV For information of the IMF FSAP refer to www.imf.org/external/NP/fsap/fsap.aspx See IMF information on OFC Assessment at www.imf.org/external/np/ofca/ofca.asp

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The objectives of the UNODC’s global programme against money laundering, proceeds of crime and financing of terrorism are to encourage member states to adopt appropriate legislation, to equip them with the necessary technical expertise to implement the legislation, and to enhance information, sharing and international co-operation amongst its member states, as its mission statement notes:

• Policy development – IMF and World Bank staff have been active in researching and analysing

international practices in implementing AML/CFT regimes, as a basis for providing policy advice and technical assistance.

Find it yourself The IMF has a great deal of information about the subject of money laundering that is available from: www.imf.org/external/np/leg/amlcft/eng/ and an excellent set of AML reference material available at: www.imf.org/external/np/leg/amlcft/eng/aml4.htm

2.1.3 The World Bank The World Bank, or more specifically the International Bank for Reconstruction and Development (IBRD), was founded in 1944 to help with the post-war reconstruction of Europe11. The IBRD together with the International Development Association (IDA) are jointly referred to as the World Bank, an institution owned by its 187 member countries. The two institutions play a complementary role in promoting a vision of inclusive and sustainable globalisation. The IBRD aims to reduce poverty in middle-income and creditworthy poorer countries, while the IDA focuses on the world’s poorest countries. The mission of the bank is to: fight poverty with passion and professionalism for lasting results and to help people help themselves and their environment by providing resources, sharing knowledge, building capacity and forging partnerships in the public and private sectors, through a programme of financial and technical assistance. The mandate for the World Bank’s operation in AML falls within its work on financial market integrity. Its vision statement for its AML/CFT programme is to: deliver the Board’s AML/CFT mandate to add value to the global effort on AML/CFT in a manner that supports and contributes to the World Bank’s agenda of poverty alleviation and promoting growth, good governance and freedom from corruption. The World Bank views its programmes on AML and CFT as comprising an integral part of its financial sector development mandate, reinforcing and supporting its complementary work on governance and legal framework issues. As with the IMF, strengthened financial sector integrity is achieved through a programme of technical assistance, assessment and policy development. Briefly, technical assistance is aimed at supporting the many agencies that work together across professional disciplines. It therefore focuses on:

11  Information on the history of the World Bank can be found at go.worldbank.org/65Y36GNQB0

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• helping countries draft appropriate laws and regulations; • establishing the appropriate institution frameworks to enable implementation of the law, including

FIUs; and • supporting the training of regulatory supervisors, law enforcement and the judiciary in compliance, investigation and prosecution of the regime.

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It also aims to promote high standards of domestic and international co-operation and transparency. Assessment is focused on providing an evaluation of the overall effectiveness of a country’s AML/CFT regime as part of the joint work of the World Bank and IMF. Finally, policy development provides support for international standards bodies in AML/CFT. The World Bank’s current projects are listed on their website.

Find it yourself The World Bank’s AML work is the responsibility of its Financial Integrity Group and much useful information can be found on their website at go.worldbank.org/ZVIJSUC6J0

2.2

International Instruments and Conventions

Learning Objective 3.2.2

Understand the role, purpose and scope of international instruments and conventions: Vienna; Palermo; Merida; Directive 2005/60/EC of the European Parliament; Variance of application

Legal provisions for the combating of money laundering are contained within the mandatory requirements of the UN conventions that provide for the criminalisation of money laundering. These conventions are very important, as they provide the legal context and background to national legislative frameworks that are in place around the world.

2.2.1 The Vienna Convention The first of these, and the one that provided the operational mandate for the UNODC was the UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances 198812, also referred to as the Vienna Convention, which came into force on 19 December 1988. Countries that became party to the Convention committed to criminalising drugs trafficking and money laundering, carried out in connection with drugs trafficking. Article 3 provided a comprehensive definition of money laundering, which provides the basis of many standards, laws and regulations in place today. The term money laundering does not appear anywhere within the document, although the provisions described below have subsequently been taken to provide such a definition. 12 www.unodc.org/pdf/convention_1988_en.pdf

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Article 3 (1 b i) provides, inter alia, that: the conversion or transfer of property, knowing that such property is derived from any offence or offences … for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in the commission of such an offence or offences to evade the legal consequences of his actions should be made a criminal offence. Article 3 (1 b ii) provides, inter alia, that: the concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property, knowing that such property is derived from an offence or offences … or from an act of participation in such an offence or offences should be made a criminal offence. This wording was taken forward as a basis for the formal legal definition of money laundering and has been incorporated into national legislation in most countries that have implemented the provisions of the Convention.

2.2.2 The Palermo Convention The second instrument was the UN Convention against Transnational Organised Crime (2000)13, known as the Palermo Convention, named after the location in Italy where the conference took place and the Convention was signed. The Convention came into force on 29 September 2003 and where it provides a legal definition of money laundering, specifying that it may encompass three distinct, alternative types of guilty acts: 1. The conversion or transfer of property, knowing it is derived from a criminal offence, for the purpose of concealing or disguising its illicit origin, or of assisting any person, who is involved in the commission of the crime, to evade the legal consequences of his actions. 2. The concealment or disguising of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property, knowing that it is derived from a criminal offence. 3. The acquisition, possession or use of property, knowing at the time of its receipt that it was derived from a criminal offence or from participation in a crime. Comparing this wording with the offences in the POCA outlined in Section 1.3 of this chapter clearly shows the influence of the Convention’s wording on domestic legislation. The Palermo Convention was seen as representing a major step forward in the fight against trans-national organised crime: States ratifying the convention instrument commit themselves to taking a series of measures, including the creation of domestic criminal offences (participation in an organised criminal group, money laundering, corruption and obstruction of justice); the adoption of new and sweeping frameworks for extradition, mutual legal assistance and law enforcement co-operation; and the promotion of training and technical assistance for building or upgrading the necessary capacity of national authorities.

13 www.unodc.org/unodc/en/treaties/CTOC/index.html#Fulltext

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Money Laundering

Thus, states that have ratified the Convention have committed themselves to creating criminal offences for: participation in an organised criminal group; money laundering; corruption; and obstruction of justice.

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• • • •

This Convention contains information on how countries can improve international co-operation, in areas such as extradition and mutual legal and investigative assistance, together with a series of comprehensive provisions, many mandatory, on these matters, which provide a legal basis for co-operation even in the absence of bilateral treaties.

Find it yourself A guide to the Palermo Convention is available at: www.unodc.org/unodc/en/treaties/CTOC/ legislative-guide.html.

2.2.3 The Merida Convention The third instrument is the UN Convention against Corruption (2003)14, signed in Merida, Mexico which came into force on 14 December 2005. Both the Palermo and Merida instruments: widen the scope of the money laundering offence by stating that it should not only apply to the proceeds of illicit drug trafficking, but should also cover the proceeds of all serious crimes. Both Conventions urge states to create a comprehensive domestic supervisory and regulatory regime for banks and non-bank financial institutions, including natural and legal persons, as well as any entities particularly susceptible to being involved in a money laundering scheme. The Conventions also call for the establishment of FIUs.15 A significant contribution of the Merida instrument was the inclusion of asset recovery, which is stated explicitly as being a fundamental principle of the Convention. This was important for a number of countries, where high-level corruption has expropriated national wealth and resources. Further there is an explicit requirement for those states ratifying the Convention to create a comprehensive domestic supervisory and regulatory regime for banks and non-bank financial institutions, in order to protect against money laundering. The Convention is the most up to date and comprehensive global instrument against corruption offences, which include money laundering. An extensive legislative guide is available, which assists states seeking to ratify and implement the Convention by identifying legislative requirements, issues arising from those requirements and various options available to states as they develop and draft the necessary legislation.16

14 www.unodc.org/unodc/en/treaties/CAC/index.html 15 www.unodc.org/unodc/en/money-laundering/Instruments-Standards.html#UN-Conventions 16 www.unodc.org/unodc/en/treaties/CAC/legislative-guide.html

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2.2.4 Directive 2005/60/EC of the European Parliament Directive 2005/60/EC17 is also referred to as the Third Money Laundering Directive. Essentially, as mentioned in Section 2.5.5 of Chapter 1, the EU Directives provide the European regulatory and legislative frameworks that implement both the UN Conventions and the FATF’s recommendations on money laundering. To reflect the updating of the FATF Recommendations in February 2012, work commenced to implement a new directive. A proposed text was published in February 2013 and is expected to come in to force in 2013–14. The First EU Directive on money laundering focused on the laundering of the proceeds of drug-related crime, through the traditional financial sector. As such, it imposed obligations on the regulated financial sector in relation to maintaining systems for customer identification, staff training, record-keeping, and reporting of suspicious transactions. The Second Directive amended the First Directive by expanding the scope of the predicate offence from drugs to all serious offences and extended the scope to a number of non-financial activities. The purpose of the Third Directive was to implement the FATF’s 2003 amendments (its comprehensive review and update of the 40 Recommendations) and replace the two previous directives. It provided more detailed provisions in relation to CDD, based upon a risk-based assessment, allowing for simplified due diligence for low-risk situations and enhanced due diligence where risk was seen to be greatest. As noted by the FSA, in a useful guide to the Directive, in particular these: • are defined as comprising not just customer identification and verification of identity, but also • • • •

establishment of the purpose and intended nature of the business relationship and ongoing monitoring; apply to new and existing customers; require identification of beneficial owners and the verification of the beneficial owner’s identity; introduce exemptions from full CDD (simplified due diligence) for certain low-risk situations; and require enhanced due diligence measures for situations that present a higher money laundering or TF risk and, at least for non-face-to-face business, PEPs and international correspondent banking relationships.

Find it yourself The useful explanation about the evolution of the EU Directives and their translation into UK law is available at: www.fsa.gov.uk/pages/About/What/International/pdf/TMLD.pdf

17 eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2005:309:0015:0036:en:PDF

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In relation to the theme of money laundering, the development of a range of international initiatives, from a number of international and regional bodies, raises a number of issues: the hierarchy of similar initiatives; the priorities between initiatives; the implementation of initiatives; and the monitoring process. The UK has ratified and implemented the provisions of the various instruments and conventions. Only the UNCAC currently has a review mechanism, but one which, through software-based selfassessments and a peer review process, is assessing how far countries have the laws, institutions and procedures required or proposed by the Convention. This is being undertaken on a chapter-by-chapter basis, and over a number of years. The conventions provide more of a global framework, within which countries amend laws, take action, and co-operate with each other in support of the conventions. However, no country can boast a perfect implementation of all the international standards. Certainly, ratification of the conventions leads to legislative reform, as in the case of corruption, and consequently to increased activity by law enforcement and regulators; but the UN does not pursue the ongoing monitoring and advocacy roles that regional bodies, such as the Council of Europe’s Group of States Against Corruption (GRECO) and the FATF, undertake. Among these bodies, however, the global focus on the process of money laundering, and its relation to terrorism, has seen the work of FATF take precedence. The European directives also have legal implications for member states, and there is also an updating and review process. Currently, the Fourth Directive is being considered, following private sector discussions on their experiences of the existing directives and current developments in the area of AML and counter-terrorist financing (CTF), both at EU and international level. The discussions covered CDD requirements, the use of risk-based approaches, beneficial owners, SARs, the cost of compliance and the work of the FATF and sanctions lists. The new directive is expected to follow the revised FATF Recommendations.

3.

The Financial Action Task Force (FATF)

Learning Objective 3.3.1

Understand the role and objectives of FATF, its limitations and the legal context of its Recommendations

The FATF18 is an inter-governmental body whose main role is to establish international standards for combating money laundering and terrorist financing. The FATF was established by the G7 group of countries, at the July 1989 Economic Summit in Paris, and currently comprises 34 member jurisdictions, together with the Gulf Co-operation Council and the EC. The FATF works in close co-operation with a large number of international organisations including, amongst others the IMF, the World Bank, regional development banks and the UN, who are all FATF observers.

18 www.fatf-gafi.org

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2.2.5 Variance of Application

The FATF does not have an unlimited lifespan and periodically requires a specific decision at ministerial level amongst its members to continue its mission. The current mandate covers the period 2012–20 and was adopted in April 2012. The objectives of the FATF are to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, TF and other threats related to the integrity of the international financial system. In collaboration with other international stakeholders, the FATF also works to identify national-level vulnerabilities, with the aim of protecting the international financial system from misuse. The FATF monitors countries’ progress in implementing the FATF Recommendations; reviews money laundering and TF techniques and countermeasures; and, promotes the adoption and implementation of the FATF Recommendations globally.

Find it yourself 20 years of the FATF Recommendations gives a good overview of the work of the FATF and is available at: http://www.cbr.ru/today/anti_legalisation/fatf/20_years.pdf

A key component of the FATF’s work surrounds appropriate countermeasures, and these are set out in the 40 Recommendations first formulated in 1990 and revised in 1996, 2003 and, most recently, 2012, in order to reflect changes in AML techniques and trends. In 2001, the FATF expanded its mandate to include TF and issued its special recommendations (SR) on terrorist financing; in 2004, a further SR was added, making nine in total. The two sets of Recommendations were often known as the 40+9 Recommendations. In 2012, in part to reflect that many measures taken to combat money laundering and TF are the same, the Special Recommendations were integrated throughout the 40 Recommendations, although some remain specific to TF19. The FATF mandate was also expanded in 2008 to include the financing of the proliferation of weapons of mass destruction and the 2012 Recommendations include one specifically dealing with the implementation of UN sanctions on this topic. Another significant change in the 2012 revision was inclusion of a specific recommendation on risk (Recommendation 1). All these changes, and a re-order of how the recommendations are grouped, means that only three of the recommendations in the 2012 version deal with the same subjects as the same numbered recommendation previously, so care must be taken with comparing results of previous evaluations. The recommendations essentially set out the measures that national governments (and in some cases the private sector, through requirements imposed by law or regulations) should take to implement effective AML programmes and, in consequence are used to evaluate the extent of compliance by any country. The FATF monitors the implementation of the recommendations in its member jurisdictions on an ongoing basis through mutual evaluations that are essentially a peer review process. 19 The FATF 40 Recommendations, http://www.fatf-gafi.org/media/fatf/documents/recommendations/pdfs/FATF_ Recommendations.pdf

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Mutual evaluations are conducted by a team, which is usually composed of four to six experts, with legal, financial and law enforcement expertise, plus members of the FATF secretariat. These reviews provide an in-depth description and analysis of each country’s system for preventing criminal abuse of the financial system. These are conducted in accordance with a set of Key Principles that were compiled by the FATF in consultation with the FSRBs, the IMF and World Bank. The FATF is currently preparing for its fourth round of evaluations, which will be conducted under a new methodology for assessing compliance with, and ensuring effective implementation of, the revised recommendations is agreed. As stated in the 2009–10 FATF Annual Report20, the scope and the purpose of previous evaluations were to assess whether: • the necessary laws, regulations or other measures required under the new standards were in force

and in effect; • there had been a full and proper implementation of all necessary measures; • the system in place was effective.

The peer review team assessed the extent to which the evaluated country had implemented an effective AML/CFT system and identified deficiencies that needed to be addressed. Each country was assessed on all of the 40+9 Recommendations, and a rating given for their level of compliance. The mutual evaluation reports are published and can provide useful information to assess money laundering risk in the country concerned. Similar evaluations under the new FATF standards, which will also consider how effective implementation has been, are expected to commence in late 2013.

3.1

The FATF Recommendations

Learning Objective 3.3.2

Know which FATF Recommendations are mandatory and those which are not

The preamble to the 2012 revised 40 Recommendations states: The FATF Recommendations set out a comprehensive and consistent framework of measures which countries should implement in order to combat money laundering and terrorist financing, as well as the financing of proliferation of weapons of mass destruction. Countries have diverse legal, administrative and operational frameworks and different financial systems, and so cannot all take identical measures to counter these threats. The FATF Recommendations, therefore, set an international standard, which countries should implement through measures adapted to their particular circumstances. Alongside their recommendations, the FATF issues interpretative notes to some of the recommendations and a glossary of applicable definitions – taken together these comprise the FATF standards. Some of the interpretative notes and definitions in the glossary include examples to illustrate how the requirements could be applied – these examples are merely indicative and are not mandatory for achieving compliance. Similarly, the FATF produces guidance and best practice papers, and other advice for countries, but these too are not mandatory for assessing compliance with the standards. 20  http://www.fatf-gafi.org/media/fatf/documents/reports/2009%202010%20ENG.pdf

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The FATF also produces a methodology for mutual evaluations21. This allows for a degree of flexibility, based on risk, and states that: Where there is a low risk of money laundering and terrorist financing, countries may decide not to apply some of the recommendations requiring financial institutions and Designated Non-Financial Businesses and Professions (DNFBPs) to take certain actions. In such cases, countries should provide assessors with the evidence and analysis which was the basis for the decision not to apply the recommendations. Thus, there is a presumption that all the recommendations will be implemented, but in strictly limited situations, which countries must be able to explain on the basis of the ML/TF risks posed, some of the recommendations may not be applied to some firms or products.

3.2

FATF Categorisation of Jurisdictions

Learning Objective 3.3.3

Know the categorisation of jurisdictions which FATF considers to have strategic deficiencies

In addition to the mutual evaluation processes that are employed, the FATF uses additional mechanisms to identify and respond to jurisdictions perceived to have: strategic deficiencies in their AML/CFT regimes that pose a risk to the international financial system and impede efforts to combat money laundering and terrorist financing.22 One of the early tools employed by the FATF was the use of blacklisting or name and shame. The first blacklist of non-co-operative countries and territories (NCCTs) was produced in June 2000. This group of countries was considered deficient in having effective countermeasures against money laundering. Removal from this list was only possible after a country had provided practical evidence of effectiveness through its remedial action. Those countries listed as being non-co-operative through either failing to participate, or indeed to improve, were subject to very strong financial pressure by being ostracised from the world’s financial system. During this process, 23 jurisdictions were listed due to the lack of an effective AML/CFT system, but all were removed from the list by October 2006. The current focus of the FATF is on identification of high-risk jurisdictions, and it continues to name and monitor the efforts of a number of countries. Since 2007, the FATF’s International Co-operation Review Group (ICRG) has analysed high-risk jurisdictions and recommended specific action to address the money laundering and TF risks emanating from them. This process was revised in 2009, following a call from the Leaders of the Group of 20 (G20) for the FATF to reinvigorate its process for assessing countries’ compliance with the standards and to publicly identify high-risk jurisdictions.

21 FATF, Methodology for Assessing Compliance with the FATF Recommendations and the Effectiveness of AML/CFT Systems’, February 2013, at: www.fatf-gafi.org/media/fatf/documents/methodology/FATF%20Methodology%2022%20 Feb%202013.pdf 22 See http://www.fatf-gafi.org/topics/high-riskandnon-cooperativejurisdictions/ for an outline of current work in this area.

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This information is put into the public domain through a series of public statements, issued three times a year, about those regimes considered to have strategic AML/CFT deficiencies. These public statements identify: • Jurisdictions that have strategic AML/CFT deficiencies and to which countermeasures apply. • Jurisdictions with strategic AML/CFT deficiencies that have not made sufficient progress in

addressing the deficiencies, or have not committed to an action plan developed with the FATF to address the deficiencies. • Jurisdictions which have strategic AML/CFT deficiencies, for which they have developed an action plan with the FATF and provided a high-level political commitment to address the deficiencies. Under the revised ICRG regime, in addition to the public statement, the FATF also publishes updates on improvements at the same time that discuss the progress of those regimes considered deficient but that are working in co-operation with the FATF to address their deficiencies, significantly by providing highlevel political support for such efforts. This is done through a public document, ‘Improving Global AML/ CFT Compliance: On-Going Process’. The situation differs in each country and therefore poses a different degree of risk, so the FATF encourages members to consider those risks.

3.3

Strategic Deficiencies

Learning Objective 3.3.4

Know examples of jurisdictions with strategic deficiencies

Iran and the Democratic People’s Republic of Korea (DPRK) have consistently appeared on the first list in the public statements, that is jurisdictions subject to a FATF call on its members and other jurisdictions to apply countermeasures to protect the international financial system from the ongoing and substantial money laundering/TF risks emanating from their jurisdictions.

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Based on the results of the mutual evaluation report, a jurisdiction now may be referred to the ICRG if it is shown to have a significant number of key deficiencies. This will result in a preliminary or prima facie review conducted by one of four ICRG regional review groups. The jurisdiction will be invited to comment upon the report and develop an action plan in co-operation with the FATF to address the identified deficiencies.

The second list, namely jurisdictions with strategic AML/CFT deficiencies that have not made sufficient progress in addressing the deficiencies, or have not committed to an action plan developed with the FATF to address the deficiencies, is more dynamic. Countries are added or removed from time to time, and a new list published after the FATF’s plenary meetings, held three times each year. The public statement of October 201223 identified the following jurisdictions as being deficient:

Ecuador

Nigeria

Turkey

Ethiopia

Pakistan

Vietnam

Indonesia

São Tomé and Príncipe

Yemen

Kenya

Syria

Myanmar

Tanzania

Reference should always be made to the FATF website for the current lists and background information on the progress made since its previous lists. National authorities will often also publicise these lists and may specify further what measures are expected to be taken by firms in their jurisdiction – see, for example, the advice issued by the HM Treasury in the UK24.

3.4

FATF Recommendations for AML/CFT Policies and Co-ordination

Learning Objective 3.3.5

Know FATF Recommendations 1 and 2 relating to ‘AML/CFT policies and coordination’

As mentioned in Section 1.6 of Chapter 1, RBA is now at the heart of AML/CFT thinking. Although the FATF had previously published work on applying the RBA, the 2012 revision of the standards provided an opportunity explicitly to cover risk in the recommendations. Perhaps recognising the importance of the RBA, the FATF made their new Recommendation 1 about assessing risk and applying a RBA. The new recommendation states that countries should identify, assess and understand their money laundering and TF risks and then, based on that assessment, apply a RBA to ensure that measures they apply are commensurate with the risks identified. Countries should also require financial institutions and other sectors covered by the recommendations, known as designated non-financial businesses and professions (DNFBPs – see Recommendations 22 and 23 below for more details), to identify, assess and take effective action to mitigate their money laundering and TF risks.

23 FATF Public Statement – 19 October 2012, found at: www.fatf-gafi.org/topics/high-riskandnon-cooperativejurisdictions/ documents/fatfpublicstatement-19october2012.html 24 See, for example, Advisory Notice on Money Laundering and Terrorist Financing controls in Overseas Jurisdictions, HM Treasury found at: www.hm-treasury.gov.uk/d/advisory_notice_moneylaundering_nov2012.pdf

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• Threats include criminal and terrorist facilitators and ML or TF activities – there needs to be an

understanding of both the predicate crime environment and the proceeds of crime generated to analyse the threats. • To assess vulnerabilities means focusing on weaknesses in AML/CFT systems or controls, and may include financial products or other services that are attractive to launderers. • Consequence refers to the long- and short-term impact or harm of ML or TF, on society, the economy and financial systems and institutions. Recommendation 2 deals with national co-operation and co-ordination. Many different entities are involved in the fight against money laundering, TF and the proliferation of weapons of mass destruction, both internationally and nationally. Within a country, law enforcement bodies, government departments, regulators and supervisors all must co-operate and co-ordinate their different activities, at both the policy and operational level.

3.5

FATF Recommendations for Money Laundering and Confiscation

Learning Objective 3.3.6

Know FATF Recommendations 3 and 4 relating to ‘money laundering and confiscation’

Recommendation 3 calls for countries to criminalise money laundering, consistent with the provisions of both the Vienna and Palermo Conventions (see Section 2.2 above). In addition to the main money laundering offences, ancillary offences should also be created, including participation in, association with or conspiracy to commit, attempt, aiding and abetting, facilitating, and counselling the commission, unless this is not permitted by fundamental principles of domestic law. The crime of money laundering should be applied to all serious offences, with a view to including the widest range of predicate offences, which (as previously outlined in Chapter 2, Section 1) may be described by reference to all offences; or to a: • threshold linked either to a category of serious offences, or to the minimum prison term penalty (the

threshold approach); or • list of predicate offences; or • combination of the above.

The interpretative note to Recommendation 3 deals with the extra-jurisdictional dimension of money laundering, stating that predicate offences for money laundering should extend to conduct that occurred in another country, which constitutes an offence in that country, and which would have constituted a predicate offence, had it occurred domestically.

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In March 2013, the FATF published new guidance on national ML and TF risk assessment. Carrying out such an assessment, as required by Recommendation 1, will allow the authorities to prioritise the allocation of resources and also to provide useful information to financial institutions and DNFBPs for the purpose of carrying out their own risk assessments. The guidance describes risk as a function of three factors: threats, vulnerability and consequence.

The interpretative note also makes it clear that: a. the intent and knowledge required to prove the offence of money laundering may be inferred from objective factual circumstances, which negates the so-called wilful blindness defence; b. effective, proportionate and dissuasive criminal sanctions should apply to natural persons convicted of money laundering, ie, that the punishment should be sufficient to make laundering a very unattractive profession; and c. criminal liability and sanctions, and, where that is not possible (due to fundamental principles of domestic law), civil or administrative liability and sanctions, should apply to legal persons, such as companies. Recommendation 4, consistent with the Vienna, Palermo and TF Conventions, sets out the provisions governing confiscation of assets, gained as a result of either laundering or the underlying predicate offence. This recommendation requires measures to allow the confiscation, freezing and seizure of such criminal assets. Significantly, it allows for civil asset recovery, putting the onus on the defendant to prove the lawful origin of the asset or property.

3.6

FATF Recommendations on Terrorist Financing and Financing of Proliferation

Learning Objective 3.3.7

Know FATF Recommendations relating to ‘terrorist financing and financing of proliferation’ (Recommendations 5 to 8)

These four recommendations deal with two specific topics in the FATF mandate; terrorist financing and the financing of the proliferation of weapons of mass destruction. Three of them are carried over from the former special recommendations and one (Recommendation 7) is new, reflecting the expansion of the mandate since the last full revision of the Standards. Recommendation 5 deals with the criminalising of TF on the basis of the TF Convention (we will deal with TF in more detail in Chapter 4). The recommendation also makes it clear that TF should be a predicate offence for money laundering. Recommendation 6 deals with the implementation of UN sanctions relating to terrorism and requires countries to freeze, without delay, the funds or other assets of individuals or organisations designated by the UN or by the country itself under a UN Security Council Resolution. Similarly, Recommendation 7 deals with UN sanctions relating to proliferation and also requires countries not only to implement the sanctions, but also to have mechanisms in place to freeze without delay the assets of those designated. Recognising particular TF risks relating to non-profit organisations (NPOs), such as charities, Recommendation 8 requires a review of laws and regulations, relating to this sector, to ensure that they cannot be misused by terrorists, posing as legitimate entities, by the use of legitimate NPOs as conduits for terrorist funds or for the clandestine diversion of funds to terrorists.

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3.7

FATF Preventative Measures

Learning Objective Know what FATF terms ‘preventative measures’ (Recommendations 9 to 23)

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3.3.8

The preventative measures are primarily the measures that firms should take in order to prevent, detect and report money laundering, as discussed in Section 1.2 above. As the FATF Recommendations do not carry the force of law directly, these measures must be implemented through national laws and regulations, such as the UK’s POCA 2002 and Money Laundering Regulations 2007. Recommendation 9 states that financial institution secrecy laws, such as client confidentiality, should not inhibit implementation of the FATF Recommendations.

3.7.1 Customer Due Diligence (CDD) and Record-Keeping (Recommendations 10 and 11) We explained above the importance of CDD by financial institutions in the detection and prevention of money laundering. Recommendation 10 deals with this subject and requires the principle that financial institutions should carry out CDD to be set out in law, and prohibits them from keeping anonymous accounts or accounts in obviously fictitious names. The recommendation sets out when CDD should be carried out, which is normally before establishing a business relationship with the customer (it may not be required for occasional transactions below USD/EUR 15,000). It also details the CDD measures, including identifying and verifying a customer’s (or beneficial owner’s) identity; understanding the nature and purpose of the business relationship with the institution; and conducting on-going monitoring. FATF Recommendations are not immediately binding, but these requirements will be imposed on financial institutions, through law or regulations in the country. Record-keeping, both of the information obtained and relied on during CDD, and of transactions is as important as CDD. Recommendation 11 requires such records to be kept by financial institutions for five years and to be available to domestic competent authorities, such as LEAs, with the appropriate authority, such as a court order.

3.7.2 Additional Measures for Specific Customers and Activities (Recommendations 12–16) Although Recommendation 1 requires countries and institutions to assess their own risks, there are some customers and activities that international experience has shown to pose particular risks and these five recommendations deal with these.

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Recommendation 12 deals with PEPs. These are individuals who are or have been entrusted with prominent public functions by a country, for example Heads of State or of government, senior politicians, senior government, judicial or military officials, senior executives of state-owned corporations and important political party officials. The requirements for PEPs also apply to family members or close associates. Recognising that the UNCAC covers such individuals, both at home and overseas, the new recommendations talk about foreign or domestic PEPs. Because of the higher risks (for example through corruption) posed by dealing with such individuals, Recommendation 12 requires financial institutions to carry out enhanced (ie, more in-depth) due diligence on foreign PEPs and have in place measures for senior management approval of accounts. If a business relationship with a domestic PEP poses a higher risk, the same enhanced due diligence must apply. The risks posed by correspondent banking are covered by Recommendation 13, which also imposes similar enhanced due diligence measures, such as understanding the nature of business, reputation and quality of supervision of a foreign respondent institution. Financial institutions should also assess the respondent’s own AML/CFT controls and where payable through accounts are concerned, be satisfied that the respondent has carried out CDD on customers who, in effect, will have direct access to the financial institution’s accounts. Recommendation 14 deals with money or value transfer services, which are often used by money launderers or terrorist financiers to move money around. Such services should be registered or licensed and subject to effective monitoring or supervision to ensure compliance with the relevant measures required of them. Recognising that new technologies appear all the time and are often exploited by criminals, the FATF requires countries and financial institutions to identify and assess the risks that may arise from new products or technologies. Recommendation 15 covers these issues and requires financial institutions not only to identify and assess risks, prior to the launch of new products or technologies, but also to take appropriate measures to mitigate the risks. In addition to money or value transfer services, wire transfers are very useful in the layering process and Recommendation 16 deals with the risks posed. A wire transfer refers to any transaction carried out on behalf of an originator, through a financial institution, by electronic means, with a view to making an amount of funds available to a beneficiary person. The recommendation requires that information regarding both the originator and beneficiary should be included with a wire transfer throughout the payment chain. This information should be cross-checked against those individuals and entities designated under sanctions regimes.

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In an increasingly globalised financial system, it is recognised by the FATF that financial institutions work closely together and that financial groups operate internationally and nationally. To some extent it is reasonable to allow some degree of reliance and co-operation on AML/CFT. Recommendation 17 permits financial institutions to rely on third parties to perform elements of the CDD process or to introduce business, provided they adhere to FATF Standards. Where such reliance is permitted, the ultimate responsibility for customer identification and verification remains with the financial institution relying on the third party. Recommendation 18 requires financial institutions to implement programmes against money laundering and TF. Groups consisting of more than one institution (such as large banking groups) must have group-wide programmes with policies on sharing information. Similarly, foreign branches and subsidiaries must apply the same AML/CFT standards as the home institution. As was noted in Section 3.3 of this chapter, some countries (such as those named through the ICRG process) pose higher risks and Recommendation 19 requires financial institutions to impose enhanced due diligence standards on transactions and customers from those countries. Countries themselves should impose countermeasures when called upon by the FATF, or independently if they recognise high-risk jurisdictions. These countermeasures could include a variety of measures (listed in the interpretive note), including extra reporting of, or limiting certain transactions and business relationships, with those countries. These countermeasures can be damaging for the economies of the countries concerned, hence the importance of the ICRG process.

3.7.4 Reporting of Suspicious Transactions (Recommendations 20 and 21) Reporting of suspicious transactions is the other vital aspect of preventing and detecting money laundering by institutions. Recommendation 20 requires such reports to be made promptly to the FIU when there is actual suspicion, or reasonable grounds for suspicion, that funds are the proceeds of criminal activity, or are related to TF. Recommendation 21 prohibits financial institutions, their directors, officers and employees from disclosing that a suspicious transaction report (STR) has been made to the FIU (tipping-off) and also protects them by law from criminal and civil liability for any breach of contract or confidentiality requirement the requirement to report may cause.

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3.7.3 Reliance, Controls and Financial Groups (Recommendations 17–19)

3.7.5 Designated Non-Financial Business and Professions (DNFBPs) (Recommendations 22 and 23) Money laundering and TF risks are not only found in financial institutions. Criminals will seek to misuse any vulnerability in any institution or firm if it helps them to place, layer or integrate their criminal proceeds. Over time, a list of especially vulnerable sectors, known as DNFBPs, have been identified and become subject to some AML/CFT requirements. The list of DNFBPs can be found in the Glossary in the FATF Standards and includes: casinos; real estate agents; dealers in precious metals; dealers in precious stones; lawyers, notaries, other independent legal professionals and accountants; and trust and company service providers. Recommendation 22 applies the CDD requirements (from Recommendations 10, 11, 12, 15 and 17 above) to DNFBPs in certain circumstances, where money laundering or TF risks are higher. For casinos and dealers in precious metals or stones, there is a threshold above which CDD must apply; for real estate agents they apply when they are involved in buying or selling of real estate. For lawyers, notaries, other independent legal professionals and accountants the recommendation only applies in certain circumstances, such as buying or selling real estate, managing client money or accounts, or the creation, operation and management of companies and businesses. It applies to trust or company service providers when acting as a formation agent, or director or secretary, of a company, providing services such as a registered office, acting as a trustee or nominee shareholder in certain circumstances. Similarly, Recommendation 23 applies other measures to DNFBPs, namely AML/CFT controls, enhanced due diligence for high-risk countries and the reporting requirements (Recommendations 18–21). These apply to lawyers, trust and company service providers and dealers in precious metals and stones in similar circumstances as do the CDD measures.

3.8

FATF Recommendations on Transparency and Beneficial Ownership

Learning Objective 3.3.9

Know FATF recommendations 24 & 25 relating to ‘transparency and beneficial ownership of legal persons and arrangements’

Criminals will seek to use companies, and other legal persons such as bodies corporate, foundations, partnerships, or associations and similar entities, to disguise the true ownership of assets, particularly in jurisdictions where it is possible to hide the true (or beneficial) owner. Complex corporate structures make it very difficult to identify properly who is in control and who ultimately owns the assets. The FATF defines beneficial owner as the natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted. It also includes those persons who exercise ultimate effective control over a legal person or arrangement.

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Countries should take measures to prevent their misuse for money laundering or TF and ensure there is adequate, accurate and timely information available on their beneficial ownership and control, either held by the company or through other mechanisms. Measures to facilitate access to beneficial ownership and control information by financial institutions and DNFBPs undertaking CDD should also be considered.

3.9

FATF Recommendations on Powers and Responsibilities of Competent Authorities

Learning Objective 3.3.10 Know FATF recommendations relating to the ‘Powers and responsibilities of competent authorities and other institutional measures’ (Recommendations 26 to 35)

3.9.1

Regulation and Supervision (Recommendations 26–28)

Recommendation 26 requires that countries should ensure that financial institutions are subject to adequate regulation and supervision and are effectively implementing the FATF Recommendations. In order to prevent a financial institution being hijacked for criminal purposes, the regulators or supervisors should have the power to ensure that criminals cannot own or control, or hold a management function in, financial institutions. These supervisors should have adequate powers to supervise or monitor, and ensure compliance by, financial institutions, with requirements to combat money laundering and TF, according to Recommendation 27. They should have the authority to conduct inspections and compel the production of any relevant information from the financial institutions they supervise. In addition to the supervision of financial institutions, DNFBPs also require some form of monitoring and Recommendation 28 provides for this. Casinos are treated as a special case, because of their potential attractiveness to money launderers (as a place where large amounts of cash are routinely handled). They must be licensed, supervised for compliance with AML/CFT requirements and there should be legal or regulatory measures in place to prevent criminals taking control of casinos, in the same way as for financial institutions. Other categories of DNFBPs should be subject to effective systems for monitoring and ensuring compliance with AML/CFT requirements on a risk sensitive basis.

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To counter this, Recommendations 24 and 25 focus on the transparency and beneficial ownership of legal persons and legal arrangements (such as certain types of trust) respectively. At the very minimum, countries must ensure that the authorities have access to certain basic information about companies, such as legal ownership and control structure (ie, information about the status and powers of a company, its shareholders and directors), and this information should be held in a company registry.

3.9.2 Operational and Law Enforcement (Recommendations 29–32) Financial Intelligence Units (FIUs) were introduced in Section 2.1 of Chapter 1 as an important part of the AML/CFT system. Recommendation 29 requires countries to introduce a FIU that serves as a national centre for the receipt and analysis of: (a) suspicious transaction reports; and (b) other information relevant to money laundering, associated predicate offences and TF, and for the dissemination of the results of that analysis. It is not sufficient just to gather and analyse information; it needs to be investigated. Recommendation 30 sets out the responsibilities of law enforcement and investigative authorities and requires one or more of them to be designated as responsible for money laundering and TF investigations, within the framework of national AML/CFT policies. Powers to obtain confidential information and seize evidence are required by these agencies and special investigative techniques, such as undercover operations, intercepting communications and accessing computer systems may be needed. Recommendation 31 lists these powers and techniques. Cash plays an important role in money laundering and TF and particular measures are required to deal with the movement across borders of large amounts of cash. Recommendation 32 calls for measures, such as declaration systems, to detect cash movements and legal instruments to stop them when they are suspected to be related to TF, money laundering or predicate offences, or are falsely declared or disclosed.

3.9.3 General Requirements (Recommendations 33 and 34) These two recommendations deal with two matters that help improve the effectiveness and efficiency of AML/CFT regimes – statistics and feedback. Recommendation 33 states that countries should compile a broad range of statistics on matters relevant to the effectiveness and efficiency of their AML/CFT systems. This should include statistics on the STRs received and disseminated; money laundering and TF investigations, prosecutions and convictions; property frozen, seized and confiscated; and mutual legal assistance or other international requests for co-operation. Recommendation 34 deals with feedback. It has long been a criticism that the private sector has to spend a lot of time, effort and money on implementing AML/CTF requirements and provide a lot of information via the reporting regime, but receives little feedback from the authorities in return. So in addition to the statistics dealt with in the previous recommendation, the public authorities involved should establish guidelines, and provide feedback, which will assist financial institutions and DNFBPs, in applying national measures to combat money laundering and TF, and, in particular, in detecting and reporting suspicious transactions.

3.9.4 Sanctions (Recommendation 35) Recommendation 35 is about sanctions, but not in the sense the word has previously been used, in Recommendations 6 and 7 for example, which refer to targeted financial sanctions, such as those imposed by the UN.

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Countries should ensure that there is a range of effective, proportionate and dissuasive sanctions, whether criminal, civil or administrative, and that they should be applicable, not only to financial institutions and DNFBPs, but also to their directors and senior management. So the sanctions envisaged could be fines or imprisonment under criminal law, or regulatory disciplinary measures, as appropriate.

3.10 FATF Recommendations for International Co-Operation Learning Objective 3.3.11 Know FATF Recommendations relating to international co-operation (Recommendations 36-40)

Money laundering and TF frequently have international dimensions and the inability of investigative authorities to co-operate quickly and efficiently provides a great advantage to the money launderer or terrorist financier, who may move money across borders, without leaving his home. It is no surprise, then, to find the final five FATF Recommendations deal, in some details, with international co-operation. Firstly, Recommendation 36 requires countries to take immediate steps to become parties to and ratify various international conventions, including the Vienna, Palermo, TF Conventions and the UNCAC. More practical steps are required and Recommendation 37 states that countries should rapidly, constructively and effectively, provide the widest possible range of mutual legal assistance in relation to money laundering, associated predicate offences and TF investigations, prosecutions, and related proceedings. Recommendation 38 deals particularly with requests by other countries to freeze, seize and confiscate laundered property, in order to prevent the launderers simply moving it on to a third jurisdiction. Recommendation 39 deals with extraditing suspects for money laundering and TF. And finally, Recommendation 40 deals with other forms of international co-operation, whereby countries should ensure that their competent authorities can rapidly, constructively and effectively provide the widest range of international co-operation, in relation to money laundering, associated predicate offences and TF.

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Here we are talking about sanctions available to deal with natural and legal people (ie, individuals, firms and institutions) that fail to comply with AML/CTF requirements derived from the recommendations.

4.

The Role of Other Bodies

Learning Objective 3.4.1

Understand the role, activities and coverage of FATF-Style Regional Bodies (FSRBs)

The FATF itself only has 34 countries as members, but the FATF standards are designed, and expected, to be applied globally. The FATF therefore relies on a global network of eight FATF–style regional bodies (FSRBs). The role of these organisations is to assist the FATF in carrying out its mandate and in ensuring the highest level of compliance with the recommendations amongst each of their member states. These bodies play an important role in the conduct and management of mutual evaluations, by undertaking evaluations of their own members. Over 180 countries have now committed to the FATF standards through membership of the global network of FSRBs and the FATF. The table below contains details of the current FSRBs.

FATF-Style Regional Bodies Organisation

Remit

Asia/Pacific Group on Money Laundering (APGML)

To ensure the adoption, implementation and enforcement of internationally accepted AML/CTF standards, as set out in the FATF 40 Recommendations and FATF 9 Special Recommendations. www.apgml.org

Caribbean Financial Action Task Force (CFATF)

An organisation of 30 states of the Caribbean basin, which have agreed to implement common countermeasures to address the problem of criminal money laundering. www.cfatf.org/eng

Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG)

A strong and dynamic FSRB committed to eradicating money laundering and TF in the Eastern and Southern African region. www.esaamlg.org

Eurasian Group (EAG)

The Eurasian group on combating money laundering and TF is an association of Eurasian nations seeking to implement joint efforts against economic crimes and the international threat of terrorism. www.eurasiangroup.org

Grupo de Acción Financiera de Sudamérica – Financial Action (Task Force of South America Against Money Laundering) (GAFISUD)

GAFISUD is a regional inter-governmental organisation, which brings together the countries of South America, in order to combat money laundering and TF, by means of the continuous improvement of national policies and the strengthening of different methods of co-operation between member states. www.gafisud.info/home.htm

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Organisation

Remit

Inter-Governmental Action Group against Money Laundering in West Africa (GIABA)

Established by the Economic Community of West African States (ECOWAS) as one of its major responses and contributions to the fight against money laundering. GIABA is a specialised institution of ECOWAS that is responsible for the prevention and control of money laundering and TF in the region. www.giaba.org

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Member countries of the MENAFATF agree on the following objectives and will work towards achieving them: • to adopt and implement the Special Recommendations of the FATF

Middle East & North Africa Financial Action Task Force (MENAFATF)

against TF; • to implement the relevant UN treaties and agreements and United Nations Security Council resolutions dealing with countering ML/TF; • to co-operate to raise compliance with these standards and measures within MENA the region and to work with other international organisations to raise compliance worldwide; • to work together to identify ML/TF issues of a regional nature, to share experiences of these problems and to develop regional solutions for dealing with them; and • to build effective arrangements throughout the region to combat ML/TF effectively in accordance with the particular cultural values, constitutional framework and legal systems in the member countries. www.menafatf.org/Home.asp

Council of Europe Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL)

4.1

The aim of MONEYVAL is to ensure that its member states have in place effective systems to counter ML/TF and comply with the relevant international standards in these fields. www.coe.int/t/dghl/monitoring/moneyval/default_en.asp

Combating Money Laundering

Learning Objective 3.4.2

Know the role other professional bodies play in combating money laundering and establishing best practice: Basel Committee on Banking Supervision; International Organization of Securities Commissions (IOSCO); European Union and the Council of Europe; International Association of Insurance Supervisors (IAIS); Egmont Group of Financial Intelligence Units; Wolfsberg Group; Joint Money Laundering Steering Group (JMLSG); Professional bodies

In addition to the FATF, FSRBs, UN, IMF and World Bank, there are numerous other bodies around the world which have roles to play in the fight against money laundering. The roles of some of the most important are outlined below.

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4.1.1 The Basel Committee on Banking Supervision (BCBS) The Bank for International Settlements (BIS) was established in 1930 as the central banker to central banks, fostering monetary policy co-operation and co-ordination of banking regulation through the Basel Accords on capital adequacy. The Basel Committee on Banking Supervision (BCBS) was established by the central bank governors of the Group of Ten countries at the end of 1974 and meets regularly four times a year. The BCBS does not possess any formal supranational supervisory authority, thus its statements do not have any legal force. Its role is to formulate broad supervisory standards and guidelines around standards of best practice. It expects that individual authorities will take steps to ensure their national implementation. The role of the BCBS is around setting standards of prudential supervision for financial institutions that are implemented as far as possible in a way that creates a level playing field amongst member organisations. Its focus in relation to AML and CFT is around the provision of operational guidance to national regulators on the implementation of the FATF recommendations and UN Conventions. It established, in 2005, its principles on banks’ management of compliance risk which revolve around six risk areas, one of which is the specific focus on ML/TF. It first outlined its principles with respect to money laundering in a document entitled ‘Prevention of Criminal Use of the Banking System for the Purpose Of Money-Laundering’, December 198825. This statement of principles outlined the basic policies and procedures that banks’ managements should ensure are in place within their institutions, with a view to assisting in the suppression of ML through the national and international banking system. Its focus was on reinforcing existing best practices among banks and, specifically, to encourage vigilance against criminal use of the payments system, implementation by banks of effective preventive safeguards, and co-operation with law enforcement agencies. In terms of its main area of guidance for bank regulators, it provided recommendations on CDD for banks (October 2001) and on the sharing of financial records between jurisdictions in connection with the fight against TF (April, 2002). In 2003, it also authored a joint note26 alongside the International Association of Insurance Supervisors (IAIS) and International Organisation of Securities Commissions (IOSCO). The purpose of this was to provide a record of the initiatives taken by each sector to combat ML/TF. Its ‘Core Principles for Effective Banking Supervision’27, mainly a reference for supervisory and other public authorities, reiterate that banks should have, in general, adequate policies and procedures, including strict KYC rules, and that bank supervisors are urged to encourage the adoption of the relevant recommendations of the FATF. These relate to customer identification and record-keeping, increased diligence by financial institutions in detecting and reporting suspicious activities and transactions, and measures to deal with countries with deficient AML measures. 25 Prevention of Criminal Use of the Banking System for the Purpose of Money Laundering, 1988, found at: www.bis.org/ publ/bcbsc137.pdf 26  Initiatives by the BCBS, IAIS and IOSCO to combat money laundering and the financing of terrorism, 2003, found at: www. bis.org/publ/joint05.pdf 27  Core Principles for Effective Banking Supervision ,1997, www.bis.org/publ/bcbs30a.htm; see revisions at www.bis.org/publ/ bcbs129.htm

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Find it yourself

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The BCBS’s publications on money laundering and terrorist financing can be found at: http://www. bis.org/list/bcbs/tid_32/index.htm

4.1.2 The International Organisation of Securities Commissions (IOSCO) IOSCO28 is a multilateral organisation of securities regulators whose members, it states49, regulate over 95% of the world’s securities markets. IOSCO members have resolved to: • co-operate in developing, implementing and promoting adherence to internationally recognised

and consistent standards of regulation, oversight and enforcement, in order to protect investors, maintain fair, efficient and transparent markets, and seek to address systemic risks; • enhance investor protection and promote investor confidence in the integrity of securities markets, through strengthened information exchange and co-operation in enforcement against misconduct and in supervision of markets and market intermediaries; and • exchange information at both global and regional levels on their respective experiences in order to assist the development of markets, strengthen market infrastructure and implement appropriate regulation. In May 2003 it published its ‘Objectives and Principles of Securities Regulation’29 which set out 30 principles of securities regulation, which are based upon the following three objectives: • the protection of investors; • ensuring that markets are fair, efficient and transparent; and • the reduction of systemic risk.

These objectives are viewed as providing the benchmark standard for securities regulators. With respect to ML, they provide that securities regulators should consider the sufficiency of domestic legislation to address the risks of ML. The regulator should also require that market intermediaries have policies and procedures in place designed to minimise the risk of the use of an intermediaries business as a vehicle for ML and are in accordance with IOSCO Public Document No. 26 (Report on Money Laundering, IOSCO Technical Committee, October 1992).

4.1.3 The International Association of Insurance Supervisors (IAIS) The IAIS30 was established in 1994 and represents insurance regulators and supervisors of some 190 jurisdictions in nearly 140 countries, constituting 97% of the world’s insurance premiums. It also has more than 120 observers. Its objectives are to: • promote effective and globally consistent supervision of the insurance industry, in order to develop

and maintain fair, safe and stable insurance markets, for the benefit and protection of policyholders; and 28  www.iosco.org 29  www.iosco.org/library/pubdocs/pdf/IOSCOPD154.pdf 30  www.iaisweb.org

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• contribute to global financial stability.

In October 2004 it produced its ‘Guidance Paper on Anti-Money Laundering and Combating the Financing of Terrorism’ (Guidance Paper Number 5)31. Within this document the IAIS notes that although in general the vulnerability of the sector is not regarded as being as high as for other sectors of the financial industry, the insurance sector is a possible target for money launderers and for those seeking resources for terrorist acts or for ways to process funds to accomplices. Insofar as insurers can be involved, knowingly or unknowingly, in ML/TF, this can expose them to legal, operational and reputational risks – hence the provision of guidance for the insurance sector, to ensure that it takes adequate measures to protect against misuse by money launderers and terrorists. In addition, in October 2003 the IAIS approved and issued the ‘Insurance Core Principles and Methodology’, which revised the core principles for the supervision of insurers. Compliance with this is required for a supervisory system to be effective. Their Core Principle 28 requires compliance with the FATF recommendations as they apply to the insurance sector and insurance supervision.

4.1.4 The European Union (EU) Financial crime is a particular issue for the EU, because the creation of the single market and the breaking down of barriers not only aids legitimate business, but may provide increased opportunities for crime. The Internal Market Directorate General heads the EC’s delegation to the FATF. The EU money laundering directives, and some of the European institutions for dealing with financial crime were discussed in Section 2.5 of Chapter 1. In addition to the main directive, the EC has also been responsible for other initiatives, such as publishing a list of countries considered to have AML/CFT standards equivalent to the EU standard, which can be used in provisions on simplified due diligence, and establishing the EU FIU platform, an informal group to facilitate co-operation among the FIUs of the EU. Details of these initiatives and of meetings of the EU ML/TF committee can be found on its website.

Find it yourself Details of the European Union’s work on financial crime can be found at http://ec.europa.eu/internal_ market/company/financial-crime/index_en.htm

4.1.5 The Council of Europe (CoE) The Council of Europe (CoE) established a Committee of Experts on the evaluation of anti-money laundering measures and the financing of terrorism – MONEYVAL (formerly PC-R-EV). It has 28 permanent and two temporary members and is one of the FSRBs.

31  www.iaisweb.org/__temp/Guidance_paper_on_anti_money_laundering_and_combating_the_financing_of_terrorism.pdf

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3

The aim of MONEYVAL is to ensure that its member states have effective systems in place to counter ML/TF and comply with the relevant international standards in these fields. Such standards include the following: the 40 Recommendations of the FATF; the Vienna and Palermo Conventions; the EU AML Directives and the Directive 2005/60/EC of the European Parliament. (It should also be noted that the CoE also has a very important and respected review process for anti-corruption through GRECO – see Section 2.3 of Chapter 5.)

4.1.6 The Egmont Group of Financial Intelligence Units (FIUs) Recognising the benefits inherent in the development of a FIU network, in 1995, a group of FIUs meeting at the Egmont Arenberg Palace in Brussels decided to establish an informal group for the stimulation of international co-operation. Now known as the Egmont Group32, these FIUs meet regularly to find ways to co-operate, especially in the areas of information exchange, training and the sharing of expertise. The Group has also published ‘Principles and Best Practice on Information Exchange’ between FIUs, and in 2000 published a paper containing 100 money laundering cases. Egmont defines a FIU as33: a central, national agency responsible for receiving (and, as permitted, requesting), analysing and disseminating to the competent authorities, disclosures of financial information: (i) concerning suspected proceeds of crime and potential financing of terrorism, or (ii) required by national legislation or regulation, in order to counter money laundering and terrorism financing. In other words, it is the central national agency responsible for receiving and requesting disclosures of financial information (through SARs) and for sharing these with the police and other appropriate bodies such as the Customs Authority. Any FIU which considers itself to fit this definition is eligible to apply to join the group, and so far around 120 have done so. Within the UK, the FIU is part of the SOCA and will transfer to the new NCA in 2013.

4.1.7 The Wolfsberg Group The Wolfsberg Group34 is an association of 11 global banks, which aims to develop financial services industry standards and best practice, for KYC, AML and CFT policies. The Wolfsberg Standards consist of the various sets of AML principles, as well as related statements issued by the Group since its inception. The Group came together in 2000, at the Château Wolfsberg in North Eastern Switzerland, to work on drafting AML guidelines for private banking54. The Wolfsberg ‘AML Principles for Private Banking’ were subsequently published in October 2000 (and revised in May 2002). Membership of the group includes the following banks: UBS, Société Générale, J.P. Morgan Chase, HSBC, Goldman Sachs, Deutsche Bank, Credit Suisse, Citigroup, Barclays, Bank of TokyoMitsubishi UFJ and Banco Santander.

32  www.egmontgroup.org 33  What is an FIU, Egmont Group, www.egmontgroup.org/about/what-is-an-fiu 34  www.wolfsberg-principles.com

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The group organises annual meetings where compliance officers from most international banks and officials from many countries meet on regulatory and compliance issues. Their other documentation is also highly relevant and is readily available online, including: • • • • •

Wolfsberg Trade Finance Principles (2011). Wolfsberg Anti-Corruption Guidance (2011). Wolfsberg Statement on The Suppression of the Financing of Terrorism (2002). Wolfsberg AML Principles for Correspondent Banking – November 2002 Wolfsberg Monitoring Screening and Searching Paper (2009).

Find it yourself A list of the Wolfsberg Group’s publications can be found at www.wolfsberg-principles.com/ standards.html

4.1.8 The Joint Money Laundering Steering Group (JMLSG) The Joint Money Laundering Steering Group (JMLSG)35 is made up of the leading UK trade associations in the financial services industry. Its intention is to promote good practice in countering ML and to give practical assistance in interpreting the UK Money Laundering Regulations through the publication of industry guidance. It has been producing ML guidance for the financial sector since 1990, initially in conjunction with the BoE, and most recently it has provided up-to-date guidance on the various ML Regulations in force within the country. The JMLSG Guidance36, which is a very comprehensive guide to UK legislation and requirements, underwent a major revision in 2006, to include principles on senior management responsibility and the risk-based approach, and subsequently included amendments to reflect the provisions of the Money Laundering Regulations 2007. Part II of the Guidance includes sector-specific chapters.

4.1.9 The Professional Bodies With the extension of the coverage of AML responsibilities into the professional fields, such as lawyers and accountants, so called gatekeepers to the financial system, a wide range of professional accounting and legal bodies have taken on responsibility for supervision and guidance for their members. For example, the International Federation of Accountants published an anti-money laundering guide in 200437. The FATF Recommendations require that the professions are subject to effective monitoring and ensuring compliance with their AML/CFT obligations, which may be carried out by an appropriate self-regulatory body.

35  www.jmlsg.org.uk 36 http://www.jmlsg.org.uk/industry-guidance/article/guidance 37 http://www.ifac.org/sites/default/files/publications/files/anti-money-laundering-2n.pdf

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A range of professional bodies who focus on supporting those working in the field of AML in addition to their other areas of responsibility, has also grown up. In addition to the work conducted by the wide range of professional accounting and taxation bodies and those in place for the legal professions, there are bodies that have been established to support the work of those professionals working in the field of compliance. These bodies include the Association of Certified Anti-Money Laundering Specialists (ACAMS)38 and (in the UK) the Institute of Money Laundering Prevention Officers (IMLPO)39 and the Anti-Money Laundering Professional (AMLP) Forum40. ACAMS is a global organisation with more than 10,000 members in 160 countries for AML professionals drawn from all of the regulated sectors. It states that: the mission of ACAMS is to advance the professional knowledge, skills and experience of those dedicated to the detection and prevention of money laundering around the world, and to promote the development and implementation of sound anti-money laundering policies and procedures. IMPLO draws on the same membership as ACAMS, but is focused on the UK. It was established in 2001 and originally supported AML practitioners from the financial institutions. However, as the scope of the regulations widened, so did the membership base. Being UK-based, the membership of the organisation is much smaller, at approximately 1,200. The AMLP Forum fosters participation of heavyweight AML, CTF and anti-bribery and corruption professionals, both from within financial services, insurance, money service businesses, gambling sector, real estate and other regulated industries in the UK, Europe and internationally, and covers a broad spectrum of institutions.

4.2

Officially Backed and Voluntary Organisations

Learning Objective 3.4.3

Know which organisations are officially backed by governments and those that are voluntary

The list of organisations in Section 4.1 can be divided into two categories. Firstly there are those that are best described as industry associations that will be consulted on changes to legislation and who provide guidance on interpretation to their membership. These include IOSCO, IAIS, the Wolfsberg Group and the JMLSG, together with the professional bodies. The second group comprises those organisations with government backing. These include the BCBS (although its original mandate is far wider than AML, encompassing as it does the stability and integrity of the financial system), and the EU and the CoE. The Egmont Group is a support network and does not have official government support, although the individual FIUs have such support.

38 www.acams.org 39 www.implo.com 40  http://www.amlpforum.com/

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4.3

Consent Regimes

Learning Objective 3.4.4

Understand what is meant by a ‘consent regime’

4.3.1 Consent Regimes Consent regimes, which require reporting institutions such as banks or other financial institutions to seek permission to proceed with transactions which they have identified as suspicious, have been introduced in some jurisdictions. They are one method by which FIUs and/or law enforcement or other control agencies can intervene to stop transactions or freeze assets. It is not a requirement of the FATF recommendations to have such a regime, but such provisions do appear in the Third EU Money Laundering Directive, Article 24(1) of the Directive states: Member states shall require the institutions and persons covered by this Directive to refrain from carrying out transactions which they know or suspect to be related to money laundering or terrorist financing until they have completed the necessary action in accordance with Article 22(1) (a). In conformity with the legislation of the member states, instructions may be given not to carry out the transaction.

Find it yourself The UK circular on consent is available at: https://www.gov.uk/government/publications/proceeds-of-crime-act-2002-obligations-to-reportmoney-laundering-the-consent-regime

4.3.2 The Legal Basis of Consent Regimes Learning Objective 3.4.5

Know the legal basis on which the consent of a Financial Intelligence Unit (FIU) must be obtained

Consent regimes must be specifically catered for in legislation, usually relating to the making of SARs. The UK operates a consent regime under Section 335 of the POCA. The Home Office has issued a circular 029/2008 – ‘Proceeds of Crime Act 2002: Obligations to Report Money Laundering – the Consent Regime’41, providing guidance on the operation of the consent regime in order to ensure consistency of practice on the part of the law enforcement agencies (LEAs) in considering requests for consent.

41 http://www.homeoffice.gov.uk/about-us/corporate-publications-strategy/home-office-circulars/circulars-2008/029-2008/

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Money Laundering

Within the provisions of the regime, by making a disclosure before the prohibited act occurs and obtaining consent, a person avoids liability in relation to the principal ML offences contained within the act. As stated, the consent provisions allow LEAs an opportunity to gather intelligence or intervene in advance of potentially suspicious activity taking place.

4.3.3 The Scope of Consent Regimes Learning Objective 3.4.6

Understand the scope of the FIU consent regime

Consent regimes usually cover both ML and TF or, in those countries with separate regimes, tend to be similar in content and focus (although differences may relate to reporting obligations and the wording of the legislation). For example, in the UK there is a separate (but very similar) consent regime in the Terrorism Act. In the UK, decisions on requests for consent to proceed with a transaction or activity under Section 335 of POCA 2002 are taken by SOCA in consultation with the relevant LEA. The Home Office circular sets out the high-level principles by which LEAs should make decisions on consent, and how these should be applied.

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As set out in Paragraph 3 of circular 029/2008, the consent regime requires that individuals and businesses within the regulated sector are required to report any suspicious transactions and to seek specific consent, before such transactions may be completed.

End of Chapter Questions Think of an answer for each question and refer to the appropriate section for confirmation. 1.

Name the three stages of the money laundering process. Answer reference: Section 1.1.1

2.

Explain what is meant by CDD. Answer reference: Section 1.2

3.

List the five money laundering offences created by POCA 2002. Answer reference: Section 1.3

4.

What is the penalty for contravening Sections 327 to 329 of POCA 2002? Answer reference: Section 1.3.3

5.

Explain the three ways in which the IMF and World Bank support countries in their AML/CFT efforts. Answer reference: Section 2.1.2

6.

What was the main focus of Article 3 of the Vienna Convention? Answer reference: Section 2.2.1

7.

List the money laundering offences created by the Palermo Convention Answer reference: Section 2.2.2

8.

What contribution to AML was provided by the Merida Convention? Answer reference: Section 2.2.3

9.

Describe the contributions to AML of each of the three EU Directives. Answer reference: Section 2.2.4

10. Which year is the current FATF mandate due to expire in? Answer reference: Section 3 11. Describe what FATF mutual evaluations have assessed. Answer reference: Section 3 12. List the three elements making up the FATF 40 Standards. Answer reference: Section 3 13. How many FATF Recommendations are there? Answer reference: Section 3 14. Name the two countries that require the highest level of international surveillance. Answer reference: Section 3.3

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15. What does FATF Recommendation 1 say about risk? Answer reference: Section 3.4 16.

What is a PEP? Answer reference: Section 3.7.2

3

17. Describe what a DNFBP is and list them. Answer reference: Section 3.7.5 18. Explain the main functions of an FIU. Answer reference: Section 3.9.2 19. List the FSRBs. Answer reference: Section 4 20.

What is the AML role of the BCBS? Answer reference: Section 4.1.1

21. What is MONEYVAL and what does it do? Answer reference: Section 4.1.5 22. What is the name of the FIU within the UK? Answer reference: Section 4.1.6 23.

How many banks are there in the Wolfsberg Group and what is its aim? Answer reference: Section 4.1.7

24.

Describe what is meant by a consent regime. Answer reference: Section 4.3.1

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Chapter Four

1. Background

87

2. Measures to Combat Terrorist Financing (TF)

96

3. Standards for Countering the Financing of Terrorism (CTF)

99

4. Terrorist Listing

101

This syllabus area will provide approximately 12 of the 100 examination questions

4

Terrorist Financing

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Terrorist Financing

1. Background Learning Objective Understand the similarities and differences between money laundering and financing terrorism

Terrorism involves violence, or the fear of violence, generally aimed at civilians, with the aim of compelling a government or international organisation to change their policies or actions. The basis of such conflict may be territorial disputes, perceived grievances or actions by governments or other groups seen as intended to subjugate or attack the terrorist organisation, its members and its goals. Terrorist organisations are often long term, working within and across national boundaries, relying on support (voluntary or coerced) from local populations, other groups, and diasporas, with access to materials, training and funds to pursue their intentions. The terrorist attacks in the US in 2001 undoubtedly focused the international community on the issue of TF, but it should be recognised that terrorism as a phenomenon, and therefore the need for terrorists to raise funds (and for the authorities to stop them doing so), had existed long before this date. For example, the UK had struggled with terrorist activity related to Northern Ireland on and off for over a century and had recognised the need to for specific legislation to deal with TF as long ago as the 1970s. We looked at the formal definition of TF in Chapter 1, which came from the UN Convention in 1999. But since 2001, greater attention has been paid to the problems of combating TF worldwide and, in particular, the use of similar tools as those developed to combat ML, as illustrated by the expansion of the FATF mandate and the SRs adopted by that body. It is in this context that it is important to consider the differences between TF and ML. They are often spoken about simultaneously (eg, in the title of the FATF Recommendations) and many of the tools used in financial institutions to detect them are dual-purpose. However, the two activities are distinctly different, as evidenced by the need for different criminal offences to deal with them. The most fundamental difference concerns the source of the funds themselves. TF, whether it be the collection of funds for use generally by terrorist groups (to support their organisation, operatives and dependents) or the provision of money needed to undertake specific terrorist operations, is about the use of money from any origin for an illegal purpose. ML, on the other hand, is a process that always applies to the proceeds of an illegal act, often with the intention of using the integrated funds for legal purposes, such as purchasing luxury goods. Of course, there are overlaps. TF may (but not necessarily) involve illegal proceeds, because criminal activity is sometimes used to fund terrorism. The methods used by terrorist financers may be similar to those used by money launderers – both groups, albeit for different purposes, need to move money around and to disguise its origin, will seek to use cross-border transfers to frustrate monitoring and tracking by the authorities, and frequently find themselves dealing with physical cash. Terrorists and their financial backers will use false identities and anonymous structures, in the same way as money launderers, to disguise their own involvement in the money trail.

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4.1.1

It is often said that, compared with the billions of dollars involved in drugs trafficking, large-scale bank fraud and tax evasion, TF frequently involves insignificant sums. Because the amounts involved are low, it is also argued that they are impossible to spot. Such arguments are supported to an extent by quantitative information, particularly when looking at direct costs of a particular operation, such as purchasing weapons or explosives, transport and communication. The table below, for example, sets out FATF’s 2008 estimates of the direct costs of certain high-profile terrorist acts1.

Direct Costs of a Terrorist Attack Attack

Date

Estimated cost

July 2005

£8,000

March 2004

$10,000

November 2003

$40,000

5 August 2003

$30,000

Bali bombings

12 October 2002

$50,000

USS Cole attack

12 October 2000

$10,000

7 August 1998

$50,000

London transport system Madrid train bombings Istanbul truck bomb attacks Jakarta JW Marriott Hotel bombing

East Africa embassy bombings

Conversely, some terrorist groups have extensive business operations which leverage their ability to motivate or intimidate whole communities. Such groups may also have extensive international operations based on an ability to exploit fear or support amongst specific groups and individuals in foreign countries. Such organisations, their physical infrastructure, members and members’ dependants can be expensive to support.

1.1

Proliferation Finance and Terrorist Financing (TF)

Learning Objective 4.1.2

Know the similarities and differences between proliferation finance and terrorist financing

As mentioned in Chapter 3, Section 3, the FATF has expanded its mandate in recent years not only to include ML and TF, but also the topic of financing the proliferation of weapons of mass destruction (shortened to proliferation finance2 for convenience, but it is important to keep in mind what proliferation refers to).

1 2

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FATF, Terrorist Financing, 2008 found at: www.fatf-gafi.org/dataoecd/28/43/40285899.pdf The FATF definition of Proliferation Financing was provided in Chapter 1, Section 1.4

Terrorist Financing

With regards to proliferation finance, the funds may derive from state (or pseudo-state) actors and the activity could involve front companies with legitimate trade purposes3. Of course, in the case where proliferation of weapons of mass destruction is intended for terrorist purposes, the two financing activities converge. The challenges faced by financial institutions in dealing with terrorist and proliferation finances may also be similar. The potential use of state sponsors, legitimate trade and dual-purpose goods exacerbates the challenge of detection, especially as financial institutions lack expertise in export control systems (a common tool used to combat proliferation activity), by imposing restrictions on export of certain types of goods that could be used for proliferation activity)4 and in any case when those involved in trade finance may have little information to act on. Sanctions lists and activity-based sanctions are used to counter both terrorism and proliferation. In particular, UN Security Council Resolution (UNSCR) 1737, passed in 2006, imposes financial sanctions against designated persons who engage in, directly associate with or provide support for Iran’s proliferation-sensitive nuclear activities or the development of nuclear weapon delivery systems. A later resolution, UNSCR 1803 (2008), also called on states to exercise vigilance over their financial institutions’ activities with banks domiciled in Iran, which has led to a reporting and licensing regime, and UNSCR 1929 (2010) imposed further sanctions, including a ban on investment in sensitive nuclear-related activities abroad.5 Similarly, UNSCRs 1718 (2006) and 1874 (2009) imposed measures against those involved in, or who support, North Korea’s nuclear and ballistic missile programmes. The EU also implements regulations which allow the EU to apply listings independently of the UN (eg, Regulation 267/2012, as amended by Regulation 1263/2012, prohibits EU financial institutions from transferring money to and from Iranian banks, as well as to and from individuals). Similar mechanisms are used by the UN and EU for CTF purposes, as we will see later, in Sections 2.2.1, 4.1 and 4.2 of this chapter. Perhaps recognising the difficulties in identifying proliferation finance through other means, such as transaction and account monitoring, when the FATF issued their revised recommendations in 2012, they included just one specific recommendation relating to proliferation finance. Recommendation 7 deals with the implementation of targeted financial sanctions relating to proliferation.

3 4 5

See the FATF Typologies Report on Proliferation Financing found at: http://www.fatf-gafi.org/topics/ financingofproliferation/documents/typologiesreportonproliferationfinancing.html See Appendix III of the Wolfsberg Group Trade Finance Principles (2011): www.wolfsberg-principles.com/pdf/WG_Trade_ Principles_Paper_II_Final_11-03-11.pdf. See UK Treasury page on the Iran (Nuclear Proliferation) sanctions regime: www.hm-treasury.gov.uk/fin_sanctions_iran_ nuclear.htm

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Both TF and proliferation financing are examples of what is increasingly being called threat finance: the movement or provision of funds to finance illicit acts or networks, that pose some form of security threat. In both cases it is possible that the funds involved represent the proceeds of crime, but it is not necessarily the case. Rather than involving the proceeds of crime, threat finance involves what have been described as the precedes of crime, funds from any source that will be used (or are intended to be used) for illicit activity. In this sense, there is a similarity between TF and proliferation financing.

Although there has been some recent study of the typologies of proliferation (see the FATF and Wolfsberg Group6 papers on this subject), it is generally recognised that the mechanisms are not well understood, particularly in the private sector. However, the involvement of state actors and legitimate trade vehicles is widely acknowledged. TF, on the other hand, more often involves smaller sums and fundraising from individuals (willing or unwilling). With the development of a franchise model for terrorist groups such as Al-Qaida, the central control of TF, which is likely to be exercised in proliferation activity, has diminished. Thus, although conceptually these examples of threat finance are similar, practically they can be strikingly different.

1.2

Combating the Terrorist Financing (TF)

Learning Objective 4.1.3

Know the objectives of combating the financing of terrorism: monitoring of potential terrorists; prevention of terrorist attacks; harm reduction; prevention of further acts

Effective international CFT activity rests on a number of pillars. These include: • a good understanding of risks, vulnerabilities and defences; • robust and co-ordinated public sector action against potential and actual acts of terrorism, terrorists • • • •

and terrorist assets; reliable, preventative measures in private sector areas at risk of attack or abuse by terrorists; a timely, appropriate and secure flow of data between sectors; effective legal systems and institutions to support action; national and international co-operation with regard to data, civil and criminal justice measures.

The emphasis on data, especially financial data, is essential at the strategic level to establish the scale of the problem and to try to assess what constitutes a proportional response. At the lower level, too, data are needed to support operational responses, including the identification and tracking of suspicious assets or people.

1.2.1 The Monitoring of Potential Terrorists Monitoring the economic activity of suspected terrorists and their actual or possible supporters has two main advantages. First, their income and expenditure patterns can provide evidence to suggest whether an individual or group should be monitored in the first place. Such evidence helps to determine whether to continue to monitor a suspect and, if so, what sort of further economic information would be useful and obtainable. Second, analysis of economic data can help suggest when the nature of the terrorist activity may be changing gear, either upwards towards an attack or downwards towards non-violent protest. Knowing how terrorist resources are used, and by whom, can help reveal the identity, plans and resources of terrorists and, where they exist, their networks. It enables more informed and effective decisions on how to deal with threats, individuals and assets. 6

90

Proliferation finance is covered in The Wolfsberg Trade Finance Principles (2011) found at: http://www.fatf-gafi.org/ topics/financingofproliferation/documents/typologiesreportonproliferationfinancing.html

Terrorist Financing

The aim of monitoring financial activity is, given what may be very sketchy initial information, to build up an increasingly reliable picture in answer to a series of questions about suspicious activity: Who is involved? What are they doing and why? With whom are they doing it? What or who is the object of that activity? Is there an innocent explanation? Is the activity potentially harmful?

The picture is based on financial information and the inferences that can be made from it. By combining this data with other types of (non-financial) information, the true nature of actors and activities can be uncovered. The size of an individual transaction and its apparent nature can be important, but its full value relies on further information with which to establish context and relevance. For example, an internet subscription might lead to content analysis of a suspect’s online activity to learn about their intentions, contacts and movements. The same applies to any other transaction or set of transactions which may establish a pattern. The information gained can relate not just to individuals but to networks and mechanisms used and abused by terrorists.

1.2.2 The Prevention of Terrorist Attacks If suspicions are confirmed, timely intervention based on economic data may be possible. It may take the form of action against individuals, but it can also involve action against their assets and infrastructure: • Confirmed terrorists may be tracked by use of the credit card or bank account they are known to use.

The type of purchase, eg, a hotel reservation or flight details, may give useful information on plans and timing. • If a terrorist has money to finance an attack deposited with a bank, the bank may be asked to freeze the account. • If a business is unwittingly providing facilitation to terrorists, such as storage, it will be possible to either monitor or disrupt activity. Financial institutions may be asked to provide this information in near-real time during critical incidents, putting strain on both their systems and resources, but such information has proved crucial to successful disruption of terrorist attacks.

1.2.3 Harm Reduction Harm reduction is generally orientated towards hardening possible targets – making them more difficult to approach and resistant to attack – if the prevention of an attack is not possible. It is also about mitigating the impact of an attack once it has occurred. The targets here are not just individuals and physical locations, but infrastructure that can be abused by terrorists, such as the financial system, the provision of professional services, and markets for goods, which are easy to turn into cash.

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• • • • • •

These are of course the same structures used by money launderers, and AML measures can also be applied to reduce harms to business infrastructure caused by TF. The harm lies in the abuse of the institution or individual providing goods and services and the wider damage done to their reputation and that of the sector when abuse is uncovered. Lastly, harm reduction also includes making sure the measures necessary to fight TF do not do the terrorists’ work for them by alienating the public that the measures seek to protect. Thus, one objective of TF is to find proportionate responses to threats, not disproportionate ones that adversely impact economic activity for no material gain in safety.

1.2.4 The Prevention of Further Acts Combating TF on the basis of common sense measures principles or by exploiting similarities with ML is not only possible but, as we have seen, desirable. The activity is sufficiently different from ML to allow analysis of trends and techniques in their own right. The history of successful attacks shows that it is, unfortunately, not possible to prevent all attacks. However it is possible to learn from them, and to use such knowledge in the prevention of further attacks. Economic analysis can help prevention in a number of ways: • Analysis of clues from an actual attack, eg, bank card checks on individuals, and fare purchase

• • • •

records suggested by analysis of CCTV footage, can help establish the identity, bases and homes of attackers. Analysis of personal finances can establish social behaviour and interaction with other individuals and groups. Analysis of these groups and individuals can help identify other potential suspects or establish if it was an isolated occurrence. The type of abuse of financial infrastructure necessary for an attack to be possible can be isolated and loop holes closed, where possible. Wider economic research among the populations from which terrorists emerge can isolate economic factors that give rise to extremism and economic arguments that are used to justify it.

In particular, financial investigations have come to rely heavily on identifying telecommunications transaction data (especially internet and mobile phone bills) to establish links between individuals and groups. Combined with other financial information, such data can be used to compare methods and approaches and identify those who may otherwise go undetected, so reducing the chances of successful terrorist attacks.

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Terrorist Financing

1.3

The Challenges of Combating Terrorist Financing (TF)

Learning Objective Understand the challenges of combating the financing of terrorism: potential erosion of due process and human rights; risks of incorrect or inadequate controls; challenge of detection given low visibility; reliance on intelligence

4

4.1.4

1.3.1 The Potential Erosion of Due Process and Human Rights In many countries, legislation addressing terrorism, terrorist organisations and TF expanded greatly after 9/11, in response to UN activity and pressure from affected countries. Government organisations and officials gained extensive powers to designate groups as terrorist organisations; designate individuals as terrorists; and to access wide categories of confidential information. However, the results of keenness to eliminate risk often entailed the curtailment, omission or other erosion of procedural safeguards, intended to protect individual and corporate economic actors against mistakes and abuse. Specifically, laws in some countries authorised government officials to target individuals and organisations on the basis of secret evidence, some of which was gathered on the basis of mere hearsay or happenstance. Some individuals and organisations found they were suddenly caught up in the application of CFT measures without charges being formally filed, and without having opportunity to respond or of access to meaningful judicial review. Assets could be frozen pending investigation on the basis of non-judicial decisions by officials. Finally, at the corporate level, NPOs with agendas that are legal, but opposed to the action of governments and influential stakeholders, or which support legal causes in countries with a history of terrorist activity, may be targeted by disruptive inquiries under CFT powers. It can be difficult and expensive for organisations and individuals who may be unfairly or unjustly targeted or sanctioned to obtain advice and support, as potential advisers fear being branded as supporters of alleged terrorists.

1.3.2 The Risks of Incomplete, Incorrect or Inadequate Controls In such an environment it is easy for incomplete, incorrect or inadequate controls to be introduced. The main problems arise when controls: • do not target the risk they are intended to prevent, or do so in a way that conflicts with other

• • • •

principles or rules; problems also arise when controls require knowledge or technology that is not easily obtainable; do not reflect the way individuals, groups and firms behave in the normal course of business and the marginal cost imposed by new controls on firms and individuals; are hard to police or require very intensive policing to be effective; require complex underlying arrangements to be put in place; are easily overtaken by events and lack design resilience.

93

As a result, the wrong people can be targeted and innocent parties affected, alienating communities and exacerbating tensions. Sometimes, the causes can be trivial. For example, controls that require foreign names and addresses to be compared with lists of suspected individuals assume there is uniformity in the spelling (and transliteration) of a name and the organisation of addresses. This may be true in some economies but it is not the case in others. Effective controls take time and experience to develop and, until they are refined by experience, they risk under- or over-regulating activity. This fact is well known to terrorists and is part of the response they seek to provoke, as over-reaction, especially against minority groups, can act as a recruiting sergeant for terrorism.

1.3.3 The Challenge of Detection Given Low Visibility Not unsurprisingly, terrorist groups go to great lengths to avoid detection, especially those operating international networks, which require a response on global, regional and national levels. Whether they are a network of networks (or franchise) structure or individually mounted suicide attacks, terrorists have secrecy as a common trait. A great number of strategies and tactics designed to remain unnoticed are known, taught and being used. Terrorist groups are likely to have good access to false documentation, when required, and networks of ideological sympathisers, who, whilst not involved in terrorist acts, may provide logistical and financial support, using their legitimate businesses. Indeed, some terrorists hide in plain sight, using their own names and normal (ostensibly legitimate) financial arrangements to fund their activities. Detecting that a particular individual is using some of his salary to rent a storage unit for terrorist purposes, rather than the numerous possible legitimate explanations for this activity, is approaching impossible, in the absence of other evidence or intelligence. Unfortunately for the financial sector and DNFBPs, such other intelligence (when it exists) is often in the hands of the authorities and cannot, or is not, shared.

1.3.4 Reliance on Intelligence Good financial intelligence is thus of major importance, but its true significance may only be recognised when combined with other intelligence, sometimes derived from very sensitive sources. Successful early detection, prevention, and investigation of terrorism are dependent on the smart combination of signals and pieces of evidence from a wide range of public and private sources, nationally and internationally. Unfortunately for those charged with identifying suspected terrorists in their customer base or suspected terrorist activity through their transaction monitoring, they will only see a fraction of this intelligence, often only that in the public domain, making their job extremely difficult. Efforts have been made by the authorities to share more intelligence with the private sector when possible, but even then the intelligence may not be in a useful form for the controls operated by firms.

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Terrorist Financing

1.4 Sanctions Learning Objective Know the purpose and application of sanctions screening

Sanctions are generally imposed by international bodies such as the EU and the UN, and individual countries. They prohibit certain activities with targeted individuals, entities, organisations and countries. Sanctions are normally used by the international community for one or more of the following reasons: to encourage a change in the behaviour of the target(s); to apply pressure on the target(s) to comply with international standards or objectives; to prevent conflict and human rights violations; as an enforcement tool when international peace and security has been threatened and diplomatic efforts have failed; • to prevent and suppress the TF and terrorist acts; • to prevent the proliferation of weapons of mass destruction. • • • •

As far as financial institutions are concerned, the prohibited activity may include conducting business, operating accounts or facilitating transactions. They may be required to freeze the assets of listed entities. Sanctions regimes require absolute compliance and impose criminal penalties on those individuals and firms who breach them. Sanctions screening is designed to avoid such breaches. Sanctions apply, and therefore firms are at risk of a breach, immediately an individual or entity is placed on an applicable list for a sanctions regime. Financial institutions must put systems and controls in place that will identify whether they are conducting business with any such individuals or entities, which can be a considerable challenge for large firms conducting millions of transactions daily. Such firms are likely to use one of several commercially available automated systems, which will update sanctions lists automatically. Smaller firms may use more manual processes and efforts have been made by the authorities involved to supply the data in a timely and usable format. In the UK, HM Treasury publishes a consolidated list of sanctions targets in a variety of data formats7. The screening process will throw up names of possible matches with the list. These possible matches must be reviewed by trained staff and confirmed matches reported to the authorities. Screening should be carried out against all customers, at the time of establishing a business relationship, and it is good practice to carry out periodic reviews – for example of the whole customer list, or when the consolidated list changes. Firms should also put in place measures to screen transactions (ideally in real time, ie, before a payment instruction is executed).

7

www.hm-treasury.gov.uk/fin_sanctions_index.htm

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4.1.5

The JMLSG has published guidance on compliance with the UK sanctions regime in Part III of its Guidance8. The Wolfsberg Group has also addressed the issue in their 2009 paper on AML Monitoring, Screening and Searching (2009).9 The FATF has also issued guidance for jurisdictions, such as their paper on International Best Practices: Freezing of Terrorist Assets (revised in 200910) and Guidance on implementing financial provisions of UNSCRs to counter the proliferation of weapons of mass destruction (published in 2007).11 In addition to the risk of breaching sanctions, firms must also be aware of their regulatory risk. In the UK, the FSA took an interest in systems and controls for sanctions compliance. In April 2009 it published a report on financial services firms’ approach to financial sanctions12, which found that there was significant scope across the industry for improvement in firms’ systems and controls. To quote Philip Robinson, then the Director of Financial Crime at the FSA: The use of financial sanctions to deliver public policy objectives has risen rapidly up the political agenda in the UK, in the European Union and at the United Nations. It is important that firms understand that having systems and controls relating to financial sanctions is an integral part of complying with the FSA’s requirements on financial crime.13

2. 2.1

Measures to Combat Terrorist Financing (TF) The United Nations (UN) International Convention for the Suppression of the terrorist financing (TF)

Learning Objective 4.2.1

Understand the main provisions of the United Nations International Convention for the Suppression of the Financing of Terrorism

The international community’s efforts to reduce terrorism and TF are led by the UN. The General Assembly of the UN has passed 16 universal instruments (13 instruments and three amendments) against international terrorism. In September 2006 the UN set out a new global strategy, which it renewed in September 201014, when member states reiterated strong and unequivocal condemnation of terrorism in all its forms and manifestations, by whomever, wherever, and for whatever purposes.

8 9

JMLSG Guidance Part III (October 2010), found at: www.jmlsg.org/download/6130 Wolfsberg Statement on AML Screening, Monitoring and Searching (2009) found at: http://www.wolfsberg-principles. com/pdf/Wolfsberg_Monitoring_Screening_Searching_Paper_(2009).pdf 10 www.fatf-gafi.org/documents/guidance/bestpracticesfreezingofterroristassetsspecialrecommendationiii.html 11 www.fatf-gafi.org/topics/fatfrecommendations/documents/unscr-proliferation-wmd.html 12 FSA Financial services firms’ approach to UK financial sanction (2009) found at www.fsa.gov.uk/pubs/other/Sanctions_ final_report.pdf 13 FSA Small firms’ approach to financial sanctions (2009) www.fsa.gov.uk/smallfirms/pdf/financial_crime_report.pdf and associated fact sheet at www.fsa.gov.uk/smallfirms/resources/pdfs/Sanctions.pdf. 14 UN Global Counter-Terrorism Strategy, found at: http://www.un.org/en/sc/ctc/action.html

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1. tackling the conditions conducive to the spread of terrorism; 2. preventing and combating terrorism; 3. building states’ capacity to prevent and combat terrorism and to strengthen the role of the UN system in that regard; and 4. ensuring respect for human rights for all and the rule of law as the fundamental basis for the fight against terrorism. The 1999 International Convention for the Suppression of the Financing of Terrorism15 (the 1999 Convention) is a key reference point. It obliges member states to establish and maintain a general anti-terrorist financing regime to internationally accepted minimum standards. In summary, it: • requires parties to take steps to prevent and counteract the TF, whether direct or indirect, through

groups claiming to have charitable, social or cultural goals or which also engage in such illicit activities as drug trafficking or gun-running; • commits states to hold those who finance terrorism criminally, civilly or administratively liable for such acts, by criminalising TF under domestic legislation and creating penalties in line with the grave nature of the offences; • requires the identification, freezing and seizure of funds allocated for terrorist activities, as well as the sharing of the forfeited funds with other states on a case-by-case basis; • requires close co-operation between states in investigations and evidence gathering. Importantly it excludes bank secrecy, tax regulations and political dissent being used as an excuse not to co-operate and allows for the creation of information-sharing mechanisms between states. It is important to remember that the 1999 Convention applies to cross-border offences and not just purely domestic ones.

2.2

The United Nations Security Council (UNSC)

Learning Objective 4.2.2

Understand the work of the United Nations Security Council in relation to the financing of terrorism: Resolution 1267 (1999); Resolution 1373 (2001); Resolution 1390 (2002)

In addition to UN General Assembly resolutions and the Convention, the UN acts on TF via the Security Council (UNSC) and its relevant bodies – the Counter-Terrorism Committee (CTC), the Counter-Terrorism Committee Executive Directorate (CTED) and the Counter-Terrorism Implementation Task Force (CTITF).

15 UN International Convention for the Suppression of the Financing of Terrorism, found at http://www.un.org/law/cod/ finterr.htm

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Member states have prime responsibility for implementing the strategy in their own country and, along with other international and regional organisations, have a role in facilitating and promoting co-ordination and coherence to that end at national, regional and global levels. The UN’s counter-terrorism strategy rests on four pillars:

2.2.1 UN Security Council Resolutions (UNSCR) Connected to Combating of Finance of Terrorism (CFT) In addition to establishing the 1999 Convention, the UN has reacted in response to specific threats, principally by means of Security Council Resolutions (UNSCRs). UNSCRs 1267 and 1373 are key instruments in CFT policy. Whilst such resolutions are relatively quick in the making, they typically result from short political, as opposed to long technical, processes. As information on threats becomes available, additional resolutions are used to encompass them. Both the Convention and all the UNSCRs summarised below mandate action that implies the use of financial intelligence: • Resolution 1267 (1999) – promulgated in response inter alia to attacks in Africa, it established a

Sanctions Committee on Taliban and Al-Qaida16, which publishes lists of proscribed individuals and entities, and requires assets to be seized. The resolution, which has been updated several times by other UNSCRs (including 1390 (2002)), required all member states to freeze the assets of, prevent the entry into or the transit through their territories of, and prevent the direct or indirect supply, sale and transfer of arms and military equipment with regard to, any individual or entity associated with Al-Qaida, Usama bin Laden and/or the Taliban as designated by the Council’s Al-Qaida and Taliban Sanctions Committee.

In June 2011, UNSCRs 1988 and 1989 (2011) separated this regime into two parts, one dealing with Al-Qaida and the other country-specific, with separate listing, delisting and monitoring mechanisms. • Resolution 1373 (2001) – promulgated after the 2001 attacks in the US, this instrument obliged

all states to criminalise assistance for terrorist activities, deny financial support and safe haven to terrorists, and share information about groups planning terrorist attacks. However, unlike the specific Al-Qaida/Taliban regime established under UNSCR 1267 (1999), there is no listing mechanism at the UN level. Many countries have introduced their own listing mechanism to comply with these requirements. • Resolution 1390 (2002) – updated the 1267 regime by targeting Osama bin Laden, members of

the Al-Qaida organisation and the Taliban and other individuals, groups, undertakings and entities associated with them. • Resolution 1540 (2004) – called on states to establish controls to prevent access to weapons of

mass destruction by non-state actors, ie, terrorist groups. • Resolution 1566 (2004) – provided for the extension of these measures to newly targeted terrorist

groups. It should be remembered that, when resolutions are issued under Chapter VII of the UN Charter, the UNSC’s resolutions are mandatory and have an immediate effect on all UN member states. UNSCRs 1373 and 1540 are particularly important in this regard.

2.2.2 Monitoring and Assistance The UN helps states to implement their CFT finance measures in a number of ways. Its Counter-Terrorism Committee (CTC) has published a legislative handbook covering the UN’s 12 major anti-terrorism conventions and can call on another body, the Counter-Terrorism Committee Executive Directorate (CTED) for technical support and to facilitate external technical assistance, co-operation and co-ordination. 16 UN Al-Qaida Sanctions Committee, http://www.un.org/sc/committees/1267/

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The Counter-Terrorism Implementation Task Force (CTITF) ensures that the UN system is attuned to the needs of member states with regard to CT issues and provides them with the necessary policy support to spread in-depth knowledge of UN strategy. It also provides technical assistance where necessary and co-ordinates the activity of 25 other UN and connected bodies. The UN works closely with international regional organisations, and meets annually with regional bodies such as the EU on a technical level.

2.2.3 Country Reports There are mandatory UN reporting obligations on countries. However, the processes by which reports are made and implementation reviews conducted vary by instrument. Country evaluations are meant to inform, maintain level playing fields and capture best practice. They rely for transparency, objectivity and fairness on a common evaluation methodology. The UN does not blacklist states which fail to meet treaty obligations. One issue thrown up by country reports is that UN activity combines long-term general structural measures with short-term specific initiatives such as the requirements of articles in conventions (which are developed through often lengthy consensus processes) and clauses of individual resolutions (which are often drafted summarily in direct response to an event). UNSCRs are decided by members of the UNSC rather than the General Assembly, so the decision-making process is quicker.

3.

Standards for Countering the Financing of Terrorism (CFT)

3.1

The FATF and Terrorist Financing

Learning Objective 4.3.1

Know the FATF Recommendations relative to terrorist financing

As discussed in Chapter 3, the FATF’s mandate, specifically extended to cover TF, in 2001, led to the formulation of an additional 9 Special Recommendations relating to TF. However, it had been argued that some of them were not particular or unique to TF, but applied to financial crime generally. In the 2012 revision of the FATF Standards, the Special Recommendations were removed and their provisions integrated into the main body of the 40 Recommendations.

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The UNODC also has a technical assistance role via its terrorism prevention branch (TPB). The UNODC publishes checklists for the UN’s 12 major anti-terrorism conventions and protocols and UNSCR 1373 as a well as a Guide for the Legislative Incorporation and Implementation of the Universal Instruments against Terrorism. In addition to the CTC, the Security Council has set up committees to monitor implementation of Resolutions 1267 and 1540. The monitoring team issues regular reports and updates, designed to improve effective implementation of sanctions on Al-Qaida and the Taliban. There is an expert panel to assist with implementation of UNSCR 1540.

The only Recommendations that deal specifically with TF now are Recommendations 5, 6 and 8 (Recommendation 7 deals with the implementation of sanctions relating to proliferation finance, as mentioned in Section 1.1 of this chapter): • Recommendation 5 – criminalising TF on the basis of the UN Convention. • Recommendation 6 – implementation of sanctions relating to TF. • Recommendation 8 – measures relating to NPOs (which are particularly vulnerable to misuse

for TF). That is, of course, not to say that the measures provided for in the other Special Recommendations have been forgotten, rather that, where possible, TF issues have been incorporated in similar measures also relating to ML (so, for example, risk assessments required under Recommendation 1 must assess both ML and TF risks). Some of this amalgamation reflects the point that tools used by money launderers and terrorist financers will be similar – wire transfers, cross-border movements of cash and alternative remittance systems are not regarded as being solely misused for TF. Equally, some of the responses from the private and public sectors are the same – suspicious transactions must be reported if the suspicion is of ML or TF. CDD is very important in CTF work, as well as AML and international co-operation is important in both spheres, too.

3.2

The Wolfsberg Group

Learning Objective 4.3.2

Understand the Wolfsberg Group of Banks’ statement on the Suppression of the Financing of Terrorism

As described in Chapter 3, Section 4.1.7, the Wolfsberg Group is an association of 11 global banks, which aims to develop financial services industry standards, and related products, for KYC, AML, and CFT policies. They published their Statement on the Financing of Terrorism in January 2002.17 The Statement recognised the new challenges posed by TF, including the key difference that the funds need not be derived from criminal activity, and accepted that financial institutions have a role to play in prevention, detection and information-sharing. The Group committed to participating in the fight against terrorism in a manner which is non-discriminatory and is respectful of human rights. The Statement highlights ways in which financial institutions can assist: • KYC – an adherence to existing policies and procedures and the proper identification of customers

were recognised as important, specifically to improve the efficacy of the searching of lists of known or suspected terrorists. • High-risk sectors and activities – applying enhanced and appropriate CDD in relation to those sectors and activities identified by competent authorities as being widely used for TF. • Monitoring – the continued application of monitoring procedures for unusual or suspicious transactions (whilst recognising the difficulties in identifying those linked to TF).

17

Wolfsberg Statement on The Suppression of the Financing of Terrorism, http://www.wolfsberg-principles.com/financingterrorism.html

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The Wolfsberg Group also identified the need for global co-operation in order to enhance the contribution financial institutions are able to make to the fight against TF. In relation to lists, as you will see from Section 4 of this chapter, they asked for official lists of suspected terrorists, with appropriate details and information to assist their searching and prompt feedback on reports made by financial institutions. With regard to monitoring, they sought the provision of meaningful information about TF patterns, techniques and mechanisms.

Terrorist Listing

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4.

One of the key suggestions from the Wolfsberg Group was the provision of official lists of suspected terrorists on a globally co-ordinated basis from the relevant authorities. This grew out of recognition of the difficulty already described of identifying TF transactions through monitoring. The Group also made a plea for adequate information that would enable institutions to search their customer database efficiently and for prompt feedback from the authorities. Practical experience of dealing with all kinds of lists produced since the 9/11 attacks, from sanctions lists with UN authority to suspect lists received from local authorities with no clear legal basis, had demonstrated the problems of searching on incomplete information (such as no date of birth or address and different spellings of names). And when potential matches had been found, and reports made, little feedback had been forthcoming as to the accuracy of the matches, possibly because the relevant authorities were overwhelmed by volume (particularly in the immediate aftermath of 9/11) or in fact were unable themselves to prove or disprove the suggested identification. In the years since, efforts have been made to improve the listing procedures, through provision of more complete and accurate information, improved reporting and feedback mechanisms and public-private sector co-operation, including information sharing, where possible. However, many of the difficulties remain, as they are essentially inherent to the process and reflect how some of the information on which lists are created has been obtained.

4.1

The United Nations (UN) Listing Process

Learning Objective 4.4.1

Understand the impact of the listing process of the United Nations

Under Chapter VII of the UN Charter, the Security Council can take enforcement measures, ranging from economic sanctions to international military action, to maintain or restore international peace and security.

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Under Article 41 of the Charter, the Security Council may decide what measures, not involving the use of armed force, are to be employed by UN member states. These may vary from comprehensive economic and trade sanctions to more targeted measures, including financial restrictions against listed targets. We saw in Section 2.2.1 above that the UNSCR 1267 Sanctions Committee on Taliban and Al-Qaida publishes lists of proscribed individuals and entities. Assessments of the strategic impact of the listing process can be variable. Forcese and Roche18 argue: UN listing of Al-Qaida and Taliban affiliates under the Security Council resolution 1267 system has been controversial, in large measure because of the absence of due process and the secrecy surrounding the decisions made by the sanctioning committee. There have been a number of successful domestic challenges to the implementation of this system at the national and supranational level. If domestic and supranational courts continue to invalidate domestic implementation of 1267 listings, there will be a disconnect between the global 1267 list and certain domestic lists. The 1267 process may be able to survive some domestic challenges and exemptions, but criticisms by domestic judges will erode support for the 1267 system. This may not in itself be a bad development, as 1267 listing, with its focus on Al-Qaida and the Taliban, is only a partial response to international terrorism. Even apart from the human rights implications of listing, it is not clear that listing and related terrorism financing and travel ban interventions are particularly effective means to combat today’s decentralised and often homegrown terrorism. Listing may be an example of fighting the last war against Al-Qaida rather than deploying tools to forestall the next form of terrorism. Partly in response to such criticism, UNSCR 1904 (2009) established an Office of the Ombudsperson to assist the Committee in considering de-listing requests. In 2011, the Committee updated many of the entries on the list to improve both the quality of the list and the narrative summaries. As we saw in Section 1.4 above, the ability of institutions to screen their customers successfully against sanctions lists relies very heavily on the quality of the data provided.

4.2

The European Union (EU) Listing Process

Learning Objective 4.4.2

Understand the impact of the listing process of the European Union

The EU listing process relating to Al-Qaida/Taliban is given effect by EC Regulations19, imposing certain specific restrictive measures directed against certain persons and entities associated with Osama bin Laden, the Al-Qaida network and the Taliban. This listing imposed sanctions against those individuals and entities listed by the UN Sanctions Committee. The regulation also allows for the listing of other persons based on information supplied by member states. This regulation was subsequently amended by another Council Regulation20 to reflect the split at the UN level into an Al-Qaida and an Afghanistan country-specific regime.

18 Forcese, C. and K. Roach, (2010). ‘Limping into the Future: The UN 1267 Terrorism Listing Process at the Crossroads’, George Washington International Law Review, Vol. 42. 19 Council Regulation (EC) No 881/2002 of 27 May 2002 20 Council Regulation (EU) No 754/2011, Afghanistan is now covered by Council Regulation (EU) No 753/2011

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In respect of financial support of terrorism generally, Council Regulation (EU) No 2580/2001 of December 2001 gives effect to UNSCR 1373 (2001). This EU Regulation imposes specific financial sanctions against listed targets, and implementing regulations are issued to update the list of persons to whom the regulation applies. This list is separate from the UN Al-Qaida/Taliban listings and various regulations covering the listing process and safeguards at the European level have been issued.

In practice, both the UN and EU lists failed to forestall terrorist attacks in Madrid, London and elsewhere and arguably contributed little to pre-emptive action by member states. With designations often ex-post, the value of listing may lie in its strong symbolism. Quick administrative action by member states also sends a powerful message and has a more immediate disruptive effect. This heightens the importance of national immediate freezing mechanisms.

4.3

Applying the United Nations (UN) List in the European Union (EU)

Learning Objective 4.4.3

Understand the circumstances in which the UN list can be applied within the European Union

As described in Section 4.2, UN Al-Qaida/Taliban lists can be applied either through inclusion in a European regulation or through national measures (a statutory instrument in the UK). In most cases, national measures will happen faster than a European regulation. Since June 2011, the UNSC has two listing mechanisms, one for Al-Qaida-related entities and one for country-specific Afghanistan. These lists are now included in separate EU Regulations, 754 and 753 of 2011. Changes to the UN list are automatically reflected in the EC regulation lists.

4.4

Jurisdictions and Listing

Learning Objective 4.4.4

Know the listing process of various jurisdictions and their extraterritorial application

Individual jurisdictions should have mechanisms in place to implement the UN listings domestically and may also have provisions to list suspects identified through a local process too (in addition to the application of EU regulations in member states). Here we give some examples, but as can be seen, details vary and care must be taken to implement the right list and reporting/freezing mechanisms, particularly for institutions that operate in several jurisdictions.

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EU regulations are directly applicable and have direct effect in member states. However, a statutory instrument is required to introduce any penalties resulting from a breach of the regulation into UK law.

Generally, in the UK, an EC regulation or a statutory instrument is required to give effect to UN listing measures. In most cases, a statutory instrument is effected in the UK to introduce the measures ahead of the EU adopting a regulation introducing the measures into EC law. If UN-imposed measures are given effect by an EC regulation, a statutory instrument will still be required to introduce any penalties resulting from a breach of the regulation. With regard to the Taliban and Al-Qaida listings produced by the UNSC 1267 Committee the sanctions were implemented through the Al-Qaida and Taliban (UN Measures) Order 2006, which revoked an earlier order from 2002. The parts of this order relating to the UN list were quashed in January 2010 when the Supreme Court found in the case of HM Treasury versus Ahmed that the government had exceeded its powers, particularly as the order left individuals with no judicial remedy21. As the UN list was also reflected in Council Regulation (EC) 881/2002, the government brought forward regulations under the European Communities Act to ensure full implementation of the Al-Qaida and Taliban regime the Al-Qaida and Taliban (Asset-Freezing) Regulations 2010. The Supreme Court also quashed the Terrorism (UN Measures) Order 2006, the mechanism by which the UK Government had implemented the requirements of UNSCR 1373. This order gave the Treasury the power to designate persons as being suspected of involvement in terrorist activity. The Supreme Court was particularly concerned that, by using the UN Act, the orders were wholly outside the scope of Parliamentary scrutiny. In light of the Court’s finding, the Government introduced first temporary, then permanent, primary legislation to maintain the UK’s asset freezing regime. The Terrorist Asset-Freezing etc. Act 2010 makes provision for imposing financial restrictions on, and in relation to, designated persons believed or suspected to be involved in terrorist activities. It also provides for enforcement of Regulation (EU) No 2580/2001. The same act allows the UK to designate individuals who are not on the UN Al-Qaida/Taliban list, wherever they may be. Similar measures apply in other EU member states. The US operates its terrorist sanctions regimes through the Office of Foreign Assets Control (OFAC) in the Department of the Treasury (see Chapter 1, Section 2.6.3). OFAC is also responsible for economic sanctions against countries and other targeted groups of individuals, such as narcotics traffickers. All US persons, regardless of where they are located, must abide by and comply with OFAC regulations, as must all persons and entities within the US and all US-incorporated entities and their foreign branches. Many foreign businesses will also take regard of the OFAC lists, particularly those who do business in, or with, the US. Many other countries have introduced listing procedures, which generally reflect the requirement to implement the UNSCR 1267 Al-Qaida/Taliban list, and have a domestic process to implement the provisions of UNSCR 1373 in relation to TF.

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For more details of the issues raised in this case, see Commons Library Research Paper 10/70, Terrorist Asset-Freezing Bill (HL) 2010-11 - http://www.parliament.uk/briefing-papers/RP10-70.pdf

Terrorist Financing

In contrast, Canada has enacted sanctions legislation through separate regulations under their UN Act, covering Al-Qaida and the Taliban, and the suppression of terrorism. However, there is also a listing mechanism under the Criminal Code for entities involved in terrorism.

4.5 Designation Learning Objective 4.4.5

Understand the range of legal consequences related to designation: bans; asset freeze

Those designated under sanctions regimes can suffer several consequences: • Bans – the sanctions may ban subjects from certain activities. These can range from a travel ban, ie,

preventing their entry into or transit through a country or territory, to prohibiting the supply, sale or transfer of goods, such as arms and military equipment. • Asset freeze – in addition to activity bans, sanctions will very often require the immediate freezing of funds and assets belonging to the subjects of sanctions regimes. The definitions relating to asset freezing will usually be drawn very widely and will include all types of financial asset and benefits. The UK’s HM Treasury (which has a dedicated Assets Freezing Unit that maintains the consolidated list of designated persons, including entities and individuals listed by the UN, EU and governments) defines the freezing of funds as: Preventing any move, transfer, alteration, use of, access to, or dealing with funds in any way that would result in any change in their volume, amount, location, ownership, possession, character, destination or other change that would enable funds to be used, including portfolio management.22 Persons making funds available to, or for the benefit of, designated persons commit offences.

22 www.hm-treasury.gov.uk/fin_sanctions_definitions.htm

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Both Australia and New Zealand have implemented primary legislation for terrorism asset freezes, rather than relying on designation under their UN Acts. Australia implements the UNSCR 1267 requirements through the Charter of the UN (Sanctions – Al-Qaida and the Taliban) Regulations 2008, and UNSCR through the Charter of the UN (Dealing with Assets) Regulations 2008, under which the Minister of Foreign Affairs may list persons if he is satisfied that they are associated with terrorism. New Zealand has implemented the Terrorism Suppression Act 2002, which covers both UN-listed entities and provides a mechanism for domestic listings.

4.6

Undesirable Consequences

Learning Objective 4.4.6

Understand potentially undesirable consequences of the listing process: human rights violations; privacy violation; lack of due process; private lists

4.6.1 Human Rights A criticism made of the listing process, particularly in the early days after the 9/11 attacks, was that it failed to safeguard human rights adequately. Because of the urgency of the process, individuals and entities were placed on the list without their knowledge, based on intelligence and information that was not made public and sometimes not shared between the authorities in different countries. Legislation to implement political decisions had to be implemented quickly and mistakes were made, as was discussed in Section 4.1 of this chapter. The issues of fundamental rights manifested themselves in several ways.23

4.6.2 Privacy Violation Certain identifying details of individuals on the list are sometimes lacking, particularly those details which may be readily available to financial institutions, such as dates of birth, addresses and identity documents. This can result in many false matches during screening processes, with potentially serious adverse consequences for the innocent individuals identified. Individuals with names similar to the targeted identities may find their personal information, including financial records, disclosed to the authorities on the basis of such false matches, through an over-enthusiasm for pre-emptive reporting on the part of financial institutions.

4.6.3 Lack of Due Process The early sanctions lists appeared to be compiled in a somewhat ad hoc fashion. It was not clear how individuals and entities found themselves placed on the lists and there was certainly a lack of formal de-listing mechanisms. These shortcomings have been addressed in various ways. In December 2009, UNSCR 1904 set out an improved process, which attempted to introduce greater transparency, including the establishment of an Office of Ombudsperson. Formal procedures have been adopted in various countries for considering classified information during the listing processes and taking due consideration of fundamental rights.

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See, for example, Fassbender, B. (2006). Targeted Sanctions and Due Process. Berlin: Humboldt University.

Terrorist Financing

As a further example, the EU, when considering proposals from non-member states, will: check in particular whether the proposal complies with the fundamental principles and procedures of the rule of law and respects human rights, inter alia the right to an effective remedy and to a fair trial, the presumption of innocence and the right not to be judged or punished twice for the same offence24.

In the UK the Terrorist Asset Freezing etc. Act 2010 also contains provision for disclosure of information to designated persons and an appeal mechanism.

4.6.4 Private Lists Confusion can arise not just because of the complexity of the official listing process, but also because of the use of lists which have no formal sanctions regime basis. Such lists may arise through the requirements on financial institutions to carry out enhanced due diligence on high-risk clients, such as PEPs. Commercial providers of such lists must distinguish between sanctioned and non-sanctioned (but increased risk) individuals. Private lists of terrorist suspects may also evolve through financial institutions’ liaison with investigative or intelligence agencies or through press monitoring (for example, in the immediate aftermath of attacks).

4.7

Dealing with Designated Persons and Entities

Learning Objective 4.4.7

Understand the potential consequences of dealing with listed persons and entities

The consequences of breaching a sanctions regime by dealing with designated persons and entities vary, according to the specific details of the sanctions instrument, but they can be severe. The offending institution will risk suffering reputational damage, regulatory sanction, and civil or criminal penalties. The liability can also extend to individuals within that institution. In general terms, any person to whom the relevant sanctions instrument applies and who makes any funds, economic resources or, in some circumstances, financial (or related) services available directly or indirectly to or for the benefit of, persons listed under the relevant sanctions instrument, is guilty of an offence. The penalty can be a fine or imprisonment. The maximum term of imprisonment in the UK is currently seven years. Where an institution itself is found guilty of an offence, and the offence can be proved to have been committed with the consent or connivance of, or through the negligence of, any director or senior officer of the corporate body, that individual is also guilty of the offence. 24 Council of the EU, Fight against the financing of terrorism – implementation of Common Position 2001/931/CFSP (2007), p7, found at www.consilium.europa.eu/uedocs/cmsUpload/st10826-re01en07.pdf,

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A statement of reasons will be required to establish that the listing is appropriate, although this is still not made public. The listed parties are notified where possible (after the decision), a review process is established, and there is a formal process for requesting de-listing.

An example of the severity of consequences (and the extra-territorial reach of sanctions regime) can be found in the deferred prosecution agreement reached between Lloyds TSB Bank plc and the US authorities, including the Department of Justice and the New York County District Attorney’s Office in 2009. Lloyds TSB in London and Dubai had been engaged in a practice of deliberately removing information, including names and addresses, from bank transfers involving sanctioned countries, so that the transfers would pass through US correspondent banks that would otherwise have blocked the transfers under US sanctions regulations. This stripping had allowed more than $350 million to pass through the financial system. Lloyds agreed to forfeit that sum to the US and New York County25. In the UK, members of the Royal Bank of Scotland Group (RBSG) were fined £5.6 million by the FSA for systems and control deficiencies in relation to sanctions26. The FSA noted: UK firms are prohibited from providing financial services to persons on the HM Treasury sanctions list. The Money Laundering Regulations 2007 (the Regulations) require that firms maintain appropriate policies and procedures in order to prevent funds or financial services being made available to those on the sanctions list. During 2007, RBSG processed the largest volume of foreign payments of any UK financial institution. However, between 15 December 2007 and 31 December 2008, RBS plc, NatWest, Ulster Bank and Coutts and Co., which are all members of RBSG, failed to adequately screen both their customers and the payments, they made and received, against the sanctions list. This resulted in an unacceptable risk that RBSG could have facilitated transactions involving sanctions targets, including terrorist financing.

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Department of Justice Press Release, January 9, 2009, found at: www.justice.gov/opa/pr/2009/January/09-crm-023.html FSA Press Release, 3 August 2010, found at: www.fsa.gov.uk/pages/library/communication/pr/2010/130.shtml

Terrorist Financing

End of Chapter Questions

1.

Describe two types of terrorist financing. Answer reference: Section 1

2.

Outline three UNSCRs relating to proliferation finance. Answer reference: Section 1.1

3.

Name three reasons why TF sanctions are used. Answer reference: Section 1.4

4.

Name the four pillars for the UN’s CT strategy. Answer reference: Section 2.1

5.

Outline two key UNSC resolutions concerning CFT policy. Answer reference: Section 2.2.1

6.

Which UN agencies provide anti-terrorist financing support? Answer reference: Section 2.2.2

7.

Which FATF recommendations relate specifically to terrorist financing? Answer reference: Section 3.1

8.

What are the three Wolfsberg Group recommendations on terrorist financing? Answer reference: Section 3.2

9.

What department operates US terrorist sanctions? Answer reference: Section 4.4

10.

Name two consequences of designation. Answer reference: Sections 4.5

11.

What are three ways private lists can be created? Answer reference: Section 4.6.4

12.

What are three consequences of dealing with listed persons or entities? Answer reference: Section 4.7

4

Think of an answer for each question and refer to the appropriate section for confirmation.

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Chapter Five

Corruption 113

2. Combating Corruption

137

3. The Role of Multilateral and Bilateral institutions

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5

1. Background

This syllabus area will provide approximately 14 of the 100 examination questions

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Corruption

1. Background 1.1

The Nature, Significance and Impact of Corruption

Learning Objective

Defining corruption has long been the subject of debate, in part because of differing country and cultural perceptions and in part because of the wish to seek as universal a definition as possible that allows transnational applicability.

Definitions of Corruption • World Bank1 – the term corruption covers a broad range of human actions. To understand its effect on

an economy or a political system, it helps to unbundle the term by identifying specific types of activities or transactions that might fall within it. In considering its strategy the Bank sought a usable definition of corruption and then developed a classification of the different forms corruption could take consistent with that definition. We settled on a straightforward definition – the abuse of public office for private gain. Public office is abused for private gain when an official accepts, solicits, or extorts a bribe. It is also abused when private agents actively offer bribes to circumvent public policies and processes for competitive advantage and profit. Public office can also be abused for personal benefit even if no bribery occurs, through patronage and nepotism, the theft of state assets, or the diversion of state revenues. This definition is both simple and sufficiently broad to cover most of the corruption that the Bank encounters, and it is widely used in the literature. • Transparency International (TI)2 – corruption is operationally defined as the abuse of entrusted power for private gain. TI further differentiates between according to rule corruption and against the rule corruption. Facilitation payments, where a bribe is paid to receive preferential treatment for something that the bribe receiver is required to do by law, constitute the former. The latter, on the other hand, is a bribe paid to obtain services the bribe receiver is prohibited from providing. • Interpol Expert Group on Corruption3 – corruption is any course of action or failure to act by individuals or organisations, public or private, in violation of law or trust for profit or gain. The generality of such definitions means that what may be seen as criminal in one context or country may be unethical in another or acceptable in a third (gift-giving is one area where these issues are often debated). They also often focus primarily on public office.

1 2 3

Helping Countries Combat Corruption; The Role of the World Bank found at: www1.worldbank.org/publicsector/ anticorrupt/corruptn/cor02.htm Transparency International, FAQs on Corruption found at: http://www.transparency.org/whoweare/organisation/faqs_on_ corruption/2/ Interpol, Corruption found at: http://www.interpol.int/Crime-areas/Corruption/Corruption

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5.1.1 Understand the nature, significance and impact of corruption: national level; regional and international level; private sector implications

For such reasons, other organisations have chosen not to seek a general definition. Thus the OECD argues that: the OECD, the Council of Europe and the UN Conventions do not define corruption, but establish a range of corrupt offences. The OECD Convention establishes the offence of bribery of foreign public officials, while the Council of Europe adds trading in influence and bribing domestic public officials too. In addition, the UN Convention covers embezzlement, misappropriation of property and obstruction of justice. One frequently-cited conundrum is distinguishing illegal trading in influence from legal lobbying. The Council of Europe Convention criminalises trading of improper influence, ie, there must be corrupt intent. The UN Convention only covers peddlers who abuse their influence.4 UNCAC provides the most comprehensive legal and procedural framework to address corruption. While UNCAC carries no definition of corruption, it provides a list of mandatory and optional offences which state parties are expected to legislate for as follows: • Conduct Offences (mandatory for State Parties)

Bribery of National Public Officials (Article 15). Active Bribery of Foreign Public Officials (Article 16). Embezzlement, Misappropriation and Other Diversion of Property (Article 17). Money Laundering (Article 23). • Conduct Offences (optional for State Parties) Passive Bribery of Foreign Public Official (Article 16). Trading in Influence (Article 18). Abuse of Function (Article 19). Illicit Enrichment (Article 20). Bribery in Private Sector (Article 21). Embezzlement in Private Sector (Article 22).

1.1.1 National Level In the UK in historical terms corruption in the broader sense above did not exist, in that it was normal for those holding office from the Crown not only to maximise their income from it but also to blend personal and public roles and benefits for themselves, their family and their supporters. Bribery, however, was a perennial issue, particularly in relation to those expected to act impartially or where there was an obvious conflict of interest (for example, in the case of MPs who were lawyers and hired to draft legislation). Of course, the process of reform was lengthy and usually ineffectual, although the 19th and early 20th centuries were populated with laws and regulations intended to distinguish personal interests from public responsibilities. The specific criminal offence of corruption in terms of bribery arose from the wish of Victorian reformers to develop a public-interest legislative component to holding public office, although usually after a particular scandal over activities which the existing law could not punish. Thus, up to 2010, what may be termed the UK anti-corruption legislative framework comprised three Acts primarily introduced to stop public officeholders profiting from the powers of, or knowledge inherent in, their office and to promote the belief that those holding public office exercise their responsibilities for the benefit of the public and not for particular interests (or for themselves). The three Acts were: 4

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OECD, Defining Corruption, found at: www.oecdobserver.org/news/fullstory.php/aid/2163/Defining_corruption.html

Corruption

• The 1889 Act – required that, in relation to public bodies, it was an offence to offer or receive, before

Despite the collective label of The Prevention of Corruption Acts, which implies coherence between the three Acts, there was no uniformity or clarity, and there were a number of loopholes. Overall, however, corruption as a systematic or institutional issue was considered as solved by the mid20th century, through a mix of legislation, means of audit and public inquiry, regulations, codes and procedures, and the prevalence of what might be termed a sense of public ethics. While this is debatable, evidence of corruption and bribery was primarily seen as a consequence of specific activities or individuals, often sporadic and opportunistic. The limitations to this perspective were not really reviewed until the 1970s as a result of the Poulson case, which involved entrenched and extensive networks of local government corruption and influence-peddling that also encompassed Parliament and several public sector organisations. This caused, as the Director of Public Prosecutions later told an official inquiry, serious concern because of the fact that corruption in particular areas can evidently be so widespread without discovery. It had the dubious honour of triggering four official inquiries, one of which recommended revisions to the law which included bringing MPs within the criminal law.5 Further scandals from the 1970s onwards, up to and including the MPs’ expenses scandal, have emphasised that, despite the primacy of democracy, the existence of various agencies charged with preventing and investigating corruption and an active media, cases of both bribery and corruption occur regularly in the UK, but are seen as a consequence more of sporadic and individual cases than of structural and institutional failings. In the past 20 years these have included: • the Metropolitan Police/Operation Countryman (which concerned institutional and organised

police corruption); • the 1994 Public Accounts Committee (PAC) report (warning of ‘a number of serious failures in

administrative and financial systems and controls within departments and other public bodies, which have led to money being wasted or otherwise improperly spent’ following the public management reforms across the public sector); • the SFO investigation of British Aerospace over allegations of international payments; and • MPs’ expenses.

5

See Doig, A. (1984). Corruption and Misconduct in Contemporary British Politics. Harmondsworth: Penguin.

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or after a specific decision or action (or absence of either), an advantage in favour of the giver. The Act was unique in its time in that it gave courts the power to forfeit the bribe or to confiscate goods and assets to the value of the bribe. • The 1906 Act – criminalised any benefit to any employee that was done without the knowledge of the employer (the principal). Rather than describe in detail what type of conduct, action or decision was considered unacceptable, the law again used the word corruptly as the key component. Included in the Act were provisions for concealment of documents and false accounting as the basis of an offence, whether or not bribery was involved. • The 1916 Act – transferred the presumption of guilt to the defendant charged under either Act when it is proved that a bribe has been paid or received in relation to a public sector contract.

1.1.2 Regional and International Level In terms of perceptions of corruption, the UK, is relatively free from the systematic and institutionalised nature of corruption that many countries are facing, and certainly less prone to the scandals that periodically emerge in France, Ireland and Italy, which often reveal continuing networks, influencepeddling and patronage, relating to party politics, regional politics and business groupings. In terms of the UK’s place in relation to regional activities, such as EU Common Agricultural Policy funding programmes, the Council of Europe’s Group of States Against Corruption (GRECO – see Section 2.3 of this chapter) reviews or FATF money laundering reviews, the UK again is less subject to allegations of failing to control corruption, misappropriation and financial crime than most other countries. Nevertheless, the UK, like most other countries, has varying levels of corruption within a very broad spectrum that ranges from those countries where corruption is a routine aspect of any involvement with the state, from traffic police to government ministers, to countries where corruption occurs in relation to specific sectors or activities (such as party funding or capital contracts). The type, level and location of corruption also varies according to the levels and trajectory of political development, history, geography, the presence in a country of organised crime, drug production, mineral and other resources, terrorist groups, ethnic or other divisions, and the activities of global corporations, with a number of such issues occurring together. Permutations of types, levels and pervasiveness of corruption, in terms of its broader and bribery definitions, can occur anywhere from developed countries such as Canada to developing islands in the Caribbean. Thus, the 2004 Gomery Commission in Canada, for example, was given the mandate to investigate and report on the federal government sponsorship programme and related advertising activities, including the management of the sponsorship programme, how advertising agencies were selected, who received funds and how they were used. The report noted: partisan political involvement in the administration of the sponsorship programme; insufficient oversight by senior public servants; deliberate actions taken to avoid compliance with federal legislation and policies; culture of entitlement among political officials and public servants involved with sponsorship initiatives; • the refusal of ministers, senior officials in the prime minister’s office and public servants to acknowledge any responsibility for the mismanagement that had occurred. • • • •

A study of small states in the Caribbean6 noted that narcotics-related corruption and associated arms-trafficking, money laundering and financial crime constituted a growing threat in the region. The study argued that political corruption, in the context of ineffective procurement systems, completely unregulated political parties, and winner-take-all majoritarianism seriously undermined the quality of democratic governance. Finally, it reported that petty corruption, associated with administrative corruption, was pervasive in a culturally permissive context.

6

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Transparency International (2003). NIS Country Study: Caribbean Composite Study. Berlin: Transparency International. The countries were eight of the island states of the 15 member Caribbean Community (CARICOM): Antigua-Barbuda, The Bahamas, Barbados, Dominica, Grenada, St. Kitts-Nevis (sometimes referred to as St. Christopher-Nevis), St. Lucia and St. Vincent and the Grenadines.

Corruption

It would be impossible to categorise the types and patterns of corruption, but the table below gives some examples of corruption types7 and indicators8. Although financial gain is often the motive for corruption, the possibility of other advantages such as nepotism (eg, family members being appointed to prestigious positions for which they are neither suited nor qualified) and other favours (eg, making arrangements for the schooling of the families of public officials) should not be overlooked.

Corruption Types and Indicators Types

7

8

Indicators

Abnormal cash payments

Illicit payments to officials to facilitate access to goods, services, and/or information to which the public is not entitled

Pressure exerted for payments to be made urgently or ahead of schedule

The theft or embezzlement of public property and monies

Payments being made through third-party country, eg, goods or services supplied to country ‘A’ but payment is being made, usually to shell company, in country ‘B’

Extortion and the abuse of public office, such as using the threat of a tax audit or legal sanctions to extract personal favours

Abnormally high commission percentage being paid to a particular agency. This may be split into two accounts for the same agent, often in different jurisdictions

The sale of official posts, positions, or promotions; nepotism; or other actions that undermine the creation of a professional, meritocratic civil service

Private meetings with public contractors or companies hoping to tender for contracts

Illicit payments to prevent the application of rules and regulations in a fair and consistent manner, particularly in areas such as public safety, law enforcement or revenue collection

Lavish gifts being received

The design or selection of uneconomic projects, because of opportunities for financial kickbacks or political patronage

Individual never takes time off even if ill, or holidays, or insists on dealing with specific contractors themselves

5

Illicit payments of speed money or grease to officials for the timely delivery of goods and services to which the public is rightfully entitled, such as permits and licences

Marshall, I.E. (2011). ‘A Survey of Corruption Issues in the Mining and Mineral Sector’. Appendix 1., found at: www. iacconference.org/documents/10th_iacc_workshop_A_SURVEY_OF_CORRUPTION_ISSUES_IN_THE_MINING__MINERAL_ SECTOR.pdf Serious Fraud Office, UK, Corruption indicators, found at: www.sfo.gov.uk/bribery--corruption/corruption-indicators.aspx

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Types

Indicators Making unexpected or illogical decisions when accepting projects or contracts Unusually smooth process of cases where individual does not have the expected level of knowledge or expertise Abusing decision process or delegated powers in specific cases Agreeing contracts not favourable to the organisation, either with terms or time period Unexplained preference for certain contractors during tendering period

Procurement fraud, including, kickbacks, collusion, overcharging, misrepresentation, the delivery of substandard goods and services

Avoidance of independent checks on tendering or contracting processes Raising barriers around specific roles or departments which are key in the tendering/ contracting process Bypassing normal tendering/contractors’ procedure Invoices being agreed in excess of contract, without reasonable cause Missing documents or records regarding meetings or decisions Company procedures or guidelines not being followed The payment of, or making funds available for, eg, high-value expenses or school fees on behalf of others

Corruption has long been seen as a developing country phenomenon, something that it was argued, up to the 1970s at least, would diminish as democratisation and gross domestic product (GDP) expanded. Indeed, for some commentators at the time, bribes were not only better than bullets, but were also a necessary facilitator to address an excess of bureaucracy and inefficient public administration. That approach has long been discarded, with developed countries and a number of regional and international organisations arguing that corruption is a public wrong, wastes limited resources and donor funds, disadvantages the poor, inhibits democratisation, facilitates other crimes, and highlights private benefit over the public interest. It was also recognised that a co-offending party was often a company from the developed world. In other words, corruption was seen both as a wrong and as something the addressing of which would require action in and by both developing and developed countries.

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Within the decade, the leading multilateral donor, the World Bank, announced its intention to provide a systematic framework for addressing corruption as a development issue in the assistance10 it provided while the Utstein Four – the international development ministers of the Netherlands, Germany, Norway and the UK – announced that they intended to work together in reducing the damaging effects of corruption which: diverts scarce resources from development, deters investment and retards economic growth...undermines democratic political systems and is a barrier to the delivery of basic services and the provision of security to the poor.11 At a regional level in terms of Europe, similar sentiments have been expressed. The European Bank for Reconstruction and Development (EBRD) stated that: corruption weakens the state’s ability to gain consent for, and enforce compliance with, rules and institutions by undermining the public’s trust that those rules and institutions were designed to be fair and to be enforced without discretion and prejudice.12 The Council of Europe’s GRECO project was established: to improve its members’ capacity to fight corruption by monitoring the compliance of States with their undertakings in this field. In this way, it will contribute to identifying deficiencies and insufficiencies of national mechanisms against corruption, and to prompting the necessary legislative, institutional and practical reforms in order to better prevent and combat corruption.13

9 10 11 12

13

See Asia Pacific Human Development Report. (2008). Tackling Corruption, Transforming Lives, Accelerating Human Development in Asia and the Pacific. Macmillan India/UNDP RC Sri Lanka. Helping Countries Combat Corruption; The Role of the World Bank found at: www1.worldbank.org/publicsector/ anticorrupt/corruptn/corfor.htm See http://www.u4.no/info/about-u4/ for more information about the Utstein 4 Quoted in Doig, A., S. McIvor, and R. Theobald, (2006). ‘Numbers, Nuances And Moving Targets: Converging The Use Of Corruption Indicators Or Descriptors In Assessing State Development’. International Review of Administrative Sciences. 72.2. CoE, What is GRECO, found at: http://www.coe.int/t/dghl/monitoring/greco/general/3.%20What%20is%20GRECO_en.asp

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The current prevailing among bilateral and multilateral agencies, and international NGOs is that corruption is one of the major impediments to human development. It debases democracy and the rule of law, distorts markets and stifles economic growth. Corruption hurts the poor disproportionately and constitutes an obstacle to achieving the Millennium Development Goals (MDGs), the eight international development goals adopted by all UN members at the Millennium Summit in 2000, by diverting resources away from basic social services and limiting access to health, education, public safety, and water and sanitation, due to petty corruption.9 As long ago as the end of the 1980s, the UN noted: the problem of corruption in government has come to be recognised universally as a major concern in public management.

The EU has indicated its framework on corruption – see the table below.

Table: EU Policy Approaches to Corruption The EU has produced several documents on fighting corruption: • Article 29 of the Treaty on EU mentions preventing and combating corruption as one of the

• •

• •

•

ways of achieving the objective of creating and maintaining a European area of freedom, security and justice. The 1997 action programme on organised crime calls for a comprehensive anti-corruption policy based on preventative measures. The first communication on an EU anti-corruption policy suggested banning the tax deductibility of bribes and introducing rules on public procurement procedures, accounting and auditing standards, and measures relating to external aid and assistance. The Council’s 1998 Vienna Action Plan and the Tampere European Council in 1999 also identified corruption as a particularly important area where action was needed. The Millennium Strategy on the Prevention and Control of Organised Crime reiterated the need for approximation of national legislation and to develop multidisciplinary EU policy and urged member states to ratify the EU and Council of Europe anti-corruption instruments. The Communication on the Fight Against Fraud sought to establish an overall strategic approach.

The EU has also established its own instruments to tackle corruption: • the two conventions on the protection of the EU’s financial interests and the fight against

corruption involving officials of the EU or officials of the EU member states; • the European Anti-Fraud Office (OLAF) set up in 1999, which has inter-institutional investigative powers. Source: europa.eu/legislation_summaries/fight_against_fraud/fight_against_corruption/l33301_ en.htm

For example, in relation to healthcare, misappropriation and procurement fraud diminishes available resources, informal payments work against poorer citizens and bribery can lead to over-priced pharmaceutical contracts.14 In relation to natural resources in one country, the Human Rights Watch report on forestry in Indonesia estimated that the Indonesian government lost $2 billion in 2009, due to illegal logging, corruption, and mismanagement. The total includes: forest taxes and royalties never collected on illegally harvested timber; shortfalls due to massive unacknowledged subsidies to the forestry industry (including basing taxes on artificially low market price and exchange rates); and tax losses by exporters practising transfer pricing (the determination of the taxable profits that a business realises from transactions with associated enterprises, where the international consensus is that these profits should be comparable to the profits that would have been realised in comparable transactions between independent businesses).

14

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Cairn Nordberg, updated by Taryn Vian (2008). Corruption in the Health Sector. Bergen: Chr. Michelsen Institute. U4 Issue 2008:10.

Corruption

It went on to illustrate the indirect impact of corruption as:

On the other hand, assumptions about the linear nature of democratisation and economic development, and the consequential rise of concepts of public ethics, and a distinction between private interests and public interest, are not necessarily certain. In the case of the BRIC countries – Brazil, Russia, India and China – the post-millennium decade has seen constant economic expansion. BRIC countries are the world’s largest emerging economies: Between 2002 and 2007, annual real GDP growth averaged 10.4% in China, 7.9% in India, 6.9% in Russia and 3.7% in Brazil. Fast growth, strong economic foundations and large populations have made BRIC into the world’s most promising markets.16 In comparison, their anti-corruption performance, according to some of the international quantitative corruption indicators (whose robustness is often challenged) has not improved significantly – see the following table.

Table: Corruption Indicators17 World Bank Institute Governance Indicators for Control of Corruption Country Brazil China India Russia

TI CPI: ranking/total

Year

Percentile Rank (0-100)

2009

56.2

75/180

2004

59.2

59/146

2009

36.2

79/180

2004

31.1

71/146

2009

46.7

84/180

2004

45.1

90/146

2009

11.4

146/180

2004

24.3

90/146

15 Human Rights Watch. (2009). Wild Money. New York: Human Rights Watch. p.2 16 Eghbal, M. (2008). ‘BRIC economies withstand global financial crisis’, November. Euromoney. www.euromonitor.com/briceconomies-withstand-global-financial-crisis/article 17 Sources: http://info.worldbank.org/governance/wgi/index.asp; www.transparency.org

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To give one stark illustration: between 2003 and 2006, the annual revenue lost to corruption and mismanagement in the timber sector was equal to the entire health spending at national, provincial, and district levels combined. The $2 billion annual loss is also equal to the amount that World Bank health experts estimate would be sufficient to provide a package of basic health care benefits to 100 million of the nation’s poorest citizens for almost two years.15

1.1.3 Private Sector Implications For businesses, particularly those located in advanced economies, the continuing pressure to address corruption at domestic and international level has had increasing relevance. One issue concerns the significance or impact of corruption on the delivery of private sector services and functions in any context. Another is how businesses have developed relations with, or work in, overseas countries. A third relates to the implications of the current development agenda for domestic and international business working or seeking work in countries with ruling elites and where rent-seeking (the maximisation of income and benefits from an official appointment) is the norm. Of course, UK businesses have not always had the best of reputations. As Lord Gilmour, then the UK’s defence secretary, told BBC2’s Newsnight in 2006 about alleged bribery in Saudi Arabia: You either got the business and bribed, or you didn’t bribe and didn’t get the business. You either went along with how the Saudis behaved, or what they wanted, or you let the US and France have all the business. It’s not something you emblazon or are particularly proud of. It just happens to be the terms of trade.18 This view has changed, in part as a consequence of the US Foreign Corruption Practices Act (FCPA – see Chapter 6, Section 3), which, on the somewhat debatable view by US governments that US business was losing contracts worth millions of dollars as a consequence, led to pressure through the OECD and the UN to bring other developed countries into line. This led to the OECD Convention on Bribery of Overseas Public Officials, which the UK ratified. In 2001, the UK incorporated the key requirement that the existing anti-corruption laws’ jurisdiction was extended overseas into domestic legislation. In 2003 it ratified UNCAC and began the process of reviewing existing legislation. At the same time, successive UK governments (and UK regulators) have accepted the implications of the current iteration of the development agenda, which has a focus on economic liberalisation and growth, and democratisation, with an emphasis on pro-poor policies and a limited, enabling state. The 2005 Report of the Commission for Africa noted: weak governance has blighted the development of many parts of Africa to date. Weak governance can include bad government policies and an economic and political climate which discourages people from investing. It can also include corruption and bureaucratic systems that are not open to scrutiny and therefore are not answerable to the public. And it includes a lack of accountability and weakness in mechanisms to ensure that people’s voices are heard and their rights upheld, such as parliaments, the media and the justice system.19

18 BBC Press office, Former minister admits Saudi bribes on Newsnight, found at: www.bbc.co.uk/pressoffice/pressreleases/ stories/2006/06_june/16/saudi.shtml 19 Commission for Africa (2005) Our Common Interest: Report of the Commission for Africa, London: Commission for Africa. p.148.

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Further, business also has to be aware of the willingness of law enforcement and regulators to enforce governments’ anti-corruption stance. The FSA, for example, also took strong action against regulated companies, warning in 2008: International efforts to combat corruption, combined with the continuing development of the UK’s legal framework on corruption, may increase the level of interest in the financial services sector’s efforts to combat corruption and bribery. There is a risk that firms could come under pressure to pay bribes, especially if they are operating in jurisdictions where paying bribes is widely expected. In addition, financial services firms may launder the proceeds of corruption or be used to transmit bribes.20 In 2009, it fined Aon Ltd £5.25 million for failing to take reasonable care to establish and maintain effective systems and controls to counter the risks of bribery and corruption associated with making payments to overseas firms and individuals in six countries who assisted Aon Ltd in winning business from overseas clients, particularly in high-risk jurisdictions. The FSA noted: The involvement of UK financial institutions in corrupt or potentially corrupt practices overseas undermines the integrity of the UK financial services sector. Unless they have in place robust systems and controls, which govern the circumstances in which payments may be made to third parties, UK financial services firms risk contravening UK and/or overseas anti-bribery laws.21 In 2011, the FSA went beyond an insistence on controls to an insistence on their implementation. It handed out an even larger fine to Willis Ltd for making payments to overseas third parties, who assisted it in winning and retaining business from overseas clients, particularly in high-risk jurisdictions, noting: The involvement of UK financial institutions in corrupt or potentially corrupt practices overseas undermines the integrity of the UK financial services sector. The action we have taken against Willis Ltd shows that we believe that it is vital for firms not only to put in place appropriate anti-bribery and corruption systems and controls, but also to ensure that those systems and controls are adequately implemented and monitored.22 Although the FSA’s powers only related to its regulated firms in the financial sector, other UK business has recognised the changing environment. The 2008 Woolf Report for British Aerospace noted that:

20 FSA, Financial Risk Outlook 2008, p 35, found at: www.fsa.gov.uk/pubs/plan/financial_risk_outlook_2008.pdf. 21 FSA, Final Notice, AON Limited, January 2009, p 3, found at: www.fsa.gov.uk/pubs/final/aon.pdf. 22 FSA, Final Notice, Willis Limited, found at: www.fsa.gov.uk/pubs/final/willis_ltd.pdf.

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The cumulative impact has been that, as UK governments, and in particular the Department for International Development (DFID), espouse international integrity standards, at the same time UK governments vigorously continue to promote overseas trade. This has sometimes led to a conflicted approach within government. Nevertheless, legislative reform, the anti-corruption requirements of multilateral aid agencies and the continuing role of international advocacy groups has shifted the focus to the implementation of a comprehensive Act – see Chapter 6 – which will require business to take an increasingly proactive approach. This will involve an understanding not only of the operating environment of their customers, and in particular the types of corruption they might expect to face, but also of the consequences of being involved in corruption.

In recent years boards and senior management of a number of significant global companies have been distracted by the need to deal with allegations of ethical malpractice. Restoration of a company’s reputation, when it is seen to be seriously tarnished, can be a complex and lengthy process involving significant distraction of senior management and often litigation. If reputational issues are not promptly addressed they are likely to fester. This can impact on the development and future profitability of a company. Among other damaging consequences, may be a decline in employee morale and difficulties in recruiting high quality personnel. The vulnerability of global companies to such pressures has itself increased markedly as their exposure to diverse local business practices has been extended with the growing geographic spread of business. There are also sharply rising expectations from customers, suppliers, governments and wider society that companies will establish clear global standards for their conduct in the market place.23

1.2

Conflicts of Interest

Learning Objective 5.1.2 Understand how conflicts of interest can manifest into corrupt practices

A conflict of interest is a situation that occurs where a person’s private interests – such as professional relationships, family, religious or ethnic influences, or personal financial assets – influence, or could influence, or could be thought to have influenced their professional or official or contractual functions and responsibilities. Personal conflicts of interest also arise in terms of fixed or short-term benefits, such as the provision of gifts and hospitality. The table below sets out a typical example in the UK public sector.

23 Woolf Committee. (2008). Business Ethics, Global Companies and the Defence Industry. London: Woolf Committee. p.9.

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Table: Public Sector Conflict of Interest Guidance: Northern Ireland24 To give you an idea of what might constitute a conflict of interest, here are a few examples of areas which could lead to real or apparent conflict: • relevant financial or other interests with the organisation concerned; • relationships with other parties/organisations, which could lead to perceived or real split

loyalties; • perception of rewards for past contributions or favours; • membership of some societies or organisations.

• You are the director of a building firm and the board to which you are seeking appointment

•

•

• •

conducts regular procurement exercises for building materials – you could benefit personally from decisions taken by the board. You are a manager in a voluntary organisation, whose funding applications are considered by the board to which you are seeking appointment – the body for which you work could benefit financially from decisions taken by the board. You are the director of a pharmaceutical company and the board to which you are seeking appointment will be directing policy on medical research – your company could have access to information which would give it a commercial advantage over its rivals. You have, in the past, contributed or lent significant funds to the political party to which the appointing minister belongs – your appointment could be viewed as a reward for past favours. You and a member of the selection panel are both members of an organisation whose membership is kept secret – your appointment could be viewed as the old boy network in operation.

Conflicts of interest are situations, and not activities or offences in themselves. The situation is the presence of an interest that may relate or relates to the person’s official position as follows: Acceptable – interests exist and seen as normal. Actual – interests are influencing. Apparent – others may reasonably think that interests are influencing. Potential – interests could, in certain circumstances, influence. Future potential – interests could be sought or acquired in the future, which would, in certain circumstances, influence current conduct. • Prejudicial – interests that are so significant that their existence is certain to influence. • • • • •

Conflict situations do not necessarily imply corruption, wrongdoing or inappropriate activities, but their presence could cast doubt on the integrity of the person involved, or the reasons for an action or decision. They could be considered an actual conflict if that person acts or makes a decision that benefits or appears to benefit that interest. This would also be true even if the action or decision is undertaken impartially and arrived at on the basis of the correct assessment but also, at the same time, coincidentally benefits the interest. 24 Office of the Commissioner for Public Appointments for Northern Ireland, found at: www.deni.gov.uk/ocpani-complaintsand-conflict-of-interest-information-guidance.pdf

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Some examples of potential, real or perceived conflicts of interest are:

Conflicts of interests are dealt with by either banning outright the co-existence of the interest and the official function, banning specific overlaps in certain circumstances, transferring assets to a third party to control and manage in a blind trust, or ensuring transparency by provision of relevant information. In the UK, the most visible sign of personal conflict of interest is in public life, where there are now clear rules and procedures to distinguish between personal or partisan interests and public duties, with public officials required to act impartially, independently and in response to full access to and assessment of all relevant information. The usual procedures are: • • • • •

written declaration and registration of interests, updated; publication of register; declaration of the interest before formal meetings or before speaking; procedures disallowing participation, speaking or voting on specific issues; post-employment review and approval for any appointment linked to the employment or linked to future work related to that employment.

There are also procedures to declare or record gifts, entertainment and hospitality. Private sector conflict of interest tends to be much more low-key, with individual companies responsible for what is declared, to whom and how, although the Combined Code which guides business on corporate governance indicates that, for directors: it is accepted and acknowledged that you have business interests other than those of the company and have declared any conflicts that are apparent at present. In the event that you become aware of any potential conflicts of interest, these should be disclosed to the chairman and company secretary as soon as apparent.25 Whatever the approach, procedures for disclosure and transparency need to be supported by clear guidelines on how, when, to whom and in how much detail information should be provided; whether and where it is published; and what verification is undertaken, who investigates any breaches, omissions or allegations; and what sanctions are available for breaches; and what sanctions are available for delayed submission, non-submission, incomplete submission, illicit enrichment and concealment.

1.3

Dual Criminality

Learning Objective 5.1.3 Know why the concept of dual criminality may be applied differently in cases of corruption

Dual criminality concerns the issue of whether or not an offence for which mutual legal assistance is being sought is recognised in both jurisdictions concerned. It is often an issue in extradition cases, for example. The 2003 UK Extradition Act states that information will be sought in relation to:

25 Financial reporting Council, Corporate Governance, found at: www.frc.org.uk/CORPORATE/ukcgcode.cfm

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particulars of the circumstances in which the person is alleged to have committed the offence, including the conduct alleged to constitute the offence, the time and place at which he is alleged to have committed the offence and any provision of the law of the category 1 territory, under which the conduct is alleged to constitute an offence; particulars of the sentence which may be imposed under the law of the category 1 territory, in respect of the offence, if the person is convicted of it.

In other words, the requirement is not for either an exact equivalence of offence or even a specific piece of legislation in each country, but for the criminalisation of a substantively equivalent offence. Currently, international conventions reflect this approach as the basis for co-operation. UNCAC Article 43, paragraph 2, states that: in matters of international co-operation, whenever dual criminality is considered a requirement, it shall be deemed fulfilled irrespective of whether the laws of the requested state party place the offence within the same category of offence or denominate the offence by the same terminology as the requesting state party, if the conduct underlying the offence for which assistance is sought is a criminal offence under the laws of both state parties. UNCAC Article 44, paragraph 9, goes further in inviting state parties to co-operate in instances where there is no dual criminality at all, if the requested measures are non-coercive: a. A requested state party, in responding to a request for assistance pursuant to this article in the absence of dual criminality, shall take into account the purposes of this Convention, as set forth in Article 1. b. State parties may decline to render assistance pursuant to this article on the ground of absence of dual criminality. However, a requested state party shall, where consistent with the basic concepts of its legal system, render assistance that does not involve coercive action. Such assistance may be refused when requests involve matters of a de minimis nature or matters for which the co-operation or assistance sought is available under other provisions of this Convention. c. Each state party may consider adopting such measures as may be necessary to enable it to provide a wider scope of assistance pursuant to this article in the absence of dual criminality. Other international organisations, such as the FATF, also encourage co-operation. FATF’s Recommendation 37 on mutual legal assistance states: Countries should render mutual legal assistance, notwithstanding the absence of dual criminality, if the assistance does not involve coercive actions. Countries should consider adopting such measures as may be necessary to enable them to provide a wide scope of assistance in the absence of dual criminality. Where dual criminality is required for mutual legal assistance, that requirement should be deemed to be satisfied regardless of whether both countries place the offence within the same category of offence, or denominate the offence by the same terminology, provided that both countries criminalise the conduct underlying the offence.

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The central issue for dual criminality is the criminalisation of the offence in both countries; it is now normal procedure that there is no necessity for strict comparability as the basis for extradition. If the essential character of the acts criminalised by each country are the same, and the laws are substantially analogous (ie, they punish conduct falling within the broad scope of the same generally recognised crime), then dual criminality can be established.

1.4

Quantitative Indicators

Learning Objective 5.1.4 Understand the practical application and limitations of quantitative indicators in combating corruption

Identifying the occurrence, causes and impact of corruption is important for policy and planning matters. Much is made of corruption indicators for assessing the development, direction and anticorruption capacity of a state. These tend to fall into two general groupings: quantitative or numeric, and descriptive. The quantitative approach to measure corruption allows comparisons to be made across time, between countries and between activities. The most-quoted quantitative indicator is one that attempts to encapsulate indicators into a single numeric ranking. The Transparency International (TI) Corruption Perception Index (CPI) annual publication achieves extensive media coverage. The sources, complementarity and significance of the data that forms the basis of the single-score CPI is weighted towards external and international surveys of the business community, themselves limited in terms of participants and the areas where corruption is noted. In any case, apart from the publicity given to corruption, the rankings are essentially meaningless in relation to guidance on policies and programmes established to deal with the phenomenon in the countries concerned. However, the reactions of a number of governments at the lower end of the spectrum, or whose ranking has moved downwards, suggest a strong incentive for some countries to change that rating if it is perceived that the ranking influences foreign direct investment and international perceptions. There are currently a number of more focused quantitative indicator and measurement methodologies, such as those which seek to assess the public’s perceptions of corruption (service delivery surveys), and context indicators relating to specific areas (such as possible correlations between levels of military expenditure and levels of corruption), or to wider socio-economic indicators such as, for example, income distribution or assessments of the informal sector. The most commonly used are the service delivery and household surveys, which graphically expose the institutionalisation of corruption at street level – where most citizens interface with the state – and their relative powerlessness in dealing with it. In household surveys of five South Asia countries between 2001 and 2002: petty corruption was found to be endemic in all key public sectors in the five countries, with citizens reporting moderate to high levels of corruption in their regular interaction with public services. Lack of accountability and monopoly of power were quoted as major factors contributing to corruption in public services. Extortion was the most prevalent form of corruption, with middle and lower-level functionaries identified as the key facilitators of corruption in all sectors studied.26

26 Thampi, G. K. (2004). ‘Benchmarking Corruption in South Asia: Insights from a Household Survey’. Global Corruption Report. Berlin: Transparency International, pp.300–301.

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However, many of the quantitative approaches come with caveats about the methods used. The most well-known, the TI CPI, accepts its role as a composite perception indicator, but it argues for the robustness of the data, the use of tolerance margins, and the relevance to any assessment of real levels of corruption. The leading exponent of the differentiated quantitative approach, the World Bank Institute (WBI), whose governance indicators are essentially an indicator of indicators, also claims a weighted and balanced integration of a diverse range of datasets27 which were defended rigorously by their authors in terms of their uniformity, validity, and comparability, despite the fact that the datasets are often specific and partial.

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The issue here for quantitative indicators is whether they are a useful tool for looking at countries or whether they are tools that indicate to practitioners and policymakers what to do about corruption in those countries. Many commentators have their doubts. Zoido and Chavis note that: one of the main criticisms made of perception indices…is that they do not reflect the actual situation in a country…cross-country measures of corruption are often criticised on the grounds that assigning a single score for an entire country is, at best, simplistic.28 In terms of empirical evidence, descriptive indicators provide a more in-depth focus at country level. Because they are not seeking to distil information on corruption into uncomplicated numeric statements, descriptor surveys can be expansive in terms of material, trends and conclusions. While they may use quantitative data, their focus is primarily on detailed descriptions and discussions of relevant issues, particularly the nuances of power and politics. These are produced by multilateral and bilateral aid agencies, a number of which are found among the country sources for the Business Anti-Corruption Portal29 which itself provides a detailed narrative on types and patterns of corruption on a country basis. A number of NPOs, for example TI, Integrity Action (formerly Tiri), Global Witness and the International Crisis Group, also publish country-related studies, some of which focus on specific activities (such as corruption involving the exploitation of mineral resources, or degradations of forests) and others on such issues as failed states and corruption. The TI National Integrity System (NIS)30 country studies have been a leading example of the descriptor approach in assessing corruption. The studies comprise narrative reports, analysis and questionnaire responses, often using in-country researchers, to compare and contrast the formal position and the reality in relation to the NIS in specific countries.

27 World Bank, Worldwide Governance Indicators, found at: http://info.worldbank.org/governance/wgi/ 28 Zoido, P. and L. Chavis (2004) ‘Introduction: Corruption Research’, Global Corruption Report, Berlin: Transparency International. p277. 29 www.business-anti-corruption.com/country-profile 30 Transparency International, National integrity system assessments, found at: http://www.transparency.org/whatwedo/nis/

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Nevertheless, the quantitative approach is one that seeks the holy grail of simple numeric quantitative indicators, but a number of qualitative approaches are also trying to integrate the two. One example is the use of service delivery surveys, followed by public expenditure tracking surveys, which allow information to become a lever of accountability (but only where central government reaches to the citizen over the heads of low-level officials.31 Another has been the Global Integrity Index32, which uses a scorecard with a limited amount of evidence to explain the score, to produce an overall score, together with a legal framework/implementation gap score. TI is now undertaking a significant number of NIS country studies where the narrative and questionnaire is also scored. Despite claims for robust review processes, both rely heavily on the subjective assessments of the various authors, as well as on the prescriptive nature of the indicators to be completed.

1.5

Types of Corrupt Practice

Learning Objective 5.1.5

Understand the main components and differences between types of corrupt practice: active and passive bribery; embezzlement; trading in influence; abuse of office; illicit enrichment; obstruction of justice; concealment

1.5.1 Active and Passive Bribery The use of these terms is an intention to clarify the roles of the participants in a case of bribery. In the CoE’s Criminal Law Convention on Corruption these are stated as: • Article 2 – Active bribery of domestic public officials – when committed intentionally, the

promising, offering or giving by any person, directly or indirectly, of any undue advantage to any of its public officials, for himself or herself or for anyone else, for him or her to act or refrain from acting in the exercise of his or her functions. • Article 3 – Passive bribery of domestic public officials – when committed intentionally, the request or receipt by any of its public officials, directly or indirectly, of any undue advantage, for himself or herself or for anyone else, or the acceptance of an offer or a promise of such an advantage, to act or refrain from acting in the exercise of his or her functions. As the UK’s CPS points out in reference to the Bribery Act 2010: The Act uses everyday language of offering, promising or giving (active bribery), requesting, agreeing to receive or accepting an advantage (passive bribery). This language is wide enough to include cases in which an offer, promise or request can only be inferred from the circumstances. The Law Commission used the example of an interview held over an open briefcase full of money that could be seen as an implied offer. It

31 See Reinnikka, R. and J. Svensson (2004). ‘The Power of Information: Evidence from Public Expenditure Tracking Surveys’. Global Corruption Report. Transparency International, p.326. 32 Global Integrity Index, found at: http://report.globalintegrity.org/globalIndex.cfm

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will be a matter for the tribunal of fact to decide whether such an inference can be drawn from the evidence in each case. It is also clear that, except where the allegation is that an advantage was given or received, there is no need for a transaction to have been completed. The Act focuses on conduct not results.33 As the U4 Corruption Glossary notes: it is important to note that active bribery does not always mean that the briber has taken the initiative. In fact, often the reverse is true. The individual who receives the bribe often demanded it in the first place. In a sense, then, he or she is the more active party in the transaction.34

Embezzlement is a variant of theft. Section 1 of the 1968 UK Theft Act provides the basic definition of theft: A person is guilty of theft if he dishonestly appropriates property belonging to another with the intention of permanently depriving the other of it; and thief and steal shall be construed accordingly. Theft may involve the taking of property without the prior awareness or knowledge of the victim (for example, street theft or house burglary). There is also theft where the victim has provided their assets to the offender, as a legitimate act on the part of the person providing the assets who, invariably, sees the recipient as a person to trust (such as an employee, lawyer or investment broker). In England, within the historical legal terms of larceny, conversion and embezzlement, there were clear sanctions against those who misused their position of employment or trust to misappropriate those assets. While the 1968 Theft Act generally caught such offenders, that relationship could be challenged, because of the potential issues of interpretation of the Act’s provisions. In the case of Barlow Clowes, a UK investment company that claimed to pay significant rates of return, the issue in court was who owned the funds handed over for investment.35 Clowes was actually charged with theft, but again the decision turned on the phrase property belonging to another. Clowes had persuaded his victims to part with their money by promising to invest it in gilts. In fact he used it for his own purposes. The standard agreements he had signed with them were unclear as to whether the victims retained a beneficial interest in their investments, with Clowes acting as a trustee, or whether they were merely his creditors. Fortunately, it was possible to read the agreements in the former light, and the Court of Appeal did so. In this way it was held that the investments did amount to property belonging to another. This emphasis on the issue of theft while in a position of trust – embezzlement – is made explicit in the UK’s 2006 Fraud Act, in which Section 4 states:

33 Bribery Act 2010: Joint Prosecution Guidance of The Director of the Serious Fraud Office and The Director of Public Prosecutions, March 2011, found at: www.cps.gov.uk/legal/a_to_c/bribery_act_2010/#a09 34 U4 Anti-Corruption Resource Centre, Glossary, found at: www.u4.no/document/glossary.cfm#activepassive 35 Law Commission (2002). Fraud. Cmd 5560. London: Law Commission. p.17.

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1.5.2 Embezzlement

A person breaches this section if he: a. occupies a position in which he is expected to safeguard, or not to act against, the financial interests of another person, and b. dishonestly abuses that position, and c. intends, as a result, to make a gain for himself or another, or causes loss to another/exposes another to risk of loss. The offence focuses on the offender, and is complete once the defendant carries out the act that is the abuse of his position, whether or not he is successful in his enterprise, and whether or not any gain or loss is actually made. CPS guidance on Section 4 is that a position of trust falls short of a position where there is a legal duty or an entitlement to single-minded loyalty, but is something more than a moral obligation. It gives examples as follows: • an employee of a software company, who uses his position to clone software products, with the • • • • • • •

intention of selling the products on his own behalf; a person is employed to care for an elderly or disabled person and has access to that person’s bank account, but abuses that position, by removing funds for his own personal use; an attorney who removes money from the grantor’s accounts for his own use. The Power of Attorney allows him to do so, but, when excessive, this will be capable of being an offence under Section 4; an employee who fails to take up the chance of a crucial contract in order that an associate or rival company can take it up instead; an employee who abuses his position in order to grant contracts or discounts to friends, relatives and associates; a waiter who sells his own bottles of wine, passing them off as belonging to the restaurant; a tradesman who helps an elderly person with odd jobs, gains influence over that person and removes money from their account; the person entrusted to purchase lottery tickets on behalf of others.

1.5.3 Trading in Influence Trading in influence does not relate to lobbying or associated activities, nor to the giving or receipt of a bribe, but to a public official who claims to be able to persuade or order others to act to the benefit of the payer in return for some advantage. According to Article 18 of UNCAC, trading in influence constitutes a criminal offence, when committed intentionally, that prohibits: • the promise, offering or giving to a public official or any other person, directly or indirectly, of an

undue advantage in order that the public official or the person abuse his or her real or supposed influence, with a view to obtaining, from an administration or public authority of the state party, an undue advantage for the original instigator of the act or for any other person; • the solicitation or acceptance by a public official or any other person, directly or indirectly, of an undue advantage for himself or herself or for another person, in order that the public official or the person abuse his or her real or supposed influence, with a view to obtaining, from an administration or public authority of the state party, an undue advantage.

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Each party shall adopt such legislative and other measures as may be necessary to establish as criminal offences under its domestic law, when committed intentionally, the promising, giving or offering, directly or indirectly, of any undue advantage to anyone who asserts or confirms that he or she is able to exert an improper influence over the decision-making of any person referred to in Articles 2, 4 to 6 and 9 to 1143 in consideration thereof, whether the undue advantage is for himself or herself or for anyone else, as well as the request, receipt or the acceptance of the offer or the promise of such an advantage, in consideration of that influence, whether or not the influence is exerted or whether or not the supposed influence leads to the intended result. The UK Bribery Act 2010 captures trading in influence in part by including, within the offence relating to being bribed, the possibility that the person being bribed with the intention to perform a function or activity improperly will do so themselves, or that another will do so at their request or with their assent or acquiescence.

1.5.4 Abuse of Office Abuse of office (or abuse of functions) has two overlapping connotations. Article 19 of UNCAC proposes a criminal offence that involves a public official performing or failing to perform an act, in violation of the law, in the discharge of his or her functions, with the intention of obtaining an undue advantage for himself or herself or for another person or entity. According to the interpretative notes, this offence may also encompass various types of conduct, such as improper disclosure by a public official of classified or privileged information. Abuse of office would, for example, cover a public official looking to obtain a bribe, but wishing to do nothing to make such an intention explicit. What the official would normally do is to exploit regulations, procedures and time to the point where a person offers a bribe to expedite matters. In the UK such an offence is difficult to prove, particularly if the intended briber is unaware of the full procedures and/or the norm for the implementation of the procedures, so that he or she could show that the public official’s conduct was so atypical as to explain how and why a bribe came to be offered. Nevertheless, such conduct may be encompassed by the second connotation, which is covered by a UK common law offence of misconduct in public office. This concerns circumstances where a public officer (someone who carries out their duties for the benefit of the public as a whole and, if they abuse their office, there is a breach of the public’s trust) commits an offence when he: wilfully neglects to perform his duty and/or wilfully misconducts himself to such a degree as to amount to an abuse of the public’s trust in the office holder, without reasonable excuse or justification.

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The provisions of Article 18 mirror those of Article 15, which mandates the criminalisation of active and passive bribery of national public officials. There is one main difference between Article 15 and Article 18. The offences under Article 15 involve an act or refraining to act by public officials in the course of their duties. In contrast, under Article 18, the offence involves using one’s real or supposed influence to obtain an undue advantage for a third person from an administration or public authority of the state. Section 12 of the 1999 European Criminal Law Convention on Corruption provides a better explanation of the constituent parts of the offences:

Examples of the offence include police officers who were prosecuted for taking no action as a detainee died in their care, and a county court registrar who made a court order with the intention of gaining thousands of pounds for his personal use; whether the conduct is sufficiently serious depends on the responsibilities of the public officer, the importance of their role and the circumstances of their departure from those responsibilities36. In practice, the key ingredient is not necessarily the advantage, but the failure to exercise the responsibilities of his or her office by the public official. Here the intent (the mens rea) is central, and its use to date would suggest the components of the offence include the existence of some improper, dishonest or oppressive motive in the exercise or refusal to exercise some public function.37 The UK Bribery Act 2010 contains a section with similar wording and intention, where an improper performance is one if it is performed in breach of a relevant expectation, and is to be treated as being performed improperly, if there is a failure to perform the function or activity and that failure is itself a breach of a relevant expectation.

1.5.5 Illicit Enrichment Illicit enrichment or unexplained wealth concerns the possession of assets by a public official that could not be explained as a consequence of lawful income (and expenditure). There are obviously ways by which this may be achieved legitimately, such as from inheritance or gambling, but there are also illicit ways, such as receiving bribes. The focus of the offence is, however, not on the acquisition of bribes and other advantages, where evidential issues or court proceedings make using corruption offences, as the basis of prosecution, problematic. The focus of the offence is the possession of assets and the issue is one of provenance. Thus, for prosecutors, the case is not about proving illegal acts, but proving wealth beyond someone’s declared income.38 By its nature, bringing a charge against a public official for illicit wealth places the onus on the official to demonstrate that the wealth is legitimately obtained, with implications for human rights and the presumption of innocence. In practice, those countries – usually civil code countries – that use such an offence, require the prosecution to bring forward sufficient evidence on which to argue a case of illicit enrichment. Thereafter, the defendant has the opportunity to explain the source, essentially seeking to rebut or to raise reasonable doubt about the prosecution case. Further, the legislation often uses some term such as significant or disproportionate to describe the level of enrichment that could form the basis of an offence. An alternative approach to address illicit enrichment is achieved through verification of asset declaration submissions, where discrepancies between submissions over time, or declaration of assets whose possession seems incompatible with salary levels, and/or the failure to provide an adequate explanation for significant assets, could be treated as an administrative violation, and to which confiscation or forfeiture may be attached.

36 37 38

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Guardian, 28 November 2008 Maer, L. (2009). Misconduct in Public Office. House of Commons: Parliament and Constitution Centre. For a discussion on the issues, see Guillermo, J. (2007). The Romanian Framework on Illicit Enrichment. Bucharest: ABA/ CEELI. p.63.

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In either case, as a 1991 Hong Kong appeals case pointed out, two factors come into play with such laws. First, the court recognised that, in some cases, the balance between individual rights and the wider needs of society to combat corruption could lead to upholding certain limitation of rights, by accepting the reversal of the burden of proof in issues where compelling public interests were involved. Secondly, the courts also recognised the need to safeguard the defendant’s rights, by requiring that the prosecution be the ones who had to produce evidence with respect to the disproportion of the public official’s standard of living, or the assets or properties that he held, in comparison to the official’s salary. The accused could not be convicted, unless the prosecution proved the matters of disproportion beyond reasonable doubt, and any explanation the accused might give as to the incommensurateness or disproportion is found by the judge or jury not to be, on the balance of probabilities, a satisfactory one.39

1.5.6 Obstruction of Justice Offences of obstruction of justice are conduct offences – those activities or conduct that seek to interfere with the detection, investigation and prosecution of offences, including corruption cases. These range from physical intimidation of investigators and witnesses, concealing, altering or destroying evidence (or asking others to do so), making misleading statements, providing a false alibi or perjury (as opposed to the use of the traditional right of silence), bribery of court officials or judges, and manipulation or misuse of evidential procedures, including medical evidence. Some countries have generic legislation covering the obstruction or perverting the course of justice; the UK relies on two aspects. For investigations, the common law offence of perverting the course of justice relates to any act that interferes with an investigation or causes it to head in the wrong direction, while the Perjury Act 1911 makes it an offence for anyone lawfully sworn as a witness or as an interpreter in a judicial proceeding to wilfully make a statement material in that proceeding, which he knows to be false or does not believe to be true. As an example, in 2003 Jeffrey Archer, the well-known UK politician and author, was convicted on the following counts40: • Perverting the course of justice, by procuring a false alibi – two years’ imprisonment. • Perverting the course of justice, by concealing the existence of a diary, providing his secretary with a

blank diary and details to fill in, and using it as genuine – four years’ imprisonment. • Perjury, by falsely swearing an affidavit about documents in his possession – three years’

imprisonment. • Perjury that the diary was in existence and contained certain entries – four years’ imprisonment.

To prevent obstructions of justice, some countries use procedural approaches, such as witness protection, video evidence for vulnerable witnesses, and on occasion the use of non-jury trials to guard against obstruction of justice. While many corruption investigations are financial crime scene inquiries, and the case often built on documentary evidence, some cases will require key witnesses (such as those who saw payments being made) or experts or victims (who can witness how they were deprived of funds or assets by the suspects). 39 See Guillermo, J. (2007). The Romanian Framework on Illicit Enrichment. Bucharest: ABA/CEELI. pp.65–66. 40 CPS, Perverting the Course of Justice, found at: www.cps.gov.uk/legal/s_to_u/sentencing_manual/perverting_the_ course_of_justice. See also R v. Archer [2003[ ICs. App. R. (s). 86.

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In some cases it may be necessary to avoid intimidation prior to a trial taking place, or to ensure the evidence is presented in ways that protects the intimidation or anonymity of any such witnesses when in the court and, for jury trials, some means to prevent jurors being influenced. These may be physical – such as the presence of law enforcement officials at the person’s address – or may be in terms of temporary relocation until the trial begins, or may be in the use of technology to allow evidence to be presented from another location. Usually, such threats do not continue after the conclusion of a trial. In the case of those that do continue (for example, seeking to sack or victimise a public official), then some form of legislative protection may be introduced, to safeguard terms and conditions of employment (and ensure that good whistleblowing legislation is developed). If the threat is both physical and likely to be continuing, then some form of witness protection programme may be used. Such programmes, however, are costly, complicated and lengthy. They should only be considered if conviction is either unlikely or will be negated, without the presence of the witness. They should be subject to appropriate costed, risk-assessment and other established procedures, and usually shared with other law enforcement agencies on a co-ordinated or centralised basis.

1.5.7 Concealment Concealment can be two different types of offence. One is a generic conduct offence which also includes such areas as participation in an offence, knowledge of an offence and concealment of an offence. These are part of a wide and differentiated range of offences necessary to the commission, delivery and coverup of an offence. The more specific interpretation is one of several offences relating to ML, that also includes transfer, conversion and co-mingling. Both interpretations apply equally to those directly involved and to third parties – such as associates, co-offenders and family members – who are involved in obstructing criminal inquiries. In the UK, the first interpretation is treated as perverting the course of justice and dealt with under common law. The explicit offence of concealment relates to POCA 2000. Concealment, in relation to the first interpretation may be an explicit offence. Thus Section 316(1) of the Crimes Act (New South Wales, Australia) requires that: if a person has committed a serious offence and another person, who knows or believes that the offence has been committed and that he or she has information which might be of material assistance in securing the apprehension of the offender or the prosecution or conviction of the offender, fails, without reasonable excuse, to bring that information to the attention of a member of the police force or other appropriate authority, that other person is liable to imprisonment for two years.

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2.

Combating Corruption

2.1

The United Nations Convention Against Corruption (UNCAC) and Organisation for Economic Co-operation and Development (OECD) Conventions

5.2.1 Know the background to the United Nations Convention against Corruption (UNCAC) and related Organisation for Economic Co-operation and Development (OECD) conventions and their role in combating corruption

The most visible sign of the determination to stem the growth of corruption is probably the numerous regional and international anti-corruption conventions and other agreements adopted in recent years, including UNCAC, the African Union Convention on Preventing and Combating Corruption, the Southern African Development Community (SADC) Protocol against Corruption, the OECD Convention against Bribery of Foreign Public Officials, the Inter-American Convention against Corruption, the Asian Development Bank (ADB)-OECD Anti-Corruption Action Plan for Asia-Pacific, and the Council of Europe Criminal Law Convention on Corruption.

2.1.1 OECD Anti-Bribery Convention The OECD Convention against Bribery of Foreign Public Officials was the first significant international anti-corruption convention. The pressure for its members to agree to address overseas bribery came from American business who complained that the 1977 FCPA disadvantaged them. It took two decades to have the OECD draft a convention, which was published in 1997.41 The OECD Anti-Bribery Convention establishes legally binding standards to criminalise bribery of foreign public officials, in international business transactions and provides for a host of related measures that make this effective. It is the first international anti-corruption instrument focused solely on the supply side of the bribery transaction. The OECD member countries and a number of non-member countries – Argentina, Brazil, Bulgaria, Chile, Estonia, Slovenia and South Africa – have adopted the Convention.

41 Carr, I. and O. Outhwaite (2008). ‘The OECD Anti-Bribery Convention Ten Years On’. Manchester Journal of International Economic Law. Vol 5. No 1.

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Learning Objective

The Convention focuses on the payment of bribes as the voluntary giving (promising or offering) of something of value to a foreign public official, in order to obtain or retain business or other improper advantage, directly or indirectly, in the conduct of international business, irrespective of whether the company was the best qualified or would in any case be eligible to have won under normal procurement criteria. It defines a foreign public official as any person that holds an office (whether elected or appointed) or any person exercising a public function for a foreign country; a public function includes any activity in the public interest. Other components of the Convention are requirements for the implementation of a proposed range of sanctions, that domestic law be amended, that bribes are not tax-deductible and that companies do not operate off-the-book accounts. On the other hand, the Convention does not include small facilitation payments and does not cover legal entities not registered in the state party. The OECD Working Group on Bribery monitors compliance with the Anti-Bribery Convention. The Convention itself calls for a procedure of self and mutual evaluation. Monitoring takes place in three phases. • Phase 1 evaluates the adequacy of a country’s legislation to implement the Convention. • Phase 2 assesses whether a country is applying this legislation effectively. • Phase 3 focuses on enforcement of the Convention, the 2009 Anti-Bribery Recommendation, and

outstanding recommendations from Phase 2. In 2009, 38 countries agreed to put in place new measures which reinforce their efforts to prevent, detect and investigate foreign bribery with the adoption of the OECD Recommendation for Further Combating Bribery of Foreign Public Officials in International Business Transactions. This included countries reviewing: • • • • • • •

awareness-raising; legislative improvement; the abolition of tax deductibility; measures to report cases; protection of development aid; international co-operation; and improved financial records.

2.1.2 United Nations Convention against Corruption (UNCAC) In its Resolution 55/61 of 4 December 2000, the UN General Assembly recognised that an effective international legal instrument against corruption, independent of the UN Convention Against Transnational Organized Crime (Resolution 55/25, Annex I) and which also contained provisions against corruption, was desirable. It established an ad hoc committee for the negotiation of such an instrument which was approved by the General Assembly by Resolution 58/4 of 31 October 2003. The General Assembly accepted the offer of the Government of Mexico to host a high-level political signing conference in Merida for the purpose of signing the UNCAC. To date, there are 165 state parties – those who have ratified UNCAC.

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Since that date, UNCAC has been supported by interpretative commentaries – the legislative and the technical guides (both available in several languages on the UNODC website) – while a computer-based self-assessment compliance process, reviewed through a peer review, has been initiated on a convention chapter basis. Complete compliance reviews on a country basis will not be fulfilled for a number of years. The UNODC acts as the secretariat to the Conference of State Parties that oversees the process.

Preventative measures (Chapter II, Articles 5–14) – the Convention contains a compendium of preventative measures, which goes far beyond those of previous instruments, in both scope and detail, reflecting the importance of prevention and the wide range of specific measures which have been identified by practitioners and experts in recent years. Within a requirement for a comprehensive national approach to controlling corruption, specific requirements include the establishment of specialised procedures and bodies to develop domestic prevention measures; private sector prevention measures; measures directed at the public; promoting prevention across the public sector; as well as proposed measures for specific critical areas, such as public procurement and financial management and the judiciary; and measures to prevent money laundering. Criminalisation and law enforcement measures (Chapter III, Articles 15–42) – while the development of the Convention reflects the recognition that efforts to control corruption must go beyond the criminal law, criminal justice measures are still clearly a major element of the package. The Convention requires/mandates state parties to establish or consider a series of specific criminal offences including, not only long-established crimes such as various forms of bribery and embezzlement, but also conduct which may not already be criminalised in many states, such as illicit enrichment, trading in official influence and abuses of official functions. The broad range of ways in which corruption has manifested itself in different countries and the novelty of some of the offences pose serious legislative and constitutional challenges, a fact reflected in the decision of the Ad Hoc Committee to make some of the requirements either optional on the part of state parties or mandatory, or subject to the fundamental principles of its legal system. Other provisions are intended to support the use of non-criminal measures to secure compensation and other remedies to address the consequences of corruption. Other measures found in Chapter III are similar to those of the 1988 United Nations Convention against the Illicit Traffic in Narcotic Drugs and Psychotropic Substances and the 2000 Convention against Transnational Organized Crime. These include offences relating to: • obstruction of justice and money laundering; • the establishment of which jurisdiction in which to prosecute the seizing, freezing and confiscation

of proceeds or other property; • protection of witnesses, experts and victims and others; • other matters relating to investigations and prosecutions; and • the requirement that civil, criminal or administrative liability must be established for legal persons.

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An overview of the various chapters of the UNCAC prepared for the first draft of the UNCAC Technical Guide notes:

Elements of the provisions dealing with money laundering and the subject of the sharing or return of corruption proceeds are significantly expanded from earlier treaties, reflecting the greater importance attached to the return of corruption proceeds, particularly for cases where very large amounts of money have been systematically looted by government insiders from state treasuries or assets and are pursued by subsequent governments. Measures dealing with international co-operation (Chapter IV, Articles 43–50) – the chapter contains a series of measures which deal with international co-operation in general, but it should be noted that a number of additional and more specific co-operation provisions can also be found in chapters dealing with other subject-matter, such as asset recovery and technical assistance. The core material in this chapter deals with the same basic areas of co-operation as previous instruments, including the extradition of offenders, mutual legal assistance and less formal forms of co-operation in the course of investigations and other law enforcement activities. A key issue in developing the international co-operation requirements arose with respect to the scope or range of offences to which they would apply. Between state parties there are a number of significant issues concerning the presence of uniform and reciprocal legislation and offences, the result of which is a flexible approach. Dual criminality requirements have been narrowed as much as possible within the fundamental legal requirements of those countries, which cannot criminalise some of the offences established by the Convention. On the other hand, offenders may be extradited without dual criminality, where this is permitted by the law of the requested state party and, although mutual legal assistance may be refused in the absence of dual criminality, this should only happen if the assistance requested involves some form of coercive action, such as arrest, search or seizure. Thus, state parties are encouraged to allow a wider scope of assistance without dual criminality where possible with an underlying rule, applicable to all forms of co-operation, that where dual criminality is required, it must be based on the fact that the relevant state parties have criminalised the conduct underlying an offence, and not whether the actual offence provisions coincide. Various provisions dealing with civil recovery are also formulated so as to allow one state party to seek civil recovery in another jurisdiction, irrespective of criminalisation. State parties are also encouraged to assist one another in civil matters in the same way as is the case for criminal matters. Asset recovery (Chapter V, Articles 51–59) – as noted above, the development of a legal basis for co-operation in the return of assets derived from or associated in some way with corruption was a major concern of developing countries, a number of which are seeking the return of assets alleged to have been corruptly obtained by former leaders or senior officials. The provisions of the Convention dealing with asset recovery begin with the statement that the return of assets is a fundamental principle of the Convention, with annotation in the travaux preparatoires to the effect that this does not have legal consequences for the more specific provisions dealing with recovery. The substantive provisions set out a series of mechanisms, including both civil and criminal recovery procedures, whereby assets can be traced, restrained or frozen, seized, confiscated or forfeited and returned.

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The chapter also provides mechanisms for direct recovery in civil or other proceedings and a comprehensive framework for international co-operation, which incorporates the more general mutual legal assistance requirements, mutatis mutandis. Recognising that recovering assets once transferred and concealed is an exceedingly costly, complex, and all-too-often unsuccessful process, the chapter also incorporates elements intended to prevent illicit transfers and generate records which can be used should illicit transfers eventually have to be traced, frozen, seized and confiscated. The identification of experts who can assist developing countries in this process is also included as a form of technical assistance. Technical assistance and information exchange (Chapter VI, Articles 60–62) – the provisions for research, analysis, training and economic development and technical assistance are similar to those developed with respect to transnational organised crime in the 2000 Convention, modified to take account of the broader and more extensive nature of corruption and to exclude some areas of research or analysis seen as specific to organised crime. Generally, the forms of technical assistance under the Convention include established criminal justice elements, such as investigations, punishments and the use of mutual legal assistance, but also institution-building and the development of strategic provisions, and the two articles governing signature and ratification and coming into force.

2.2

United Nations Convention Against Corruption (UNCAC) Provisions

Learning Objective 5.2.2 Understand which UNCAC provisions are mandatory and those that represent best practice

There are three types of provision: mandatory, optional and obligation to implement if consistent with fundamental legal principles. Some articles contain a permutation of such provisions. In summary: • Preventative measures – the mandatory articles relate to: national anti-corruption policies;

a body or bodies to implement the policies; procurement; the management of public finances; transparency in public administration; judicial integrity; prevention measures for the private sector; citizen engagement; and the prevention of ML. The remainder reflect good practice that countries are urged to follow.

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In terms of the last matter, the chapter proposes a series of provisions which favour return to the requesting state party, depending on how closely the assets were linked to it in the first place. Thus, funds embezzled from the state are returned to it, even if subsequently laundered, and proceeds of other offences covered by the Convention are to be returned to the requesting state party, if it establishes ownership or damages recognised by the requested state party as a basis for return. In other cases assets may be returned to the requesting state party or a prior legitimate owner, or used in some way for the compensation of victims.

• Criminalisation and law enforcement measures – bribery of domestic and foreign public

officials, embezzlement and misappropriation by public officials, money laundering, obstruction of justice, liability of companies, involvement in corruption-related activities, statute of limitations, minimisation of immunities, confiscation of assets, protection of witnesses, corruption-related debarment, establishing a specialist anti-corruption law enforcement unit, various types of co-operation, minimisation of banks’ secrecy, availability of criminal records and issues relating to jurisdictions are mandatory. • Measures dealing with international co-operation – apart from the possible transfer of convicted offenders, or of criminal proceedings, joint investigations, and some aspects of mutual assistance, all the requirements of the chapter are mandatory. • Asset recovery – apart from the establishment of an FIU, and further bilateral or multilateral agreements, all the articles are mandatory. • Technical assistance and information exchange – the provisions on training are mandatory; the

other requirements are optional.

2.3

The Council of Europe’s Group of States Against Corruption (GRECO)

Learning Objective 5.2.3 Understand the role of the Council of Europe’s Group of States against Corruption (GRECO)

In 1994 the Ministers of Justice of the Council of European Member States agreed that corruption should be addressed at European level, recommending a multi-disciplinary group on corruption (Groupe Multidiciplianire sur la Corruption – GMC) be set up. Its purpose was to prepare a comprehensive programme of action against corruption and to examine the possibility of drafting legal instruments in this field, referring expressly to the importance of developing a follow-up mechanism to implement the undertakings contained in them. In 1996 the Committee of Ministers adopted the Programme of Action against Corruption prepared by the GMC and, a year later, in a parallel response to concerns about organised crime and corruption, 20 guiding principles for the fight against corruption. In 1998 the GMC approved a draft agreement establishing the Group of States against Corruption (GRECO). GRECO’s role, using a small secretariat and member country evaluators, is to undertake mutual evaluation of countries’ progress in addressing corruption in terms of laws, institutions and procedures. The monitoring comprises: • a horizontal evaluation procedure (all members are evaluated within an evaluation round) leading

to recommendations aimed at furthering the necessary legislative, institutional and practical reforms; • a compliance procedure designed to assess the measures taken by its members to implement the recommendations. The process is undertaken in cycles (in cases where not all recommendations have been complied with, GRECO will re-examine outstanding recommendations within another 18 months) and, as one member of GRECO put it, it is the certainty of a regular review that makes countries realise that they cannot avoid compliance. The cycles covered specific themes and areas:

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• The first evaluation round (2000–02) dealt with the independence, specialisation and means of

The reviews involve completion of a questionnaire in country visits by evaluation teams, composed of experts, chosen from lists proposed by member states; consultation with government, private sector and civil society representatives; and publication of reports.

2.4

The Role of Development Bodies

Learning Objective 5.2.4 Understand the role of development bodies in combating corruption: World Bank; multilateral financial institutions (MFIs); multilateral development banks (MDBs)

2.4.1 The World Bank In the late 1980s and early 1990s, the World Bank, and other multilateral and bilateral aid agencies, increasingly promoted good governance, as a precondition for economic growth. This has included, as with other international agencies, a focus on corruption. That focus, however, has been within a wider governance reform agenda, These reforms have poverty reduction and the provision of functioning public services as overarching objectives. In taking this approach, the reforms may also both design out the opportunity and incentive for corruption, as well as raising the sense of public service among officials and encouraging the articulation of such expectations by the public. In donor terms, much of the agenda is predicated on a drive to democratisation, while the devising of donor policies is invariably focused on an institutional approach.

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national bodies engaged in the prevention and fight against corruption. It also dealt with the extent and scope of immunities of public officials from arrest and prosecution. • The second evaluation round (2003–06) focused on the identification, seizure and confiscation of corruption proceeds, the prevention and detection of corruption in public administration and the prevention of legal persons (corporations) from being used as shields for corruption. • The third evaluation round (launched in January 2007) addressed (a) the incriminations provided for in the Criminal Law Convention on Corruption and (b) the transparency of political party funding. • The fourth round, launched in January 2012, is to focus on prevention of corruption in respect of members of Parliament, judges and prosecutors.

The World Bank Group (WBG) anti-corruption initiative’s 2007 implementation plan covers mainstreaming anti-corruption work, through country assessments and inclusion into its Poverty Reduction Strategy Papers (PRSP, see Section 2.5) and into its projects. Together these tend to focus on governance, rather than specific anti-corruption activities – enhancing sector-level transparency, participation and accountability, core cross-cutting governance and accountability systems, including public management systems (eg, financial and budget management, procurement, public administration, and independent oversight institutions, such as supreme audit institutions, public accounts committees, judiciary); strengthening demand-side enabling frameworks and capacity by enhancing transparency/ information disclosure, civil society organisations (CSO) capacity, use of social audit and accountability tools, and working with the private sector. For certain countries where corruption is integral to the government, additional governance arrangements will be included. Where corruption affects project funding, the World Bank now has a team of investigators in the Integrity Vice Presidency to investigate fraud and corruption and to investigate allegations of possible staff misconduct involving significant fraud and corruption. The new Preventive Services Unit helps raise awareness of fraud and corruption risks; provides practical tools, training and advice to bank staff; and conducts research, to distil lessons learned from investigations that are incorporated into future projects. Internationally, the World Bank is engaged in: • intensified support for multi-stakeholder engagement, such as the Extractive Industries Transparency

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Initiative (EITI) and the initiatives being developed in other sectors, such as in construction and forestry; improved donor co-ordination, in countries where governance and anti-corruption (GAC) challenges pose serious obstacles to development; harmonisation of GAC policies and procedures (including investigative practices) with other MDBs (see Section 2.4.3) and improved information/sharing with national prosecutors, especially with respect to sanctions; support of global and regional legal conventions, with a special emphasis on asset recovery, notably by encouraging countries to sign and implement UNCAC and the OECD Anti-Bribery Conventions, and by the development and promotion of the Stolen Assets Recovery (StAR) Initiative; working to build consensus on how GAC work can enhance development effectiveness, including through sponsoring a biannual conference on linkages and financial support for research into the impact of GAC issues on development effectiveness.

The WBI was responsible for a comprehensive set of governance indicators, which reported aggregate and individual governance indicators for 212 countries and territories, over the period 1996–2008, for six dimensions of governance: voice and accountability; political stability and absence of the violence; government effectiveness; regulatory quality; rule of law; and control of corruption. Of the other organisations in the WBG, the International Finance Corporation (IFC) has introduced fraud and corruption policies, relating to the disbursement of its funds. These include: • checks against public databases, and against the WBG debarment list42;

42 http://web.worldbank.org/external/default/main?theSitePK=84266&contentMDK=64069844&menuPK=116730&pagePK= 64148989&piPK=64148984

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• an assessment of the client’s safeguards for dealing with fraud and corruption; and • a review of the fairness and balance of underlying contractual arrangements.

The sanctions process has gained broader support, with MDBs signing in 2010 a joint sanction accord, with cross debarment as a new enforcement tool, greatly increasing potential penalties for firms engaging in fraud and corruption. Since 2007 the IFC has been applying a sanctions approach to combating fraud and corruption related to newly initiated investment financing, as well as technical assistance and advisory projects. This sanctions approach is part of a larger effort to combat fraud and corruption.

2.4.2 Multilateral Financial Institutions (MFIs) Apart from the World Bank, the main MFIs are the IMF, the African Development Bank (AfDB), the Asian Development Bank (ADB), the EBRD and the Inter-American Development Bank (IDB). In addition, there are other agencies, such as the European Investment Bank (EIB) and the Caribbean Development Bank. The AfDB, ADB and EBRD are discussed in Section 2.4.3.

The International Monetary Fund (IMF) The IMF argues that many of the causes of corruption are economic in nature, and so are its consequences – poor governance is seen as detrimental to economic activity and welfare. In 1997 the IMF therefore adopted a policy on how to address economic governance, embodied in the Guidance Note The Role of the IMF in Governance Issues. Given the economic emphasis, the IMF covers economic governance issues that fall within its mandate and expertise, concentrating on issues that are likely to have a significant impact on macro-economic performance. Its work involves annual reviews of countries’ economic policies, carried out through the so-called Article IV consultations. In the process, the IMF provides policy advice, when relevant, on governance-related issues. Good governance is also promoted through IMF-supported lending. When warranted, specific measures to strengthen governance may be included and thus become part of the conditions of funding. In all of these areas, the IMF also provides technical assistance that benefits good governance. In addition, the IMF assists in strengthening countries’ capacity to combat corruption, by advising on appropriate anti-corruption legal frameworks.

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If there are allegations of questionable practices or a lack of transparency, the IFC’s review may involve more in-depth investigations. Acts of fraud or corruption by a client may give the IFC the right to accelerate its investment, cancel disbursements or terminate a facility. Additionally, allegations of fraud or corruption in technical assistance arrangements, and in the IFC investment projects, will be subject to the WBG’s anti-corruption and anti-fraud sanctions process, including debarment.

Thus the IMF promotes good governance through specific initiatives that tie in with its monitoring, lending and technical assistance as follows: • It encourages member countries to improve accountability, by enhancing transparency in policies,

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in line with internationally recognised standards and codes that cover government, the financial sector and the corporate sector. For fiscal policy and monetary and financial policies, it has developed codes that set out transparency principles. For application in natural-resource-rich countries, it issued its Guide on Resource Revenue Transparency. A multi-donor topical trust fund, launched in 2011, will enable the IMF to considerably increase technical assistance in the management of natural-resource wealth. To improve the transparency, quality, and timeliness of data, the IMF encourages its members to subscribe to the special data dissemination standard or participate in the general data dissemination system (GDDS). In its work with low-income countries, the IMF emphasises adequate systems for tracking public expenditure, related to poverty reduction. It partners with other international financial institutions and donors in the public expenditure and financial accountability programme, which helps countries measure their performance. Finally, it contributes to various working groups and international initiatives, including the EITI, the G20 Anti-Corruption Working Group, the OECD Working Group on Bribery in International Business Transactions, and the StAR initiative.

To promote good governance within its own organisation, the IMF has adopted a number of integrity initiatives, including a code of conduct for staff – bolstered by financial certification and disclosure requirements, and sanctions – and a similar code of conduct for members of the executive board, an integrity hotline offering protection to whistleblowers, and an ethics office, which advises the IMF and its staff on ethics issues and inquires into alleged violations of rules and regulations.

2.4.3 Multilateral Development Banks (MDBs) The various MDBs take the same approach as the World Bank and IMF. The IDB reflects the practice of other development banks, with a stated intention to encourage anti-corruption, through wider governance reforms, strengthening internal controls (such as a code of conduct, an office of institutional integrity and a sanctions policy) and wider engagement with other similar agencies. The IDB works closely with countries to increase their own transparency and anti-corruption practices, with projects that improve the institutional capacity of both local and national governments. These actions, for example, are aimed at improving budget processes, information systems and public expenditure controls, as well as assisting governments in enhancing regulations. It argues that corruption adversely affects not just economic development, but income distribution, the legitimacy of the political system, the viability of the state, and the level of crime. With the objective of addressing this challenge, the board of directors of the IDB approved in November 2009 the Action Plan for Supporting Countries’ Efforts to Combat Corruption and Foster Transparency (PAACT).

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The PAACT establishes a strategic policy framework that seeks to integrate, update and deepen the mechanisms and capacities for attaining greater effectiveness in actions to prevent, monitor and penalise corruption. The PAACT supplements the advances the IBD has been making in the field of integrity within the institution itself, which have strengthened the mechanisms for monitoring and investigating prohibited practices in the programmes it finances and the ethical standards of personnel. It has a commitment to working, supporting and co-operating with countries in the region in four priority areas: strengthening the country focus; strengthening the sector focus; strengthening institutional frameworks in countries; and consolidating knowledge and capacities.

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The AfBD takes its approach from the agreement establishing the bank. This entrusts it with a responsibility to install effective control mechanisms, to ensure probity in its business transactions and therefore promotes the elimination of all forms of fraud and corruption from its lending operations and financial assistance. The AfBD anti-corruption efforts focus on the following areas: • preventing and controlling corruption in bank-financed projects and programmes; • reducing opportunities for rent-seeking and corrupt practices; • supporting research on the nature, origin, development and impact of corruption on African

societies; • supporting civil society capacity building in investigating corruption matters; • sensitising and assisting regional member countries (RMCs) in efforts at combating corruption. The AfDB considers combating corruption as pivotal to the efforts a country can make to promote good governance. This factor is being taken into account in the country performance assessment and allocation of the concessional African Development Fund resources. It will also encourage RMCs to introduce anti-corruption measures, aimed at the detection and deterrence of fraud and corruption, in their own procurements. In 2000, it adopted the Good Governance Policy to support the RMCs’ governance reform in a more proactive and purposeful manner. The AfDB has reaffirmed the strategic priority it gives to governance as one of its core strategic pillars and has established a dedicated department in charge of governance, the governance, economic and financial reforms department in the Operations Sector Vice-Presidency, as the anchor and catalyst for the AfDB’s work on governance. The EBRD seeks to promote economic growth and the development of democratic market economies from central Europe to central Asia, through project financing for banks, industries and businesses, both new ventures and investments in existing companies. Corruption represents a critical challenge to this work. Combating corruption has thus always been a critical aspect of the bank’s activities, for which it has an office of compliance, which is responsible for ensuring that the bank’s ethical rules of conduct and internal standards, including procedures and guidelines on AML, CFT, conflicts of interest, treatment of confidential information and integrity due diligence, reflect internationally accepted norms. It does this by:

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• overseeing the effective administration of the bank’s accountability mechanism, which reviews

complaints that the bank has failed to adhere to applicable policies in approving a particular project and affords members of the affected community the opportunity of obtaining the bank’s assistance in a problem-solving initiative with the project sponsor; • ensuring that board officials and staff fulfil their obligations to behave in an ethical manner, consistent with the relevant code of conduct, and that they are adequately trained to understand and meet these obligations; and • ensuring that allegations of fraudulent or corrupt practices are processed in compliance with the bank’s enforcement policy and procedures. The EBRD’s approach to combating corruption is broad and wide-ranging. It includes promoting good corporate governance, providing technical legal assistance to aid the development of national institutions, laws and policies that deter corruption, active participation in various international anti-corruption initiatives and maintaining robust integrity procedures and guidelines. Each year, the bank reports on the steps it has taken to promote integrity in the projects it finances, and the measures undertaken to combat fraud and corruption both inside and outside the bank. It also, like a number of other banks, publishes a list of debarred contractors. The entities and individuals listed are ineligible to become an EBRD counterparties for the periods indicated, because they were found to have engaged in a prohibited practice as defined in EBRD’s enforcement policy and procedures by either the EBRD or another international financial institution that has entered into the Agreement for Mutual Enforcement of Debarment Decisions. The ADB takes an approach to corruption that very much reflects that of other MDBs and the World Bank, in terms of corruption as a constraint on a particular developmental trajectory. Its intentions concern: • supporting competitive markets and efficient, effective, accountable and transparent public

administration, as part of its broader work on governance and capacity-building; • supporting promising anti-corruption efforts on a case-by-case basis and improving the quality

of the dialogue with the developing country members (DCM) on a range of governance issues, including corruption; and • ensuring that ADB projects and staff adhere to the highest ethical standards. Its approach also places anti-corruption work within wider governance objectives, as it argues that: poor governance holds back and distorts the process of development, and has a disproportionate impact on the poorer and weaker sections of society. Assisting developing countries in improving governance is therefore a strategic priority of ADB in its work to eliminate poverty in Asia and the Pacific. Good governance is one of the three pillars of the ADB’s poverty reduction strategy. The ADB’s approach to governance, established as a core strategic area of intervention, under its long-term strategic framework (2001–15), recognises the importance of capacity development and identifies four key interrelated elements. These are accountability, participation, predictability and transparency, which are considered necessary to sustain efforts and ensure results.

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The ADB also supports governments’ efforts towards effective and transparent systems for public service, anti-bribery and business integrity, through its governance work and active involvement in the ADB/OECD Anti-Corruption Initiative for Asia-Pacific. This is an anti-corruption policy framework agreed in 2001 within which DCMs develop their own country anti-corruption action plans during a ten-year cycle; there are also thematic reviews – such as procurement or criminalisation of bribery, or anticorruption policies – and training seminars.

2.5

Good Governance Guidelines and the Comprehensive Development Framework

Learning Objective 5.2.5 Understand the good governance guidelines incorporated in the World Bank’s Poverty Reduction Strategy Papers and comprehensive development framework

As discussed in Section 2.4 above, the development agenda pursued by the World Bank and other multilateral and bilateral donor organisations has a strong pro-poor bias. In 1999 the World Bank’s comprehensive development framework was intended to be implemented through the production by the poorest countries of PRSPs. The distinction between the two was described by one commentator as the framework being the destination and the PRSPs as the route selected.43 PRSPs describe a country’s macroeconomic, structural and social policies and programmes for promoting growth and reduce poverty, as well as associated external financing needs. The World Bank produces a Sourcebook that explains the process, including addressing the country’s governance arrangements because: diagnosing the quality of governance arrangements is crucial to determining practical and sustainable strategies for tackling poverty. Reflecting the pro-poor nature of the current development agenda, the World Bank argues that:

43 Levinson, J. (2002). The World Bank’s Poverty Reduction Strategy Paper Approach: Good Marketing or Good Policy? Group of 24, found at: http://www.g24.org/TGM/TGM/levintgm.pdf

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In 2006 the ADB published its Second Governance and Anti-Corruption Action Plan (GACAP II) to improve its performance in the implementation of the governance and anti-corruption policies in sectors where the ADB operates. The purpose of GACAP II is to improve the ADB’s performance in the implementation of the governance and anti-corruption policies in the sectors and subsectors where the ADB is active. The plan covers a range of risk-based assessments to mainstream anti-corruption work within projects and project administration. One consequence is that the ADB now has whistleblowing arrangements in place, and an Office of Anticorruption and Integrity – the ADB’s independent investigative unit, which is the initial point of contact for allegations of, and to screen and investigate, fraud or corruption.

problems of poverty and governance are inextricably linked. If power is abused, or exercised in weak or improper ways, those with the least power – the poor – are most likely to suffer. Weak governance compromises the delivery of services and benefits to those who need them most; the influence of powerful interest groups biases policies, programs, and spending away from the poor; and lack of property rights, police protection, and legal services disadvantage the poor and inhibit them from securing their homes and other assets and operating businesses. Thus, poor governance generates and reinforces poverty and subverts efforts to reduce it. Strengthening governance is an essential precondition to improving the lives of the poor.44 The World Bank also makes the link between poor governance and corruption: good governance can be undermined by a range of factors, including lack of transparency, weak accountability, poor organisation and lack of technical capacity, lack of responsiveness, inefficiency, and poor motivation. It is important to be clear about the sources of poor governance, as possible remedies will vary accordingly. And it is important to assess the extent of demand for reform, which requires an understanding of the incentives of the main actors involved. Corruption is often both a cause and an effect of weak governance. An understanding of the specific mechanisms and nature of the specific costs imposed on the poor by weak governance is needed in order to design realistic action plans for dealing with it. The following table illustrates the WB guidelines linking dimensions of poverty to a governance response, also taken from the governance chapter of the PRSP sourcebook.

44 World Bank. PRSP Sourcebook. Chapter 8, found at: http://siteresources.worldbank.org/INTPRS1/ Resources/383606-1205334112622/4105_chap8.pdf

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Table: World Bank Guidelines Poverty dimensions

Governance issues

Empowering the poor

Oversight by political principals: • Parliamentary oversight with independent audit institutions • Budget that is a credible signal of government policy intentions • Pro-poor policies • Sound institutions for local and national representation Adequate, predictable resources for sectors, local authorities: • Pro-poor budget priorities for service provision • Stable intergovernmental transfers with hard budget constraints • Hierarchical and transparent budgeting processes Demarcation of responsibilities for delivery: • Assignment of responsibilities according to the subsidiarity principle

Improving coverage, efficiency, and sustainability of basic services

Capable and motivated civil servants: • Merit-based recruitment and competitive pay • Hiring to fill real needs within a hard budget constraint • Public service that earns respect Accountability downwards: • Publication of accounts for local-level activities • Dissemination of basic data on performance • Mechanisms for client feedback, including report cards and client surveys Flexible delivery: • Involvement of civic and private (for profit) partners Development of local capacity: • Incentives to deploy staff to poor and remote areas • Appropriate autonomy in deploying staff

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Rules for seeking and holding public office: • Fair, transparent national electoral processes • Power-sharing arrangements to ensure stability in heterogeneous societies

Poverty dimensions

Governance issues Legal and regulatory framework: • Enforcement of anti-discrimination legislation • Incentives for deepening of credit and land markets

Increasing access to markets

Providing security from economic shocks and from corruption, crime, and violence

Methods for reducing exclusion: • Enforcement of legislation against barriers to entry • Provision of information on labour and credit markets • Demarcation of responsibilities and budgeting procedures to support development and maintenance of infrastructure (eg, rural roads) to enable physical access to markets Rules for sound economic management: • Hard budget constraint for sub-national governments and aggregate fiscal discipline • Efficient administration of tax and customs • Independent central bank to carry out monetary policy Safeguards against economic vulnerability: • Recognition of property rights over physical assets • Access to social insurance and other services through hub-and-spoke arrangements Enforcement mechanisms: • Independent and adequately funded court system • Access to speedy recourse and redress • Reliable and competent police • Efficient courts with competent judiciary and legal personnel • Alternative mechanisms for dispute resolution

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3.

The Role of Multilateral and Bilateral Institutions

3.1

The United Nations Global Compact (UNGC)

Learning Objective

The Global Compact (GC) is a UN initiative to encourage corporate responsibility among private sector companies by asking them to sign up to a set of core values in the areas of human rights, labour standards, the environment and anti-corruption. It covers the following: • Human Rights

Principle 1 – businesses should support and respect the protection of internationally proclaimed human rights; and Principle 2 – make sure that they are not complicit in human rights abuses. • Labour Standards Principle 3 – businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining; Principle 4 – the elimination of all forms of forced and compulsory labour; Principle 5 – the effective abolition of child labour; and Principle 6 – the elimination of discrimination in respect of employment and occupation. • Environment Principle 7 – businesses should support a precautionary approach to environmental challenges; Principle 8 – undertake initiatives to promote greater environmental responsibility; and Principle 9 – encourage the development and diffusion of environmentally friendly technologies. • Anti-Corruption Principle 10 – businesses should work against corruption in all its forms, including extortion and bribery. The work of the GC is voluntary, based on local self-governing networks, with support from a GC office run by the UN. Business is asked to contribute a fee to the work of the GC. The mandatory annual communication on progress (COP) report by business on adherence to and implementation of the ten principles is the key determinant both of continued membership in the GC and evidence of progress. For example, BP produces an annual sustainability report which, inter alia, discusses how the company addresses Principle 10, as this example from 2010 shows:

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5.3.1 Understand the purpose of the United Nations Global Compact

Revenue transparency is a mechanism for disclosing information about revenue flows from oil and gas activities in resource-rich countries. As a member of the Extractive Industries Transparency Initiative, we work with governments, non-governmental organisations and international agencies to improve transparency in this area. Bribery and corruption are serious risks in the oil and gas industry. Our code of conduct requires that our employees or others working on behalf of BP do not engage in bribery or corruption in any form in both the public and private sectors. In 2010, we continued to implement and enhance our anti-bribery and corruption compliance programme, including launching new processes and controls designed to proactively manage bribery risk. We support the UK Bribery Act and are working to respond effectively to the standards flowing from it.45 About 8,000 companies are members of the GC internationally; a further 2,000 have been deregistered for failing the COP requirement.

3.2

The United Nations Global Compact’s (UNGC) 10th Principle

Learning Objective 5.3.2 Know the objectives of the UN Global Compact’s 10th Principle

Following the 2003 adoption of UNCAC, the 10th Principle was added in 2004, as a commitment by business that it shared responsibility for the challenges of eliminating corruption and was committed not only to avoiding bribery, extortion and other forms of corruption, but also to developing policies and concrete programmes to address corruption. Business was expected to include three elements in relation to implementing the principle: • Internal – as a first and basic step, introduce anti-corruption policies and programmes within their

organisations and their business operations. • External – report on the work against corruption in the annual COP; and share experiences and best

practices, through the submission of examples and case stories. • Collective – join forces with industry peers and with other stakeholders.

In 2009, the difficulty of reporting was confirmed by GC implementation surveys that found that too few GC business participants were reporting comprehensively on anti-corruption policies and implementation mechanisms. The GC working group on the 10th principle appointed the taskforce to create a reporting guidance46 on the 10th principle as a tool to give practical guidance to small, medium and large companies as they report on their efforts. The reporting guidance provides a comprehensive set of 22 reporting elements, which can be reported against in a mainly descriptive manner. Recognising that companies report on anti-corruption in different ways and to different extents, the reporting elements are organised in a matrix as follows:

45 2010 BP Sustainability Review, p.39, found at: www.bp.com 46 OECD Development Assistance Committee (DAC) Network on Governance – Anti-Corruption Task Team. (2009) Working Toward Common Donor Responses to Corruption: Mozambique Case Study. Paris: OECD. pp.8-9

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• By reporting levels:

5

Basic Reporting Elements – these seven elements are considered to be the basic level of reporting on an organisation’s anti-corruption policies and procedures. Desired Reporting Elements – these additional 15 elements provide the opportunity to report more extensively on anti-corruption policies and procedures. • By categories: Commitment and policy – how the organisation has committed to a zero-toleration of corruption. Implementation – how the organisation’s commitment has been put into practice, through detailed policies and systems. Monitoring – how the organisation monitors progress and has a continuous process for improvement. The basic reporting elements, together with expected evidence, are:

Table: 10th Principle Basic Reporting Elements Element

Evidence

B1 – Commitment and policy: publicly stated commitment to work against corruption in all its forms, including bribery and extortion

Provide your organisation’s statement against corruption. Describe where the statement can be found publicly (eg, website, corporate citizenship report).

B2 – Commitment and policy: commitment to be in compliance with all relevant laws, including anti-corruption laws

Provide a public written statement that you are committed to be in compliance with all relevant laws and indicate where this statement is published. Describe your procedures and efforts with regard to that statement.

B3 – Implementation: translation of the anti-corruption commitment into actions

Report on the existence and the elements in your anti-corruption programme. Describe the assignment of responsibility to oversee and implement the anti-corruption programme.

B4 – Implementation: support by the organisation’s leadership for anti-corruption

Describe the organisation’s leadership message. Describe the form of expression (eg, CEO declaration, corporate social responsibility report, speaking at employee events).

B5 – Implementation: communication and training on the anti-corruption commitment for all employees

Describe internal communication of the programme, such as anti-corruption campaigns, management communications, departmental meetings, publications, business conduct guidelines, internet or intranet resources. Provide monitoring measures, such as results of surveys of employee attitudes, publications in local languages. Describe the frequency of such communications (eg, quarterly, annually).

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B6 – Implementation: internal checks and balances to ensure consistency with the anticorruption commitment

B7 – Monitoring: monitoring and improvement processes

3.3

Describe specific internal checks and balances, such as approval policies and processes, audit plans, expense and invoicing guidelines, aimed at detecting and/or preventing corruption and how these support your anti-corruption commitment. Describe how often you review these internal checks and balances. Describe the process in place to undertake monitoring and continuous improvement, who is responsible for the process, how often it takes place and how results are taken into account, including review and oversight by senior management and/or the board or appropriate board committees. Describe the procedures for internal and external communication of the monitoring and improvement process and the results.

The Organisation for Economic Co-operation and Development’s (OECD) Development Assistance Committee (DAC)

Learning Objective 5.3.3 Understand the work the OECD’s Development Assistance Committee (OECD DAC) performs in relation to fighting corruption

The development assistance group (DAG) was created in 1960 as a forum for consultations among donors on assistance to developing countries. Following the establishment of the OECD 1961, the DAG became the development assistance committee (DAC), holding its first meeting on 5 October 1961. The OECD development department was created, consisting of two branches; which are now the Development Assistance Directorate (DAD, 1969) and the Development Co-operation Directorate (1975), which acts as the operational arm of the DAC. DAC operates as a policy, guidance, co-ordinating and recording centre for its members. Using task teams or networks, it undertakes a range of initiatives. For example, one initiative was persuading donors to untie aid, where tied aid meant recipient countries stipulated that official grants or loans must be used to purchase services, goods or works from companies in the donor country. Another is the work of one of its working parties which led to the 2010 Paris Declaration on aid effectiveness, whose principles are: • ownership – developing countries set their own strategies for development, improving their

institutions and tackling corruption; • alignment – donor countries bring their support in line with these objectives and use local systems;

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• harmonisation – donor countries co-ordinate their action, simplify procedures and share

information to avoid duplication; • managing for results – developing countries and donors focus on producing – and measuring –

results; • mutual accountability – donor and developing country partners are accountable for development

Within that context, the DAC undertakes a number of studies and initiatives relating to corruption, beginning in 2003 with its report on donor practices, which noted that, overall: there are relatively few success stories in fighting corruption. While it acknowledged the work of donors, it argued that the positive gains were being diluted by a failure to address the context of: the systems and institutions of partner countries. In proposing new approaches, such as untying aid, and the work of domestic and international NGOs, the DAC identified three emerging issues: • Political corruption, in the form of both political financing and unfair imbalances in elections, is a

growing concern. • Service delivery and sectoral corruption. The tendency to approach corruption as a governance issue has meant that efforts have focused on the governance agencies, such as the judicial system and oversight agencies. There have been promising efforts to attack the intertwined problems of inefficiency and corruption in service delivery sectors, such as health and education. • Concerns that low public sector remuneration can contribute to corruption (and inefficiency) are not new, but reoccurred frequently in the corruption literature and in the video conferences. Several examples of attempts to increase salaries were cited, but there appear to be very few evaluations that put these attempts in the context of public sector reform and reducing corruption. All recognised that this is a complex area and there are no easy, quick fixes. Since then, the DAC has developed three Principles: • Principle No. 1 – we will collectively foster, follow and fit into the local vision; • Principle No. 2 – we will acknowledge and respond to the supply side of corruption; • Principle No. 3 – knowledge and lessons should be marshalled systematically and progress needs

to be measured. In 2007 it published a policy paper on donor priorities and co-ordination after DAC ministers of development co-operation and heads of agencies agreed a collective agenda for action against corruption. Subsequently, the DAC network on governance (GOVNET) has worked on a framework for joint responses. To inform this work the anti-corruption task team (ACTT) of the GOVNET commissioned a study of three countries – Afghanistan, Indonesia and Mozambique. This was intended to provide coverage of a range of corruption situations, different donor architectures, different aid delivery mechanisms, varying degrees of donor harmonisation and a geographical spread of countries in Africa and Asia, including one conflict or post-conflict state, to see how donors responded to corruption in practice in the past, so as to understand better the opportunities, constraints and incentives for more effective collective responses.

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results.

The recommendations (from the Mozambique study, but intended to be of use beyond the specific country context and inform development of a code of conduct for collective donor responses), are as follows:47 • • • • •

donors’ joint response mechanisms can improve but also distort accountability mechanisms; specific dialogue mechanisms on corruption are important; accountability to home constituencies influences prospects for joint responses; maintaining joint donor mechanisms is complex; and donors respond according to their corporate priorities.

3.4

The United Nations Development Programme (UNDP)

Learning Objective 5.3.4 Understand the work of the United Nations Development Programme in combating corruption

The UN, and notably the UNODC and the UNDP, as key agencies, with a mandate in anti-corruption, are committed to responding to the growing international demand for support for UNCAC self-assessments. UNODC acts as the secretariat to the conference of the state parties to the UNCAC (see Section 2.2) and has played a leading role in developing the UNCAC self-assessment checklist to assist state parties, as well as in developing the peer review process. UNDP, with its decades-long anti-corruption programme experience at the country-level and ongoing anti-corruption programmes in 112 countries within its democratic governance group (DGG), and at the regional level, also has a keen understanding of the importance of broad-based participation for national anti-corruption reform and stakeholder involvement in UNCAC self-assessment processes. Thus, it takes a much broader approach to corruption, within its wider remit of pro-poor policies, increased public participation in decision-making, and monitoring of government services, infrastructures and budgets by mainstreaming anti-corruption in existing UNDP work and other development processes. Its work is both specific and general, ranging from specific toolkits (for example, on assessing anticorruption agencies (ACAs) or on UNCAC reviews) to programmes such as PACDE (Global Programme on Anti-Corruption for Development Effectiveness), which is currently concentrating on developing the internal capacity of UNDP country offices (COs) to provide quality anti-corruption technical assistance. It includes both regional networks – such as the anti-corruption practitioner’s network, which is a group of people committed to the fight against public corruption in the Eastern European and the Commonwealth of Independent States (CIS) countries – and a Community of Practice (CoP), which are anti-corruption focal points for staff, who have been identified and trained at global, regional and CO levels.

47 OECD DAC Network on Governance – Anti-Corruption Task Team. (2009) Working Toward Common Donor Responses to Corruption: Mozambique Case Study. Paris: OECD. pp.8-9

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The UNDP has proposed an intensive, multi-participatory approach, that includes a supervisory stakeholder committee, a team of highly competent, experienced and trained professionals, and an inter-disciplinary and integrated team, including various government departments, civil societies, the private sector and academia, to undertake a comprehensive analysis. This feeds into the UNCAC review mechanism, and will assist the government to identify compliance issues and subsequently prioritise and sequence its anti-corruption reforms.

3.5

Principles for Countering Bribery

Learning Objective 5.3.5

Understand the Principles for Countering Bribery developed by the World Economic Forum Partnering against Corruption Initiative (PACI)

The World Economic Forum was founded in 1971, as an independent international organisation, committed to improving the state of the world, by engaging business, political, academic and other leaders of society to shape global, regional and industry agendas. Most famous for the annual meetings in Davos and often the target for anti-global capitalism protesters, the Forum also produces reports, such as its annual global risks report. It has also set up the partnering against corruption initiative (PACI), which engages with over 150 chief executive signatories of industry-leading companies, in the implementation of a zero-tolerance policy towards bribery and an effective internal anti-corruption programme. PACI’s mission is to develop multi-industry principles and practices, that will result in a competitive level playing field, based on integrity, fairness and ethical conduct. It works with a range of stakeholders such as the Basel Institute on Governance, the International Chamber of Commerce (ICC), the OECD, TI, and the UNGC. It offers those firms that sign up access to: • PACI principles for countering bribery (a practical guide for developing internal anti-corruption

programmes); • a self-evaluation tool (to evaluate the effectiveness of internal anti-corruption programmes); • an external verification tool (a voluntary framework for independent assessment of anti-corruption

programmes);

48 UNDP, Guidance Note: UNCAC Self-assessments – Going beyond the Minimum, January 2011, found at: http://www. undp.org/content/undp/en/home/librarypage/democratic-governance/anti-corruption/guidance-note---uncac-selfassessments-going-beyond-the-minimum.html

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In 2010, the UNDP developed a guidance note in relation to UNCAC48, Going Beyond the Minimum, which presents an approach that may assist countries in implementing a nationally owned UNCAC selfassessment process. The process seeks the engagement of all stakeholders, notably national agencies and departments, parliament, media, the private sector, civil society, academia and development partners from the very start, to ensure a successful UNCAC self-assessment process. This wide level of engagement is important in taking forward the implementation of any action plan that arises from the self-assessment.

• a business case against corruption; and • resisting extortions and solicitations in international transactions (RESIST), a company training tool

with scenarios on extortion and solicitation.

3.6

Anti-Corruption Toolkits

Learning Objective 5.3.6 Understand the application and limitation of anti-corruption toolkits

RESIST is a number of toolkits, guides and resource materials available to organisations to address corruption – see the table in the annex at the end of this chapter for more examples. The value of the toolkits is that they pull together practical approaches and case studies, as a portfolio resource for countries, aid agencies and practitioners, often with lessons learned, and provide legal, institutional, technical and procedural options for anti-corruption work. As well as case studies, toolkits will frequently contain diagnostic frameworks (such as those contained in the 2006 USAID Handbook on Fighting Corruption) and practitioner guidance on addressing corruption (such as the comprehensive resources found in the 2004 UNODC global programme against corruption: UN anti-corruption toolkit, which includes guidance on the assessment of a range of issues, including the nature and extent of corruption and institutional capabilities and responses to corruption. It also provides advice on institutional, practical and legislative approaches to anti-corruption). Although the range and variety of toolkits and associated materials provide synthesised experience and lessons from a range of practitioners, supported by case studies and country examples, they also suffer from three main weaknesses: • they are often strong on defining the issues, and proposing the intended outcome of reforms,

but are weak on the reasons for why particular approaches work in specific countries and, more generally, on the how to process; and • although there are some exceptions, many are not conversant in organisational design and development. Thus one major absence is information on the building blocks of effective organisations, including establishing conditions of service, HR and finance departments, standing orders, budget procedures, operating procedures, and financial control systems; and • the toolkits and guides are often not country-specific and not derived from country-specific issues. Given the comments above on the complexity and variety of the permutation of types and patterns of corruption, the guidance may not necessarily be either relevant or realistic. At the same time, the perspectives of the issuing agencies also influence the approach and guidance being provided.

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3.7

Private Sector Initiatives

Learning Objective 5.3.7 Understand the work of Multilateral agencies in promoting the Extractive Industry Transparency Initiative (EITI) and Collective Action

5

One of the developments, in attempts by multilateral and international organisations to engage with the supply side of corruption, through the private sector, has been a set of specific initiatives to guide the private sector, in its dealings with the public sector or to provide a mutual framework, within which both can work towards a corruption prevention approach. Some are general in that they provide guidance to business, such as the OECD Guidelines for Multinational Enterprises intended to provide voluntary principles and standards for responsible business conduct consistent with applicable laws, and the TI Business Principles for Countering Bribery; others offer specific guidance, such as the ICC Guidelines on Agents, Intermediaries and Other Third Parties. Some are directed at specific industry sectors. The Global Infrastructure Anti-Corruption Centre49, is an independent, not-for-profit, organisation set up in 2008, which provides resources and services for the purpose of preventing corruption in the infrastructure, construction and engineering sectors. It advises stakeholders in relation to the design and implementation of anti-corruption programmes, project anti-corruption systems, anti-corruption procedures for government regulatory authorities, and specific anti-corruption measures. The Business Anti-Corruption Portal50 is tailored to meet the corruption risk management needs of small- and medium-sized enterprises (SMEs) operating in, or considering doing business in, emerging markets and developing countries. It provides procedures on how to: develop an anti-corruption policy; prepare an initial risk assessment; devise a reporting and control mechanism; prepare employee training; and develop a practical integrity system flowchart (with policies, procedures and guidelines available for download and which can be modified to accommodate individual company needs). Finally, there are a number of industry-specific initiatives, involving a range of bilateral and multilateral agencies. The Medicines Transparency Alliance was set up by DFID, the World Bank and the World Health Organization. It is intended to improve access and affordability of medicines, through good prices, quality and availability of medicines, as well as to promote transparency and accountability through multi-stakeholder collaboration. The Water Integrity Network is a coalition made up of the IRC International Water and Sanitation Centre, the Stockholm International Water Institute, TI, and the Water and Sanitation Program-Africa to support anti-corruption activities in the water sector worldwide, by forging coalitions of all interested stakeholders. The two major initiatives are the Extractive Industries Transparency Initiative (EITI) and Collective Action.

49 www.giaccentre.org 50 www.business-anti-corruption.com

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The EITI began as a campaign, by civil society organisations, for publication of payments by extractive companies to host governments. Its aim is to increase transparency over payments by companies to governments and government-linked entities. They also sought transparency over revenues to those host country governments, particularly in relation to revenues from oil, gas and mining companies, in the form of taxes, royalties, signature bonuses and other payments, that should be an important facilitator for economic growth and social development in developing and transitional countries. The EITI was to be run by an independent board and secretariat. At a conference in London 2003, a set of principles (the EITI principles) were agreed and a pilot phase was launched. Based on some of the experiences gained during this pilot implementation phase, a set of criteria (the EITI criteria) were agreed in 2005, at a meeting at Lancaster House, which was the inaugural meeting of the EITI International Advisory Group. In 2005 the EITI Sourcebook was published, which is an illustrative guide to assist countries implementing the EITI. The validation guide was launched in 2006, and revised in 2011. This provides the rules for implementing an EITI agreement, which are: • Regular publication of all material oil, gas and mining payments by companies to governments

• •

• • •

and all material revenues received by governments from oil, gas and mining companies to a wide audience, in a publicly accessible, comprehensive and comprehensible manner. Where such audits do not already exist, payments and revenues are the subject of a credible, independent audit, applying international auditing standards. Payments and revenues are reconciled by a credible, independent administrator, applying international auditing standards and with publication of the administrator’s opinion regarding that reconciliation, including discrepancies, should any be identified. This approach is extended to all companies, including state-owned enterprises. Civil society is actively engaged as a participant in the design, monitoring and evaluation of this process and contributes towards public debate. A public, financially sustainable work plan for all the above is developed by the host government, with assistance from the international financial institutions where required, including measurable targets, a timetable for implementation, and an assessment of potential capacity constraints.

The EITI Multi-Donor Trust Fund (MDTF) is an arrangement whereby the World Bank manages funds on behalf of multiple donors. It is governed by standard World Bank rules and procedures. The goal of the MDTF is to broaden support for the EITI principles and implement EITI processes through programmes of co-operation among the government, the private sector, and civil society. Collective Action was initiated and co-ordinated by the WBI. It is an initiative delivered through a coalition made up of Grant Thornton member firms in Canada, the UK and US, Siemens, the UNGC, the Centre for International Private Enterprise (CIPE), TI and the Global Advice Network, to provide an anticorruption resource for business. It focuses on business fighting corruption jointly with other companies and stakeholders, including government. It provides a guide for anyone with responsibility for a major project or market, and who operates in an environment where corruption is or may be present. It uses dilemma, decision-tree and other approaches to explain the key concepts and characteristics of the four different types of collective anti-corruption initiatives, which usually can be found in practice: 1. 2. 3. 4.

anti-corruption declaration; integrity pact; principle-based initiative; and certifying a business coalition, as well as guidance on how to implement them.

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The WBI provides the website and facilitates the work of the coalition. Depending on the country or project, a collective action contract tender agreement can mean a no-bribes agreement on both sides, supported by training and formal agreements, with an independent third party to act as monitor and complaints-handler.

Annex to Chapter 5: Table of Anti-Corruption Toolkits Source/Author

Tool Kit Anti-Corruption Tool Kit

UNODC

Practical Anti-Corruption Measures For Prosecutors and Investigators

UNDP – Oslo Governance Centre

Governance Indicators: A Users’ Guide

Richard Holloway

NGO Corruption Fighters’ Resource Book

Open Society Institute Justice Initiative

Monitoring Election Campaign Finance: A Handbook for NGOs

Pope, Jeremy

Confronting Corruption: The Elements of a National Integrity System

Article 19

Freedom of Information – Training Manual for Public Officials

Office of Security and Co-operation in Europe (OSCE) Office for Democratic Institutions and Human Rights

Election Observation Handbook

OSCE – Office of the Co-ordinator of OSCE Economic and Environmental Activities

Best Practices in Combating Corruption

OECD

Bribery Awareness Handbook for Tax Examiners

OECD

Managing Conflict of Interest in the Public Service: A Tool Kit

International Foundation for Electoral Systems (IFES) Center for Transitional and Post-Conflict Governance

Enforcing Political Finance Laws: Training Handbook

TI

The Corruption Fighter’s Tool Kit

The International Budget Project

A Guide to Budget Work for NGOs

Center for Democracy and Governance, United States Agency for International Development (USAID)

A Handbook on Fighting Corruption

Basel Institute on Governance, International Centre for Asset Recovery

Tracing Stolen Assets: A Practitioner’s Handbook

USAID

Money in Politics Handbook: A Guide to Increasing Transparency in Emerging Democracies

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UNODC

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Source/Author

Tool Kit

International Institute for Democracy and Electoral Assistance (IDEA)

Funding of Political Parties and Election Campaigns

UNODC

Legislative Guide for the Implementation of UNCAC

UNODC

Technical Guide for the Implementation of UNCAC

UNODC

Legislative Guide for the Implementation of the UN Convention against Transnational Organised Crime

World Bank/IMF

Financial Intelligence Units: An Overview

OECD

Good Practice Guidance on Internal Controls, Ethics and Compliance

OECD

Integrity in Public Procurement – Good Practice from A to Z

OECD

Specialised Anti-Corruption Institutions – Review of Models

UNDP

Practitioners’ Guide to Capacity Assessment of Anti-Corruption Agencies

CIPE

Combating Corruption: A Private Sector Approach

CIPE/USAID

Business Without Corruption: An Action Guide

Council of Europe

Model Initiatives Package on Public Ethics at Local Level

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End of Chapter Questions

1.

Which are the mandatory anti-corruption offences in UNCAC? Answer reference: Section 1.1

2.

What were the three UK Acts that the Bribery Act replaced? Answer reference: Section 1.1.1

3.

Name at least three EU documents on fighting corruption. Answer reference: Section 1.1.2

4.

What does BRIC stand for? Answer reference: Section 1.1.2

5.

What is a conflict of interest? Answer reference: Section 1.2

6.

What does dual criminality mean? Answer reference: Section 1.3

7.

What are the main weaknesses of anti-corruption quantitative indicators? Answer reference: Section 1.4

8.

Is there a distinction between active and passive bribery? Answer reference: Section 1.5.1

9.

What does trading in influence mean? Answer reference: Section 1.5.3

10.

What does abuse of office mean? Answer reference: Section 1.5.4

11.

Name the three phases of monitoring by the OECD. Answer reference: Section 2.1.1

12.

Name one area of mandatory requirement in Chapter 6 of UNCAC. Answer reference: Section 2.2

13.

What is the role of the Vice Presidency Integrity in the World Bank Group? Answer reference: Section 2.4.1

14.

Name three initiatives undertaken by the IMF. Answer reference: Section 2.4.2

5

Think of an answer for each question and refer to the appropriate section for confirmation.

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15.

What is PAACT? Answer reference: Section 2.4.3

16.

What link does the World Bank make between poor governance and corruption? Answer reference: Section 2.5

17.

What is the UN Global Compact’s 10th principle? Answer reference: Sections 3.1, 3.2

18.

What are the three principles of the OECD DAC? Answer reference: Section 3.3

19.

Name at least four toolkits produced by international organisations. Answer reference: Section 3.6, Annex

20.

What is the difference between EITI and Collective Action? Answer reference: Section 3.7

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Chapter Six

Bribery 169

2. The UK Bribery Act (2010)

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3. The Foreign Corrupt Practices Act (FCPA) (1977)

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1. Bribery and Corruption

This syllabus area will provide approximately 11 of the 100 examination questions

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1.

Bribery and Corruption

Learning Objective

We looked at the difficulties of defining corruption in Section 1 of the previous chapter. Bribery is only one offence, within the wider term of corruption, which also includes embezzlement and illicit enrichment, and is a single term that captures conduct and behaviour, which reflects private or partisan interests over official duties and responsibilities. In general, bribery is a transactional offence where a person is persuaded to act in favour of the person offering, promising to offer or giving the bribe, without the knowledge of his employer, and in contradiction of his official duty. This offence underlines the point that the benefit or advantage is the criterion that persuades the recipient to act (or not act) as the payee intends, and it is from that basis that the relevant decisions or actions flow. Bribery is invariably criminalised and, while there are variations in terms of the wording or extent of the legislation, most countries have broadly similar laws. It is sometimes useful, therefore to distinguish between criminalised offences, particularly bribery, and the range of offences that are often labelled corrupt. In the UK, for example, corruption is very much seen as synonymous with bribery and the new act, which repeals the previous Prevention of Crime Acts, is termed the Bribery Act.

2.

The UK Bribery Act (2010)

2.1

Factors Behind the UK Bribery Act 2010

Learning Objective 6.2.1

Know the factors that led to the UK Bribery Act (2010)

The main factors behind the introduction of a new bribery act in the UK were a series of scandals, reviews and international developments which set in train (a) a general view that the existing legislation required reform, and (b) the view that the UK legislation had to match those international standards to which it had subscribed. These included the following stages of development: • A series of scandals from the 1970s, such as the Poulson case, led to a Royal Commission which

proposed a review of the existing three Acts, in part in relation to the immunity of MPs and in part because of the lack of coherence of the existing legislation. • The 1995 Nolan Committee on Standards in Public Life, reviewing various personal and financial scandals surrounding the end of the government of John Major, recommended that the issue of immunity of MPs be revisited, usefully combined with the consolidation of the statute law on bribery (which the later iteration of the Committee noted had been agreed by the government, but not done). It suggested that this was also something the Law Commission should undertake.

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6.1.1 Know the difference between bribery and corruption

• In 1997, the Law Commission, which regularly reviews UK legislation, produced a report for the

government on the corruption laws1. It noted that: although the number of prosecutions for corruption in the past ten years has been very small, the conclusion of the Law Commission that the present law was in an unsatisfactory state has been generally accepted and concluded that the present arrangements were obscure, complex, inconsistent and insufficiently comprehensive. It proposed repeal of all or parts of the existing relevant acts and their replacement by a modern statute and incorporation of the common law offences of bribery. The new offences, drawn from these existing statutes and common law, would apply to both the public and the private sector. As the report noted, it was widely recognised that it was no longer useful or practicable to distinguish between the agents involved in public authorities and those in the private sector, given privatisation, the contracting out of government services and the general blurring of the boundaries. • At the same time, however, the 1998 ratification by the UK of the OECD Convention on Combating

Bribery of Foreign Public Officials in International Business Transactions – which sought to encourage developed countries to agree to try company officials and others who pay bribes overseas in their own countries– saw its provisions included as part of a hurried Act of Parliament, which mainly addressed anti-terrorism matters, brought about by the terrorist attacks of 11 September 2001. Sections 108–110 of the Anti-Terrorism, Crime and Security Act 2001 introduced the areas of the Convention that had been required of the UK in relation to overseas jurisdiction since ratification (although the Act did not address the position of MPs). • The sixth report of the Committee on Standards in Public Life2 in 2000 urged the Government to: introduce its proposed legislation on the criminal law of bribery as soon as possible in order to remove any uncertainty regarding the scope of the statutory offence of bribery and to make clear that members of both Houses of Parliament, acting in their capacity as members, and those who bribe a member of either House of Parliament, fall within its scope. • It should be noted that around this time the UK had signed or ratified a number of regional and international conventions and other formal documentation, including: the Protocol to the Convention on the protection of the European Communities financial interests; the Council of Europe Criminal Law Convention on Corruption; the EU Convention on the fight against corruption involving officials of the European communities or officials of member states of the EU; and UNCAC (which was signed in 2003 and ratified in 2006). The proposed bill was announced by the government in 2000, whose White Paper ‘Raising Standards and Upholding Integrity’3 made it plain that it accepted in principle the proposals made by the Law Commission in its report on the reform of the law of corruption. The purpose of the paper was to set out how the government intended to meet its objectives of clarifying and updating the law, so as to put beyond doubt its ability and commitment to fulfil its domestic and international commitments to combating corruption in both the public and private sectors. At the same time, the issue of overseas corruption was the subject of pressure from international and domestic agencies, as well as parliamentary committees. It took a number of years, however, before the necessary legislation was drafted and brought before Parliament. The Act has given rise to another widely used acronym; ABC (Anti-Bribery and Corruption). 1 2 3

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Law Commission (1997). Legislating the Criminal Code: Corruption. Consultation Paper No 145. London: Law Commission Committee on Standards in Public Life (2000). Reinforcing Standards; Review of the First Report of the Committee on Standards in Public Life. 6th Report. London: The Stationery Office. The Stationery Office, Raising Standards and Upholding Integrity: The Prevention of Corruption, found at: http://www. archive.official-documents.co.uk/document/cm47/4759/4759.htm

Bribery

2.2

The Extra-Territorial Reach of the Act

Learning Objective 6.2.2

Know the extra-territorial reach of the Act

A close connection with the UK means that they are a UK subject, a British overseas citizen, an individual ordinarily resident in the UK, or body incorporated under the law of any part of the UK. Similar provisions apply to all UK businesses and are also intended to apply to non-UK companies for a failure to prevent bribery if they do business in the UK.

2.3

Offences Introduced in the UK Bribery Act (2010)

Learning Objective 6.2.3 Know the offences introduced by the UK Bribery Act (2010): bribing another person; receiving bribes; bribery of a foreign public official (FPO); failure of commercial organisations to prevent bribery

2.3.1 Main Offences The main offences by section are: • General bribery offences

Section 1 – Offences of bribing another person. Section 2 – Offences relating to being bribed. • Bribery of foreign public officials Section 6 – Bribery of FPOs. • Failure of commercial organisations to prevent bribery Section 7 – Failure of commercial organisations to prevent bribery.

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The Act now is explicit in that the offences it covers can take place anywhere in the world, but be treated as though they had taken place in the UK, for the purposes of investigation and prosecution. The requirement is that a person’s acts or omissions are done or made outside the UK and would form part of such an offence if done or made in the UK, and that person has a close connection with the UK. In such circumstances, proceedings for the offence may take place anywhere in the UK.

2.3.2 Section 1 – Bribing Another Person There are two ways a person can bribe another – either to get them to do an improper act (or reward them for so doing) or by offering something the acceptance of which itself would be improper. A bribe does not have to precede the improper act; it could be given as a reward after the fact. It is an offence if you offer, promise or give a financial or other advantage to another person, and intend the advantage to induce a person to perform a relevant function or activity improperly, or to reward a person for the improper performance of such a function or activity. It does not matter whether the person to whom the advantage is offered, promised or given is the same person as the person who is to perform, or has performed, the function or activity concerned. It is an offence if you offer, promise or give a financial or other advantage to another person, and know or believe that the acceptance of the advantage will itself constitute the improper performance of a relevant function or activity. It does not matter whether the person to whom the advantage is offered, promised or given is the same person as the person who is to perform, or has performed, the function or activity concerned. It also does not matter whether the advantage is offered, promised or given directly or through a third party. One thing to note in respect of these offences is that a bribe does not have to consist of giving money – the Act refers to financial or other advantage.

2.3.3 Section 2 – Receiving Bribes The offences in this section are in effect the mirror-image of the previous section – if a bribe is being given, it must also be an offence to accept it, or indeed to request a bribe. Again, the bribe need not be money; it could be some other form of advantage. It should be noted that the person receiving the bribe need not be the person who commits the improper performance; they may arrange for the improper performance by another person. It is an offence if you request, agree to receive or accept a financial or other advantage intending that, in consequence, a relevant function or activity should be performed improperly, whether by yourself or another person. The offence happens where you request, agree to receive or accept a financial or other advantage, as a reward for the improper performance (whether by you or another person) of a relevant function or activity for yourself, or by another person at your request or with your assent or acquiescence. It is also an offence if you request, agree to receive or accept a financial or other advantage, and the request, agreement or acceptance itself constitutes the improper performance by yourself of a relevant function or activity. The offence happens where, in anticipation of or in consequence of your requesting, agreeing to receive or accepting a financial or other advantage, a relevant function or activity is performed improperly by yourself, or by another person at your request or with your assent or acquiescence.

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In any case it does not matter whether the advantage is received directly or through a third party, nor whether the advantage is (or is to be) for the benefit of yourself or another person. It also doesn’t matter whether you know or believe that the performance of the function or activity is improper. If another is performing the function or activity, it also does not matter whether that person knows or believes that the performance of the function or activity is improper.

2.3.4 Functions and Activities Sections 1 and 2 talk about bribery in relation to a relevant function or activity. The Act casts this net widely, capturing people in public life as well as business. Section 3 states that a relevant function or activity is:

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• any function of a public nature; • any activity connected with a business; • any activity performed in the course of a person’s employment; any activity performed by or on

behalf of a body of persons (whether corporate or unincorporate). The three conditions related to the relevant function or activity are that the person performing the function or activity is: a. expected to perform it in good faith; b. expected to perform it impartially; and c. in a position of trust by virtue of performing it. Section 4 then states what comprises an improper performance of a relevant function or activity: if it is performed in breach of a relevant expectation, and if there is a failure to perform the function or activity and that failure is itself a breach of a relevant expectation. Relevant expectation in relation to a function or activity that meets condition A or B means the expectation mentioned in that condition. In relation to condition C, it means any expectation as to the manner in which, or the reasons for which, the function or activity will be performed that arises from the position of trust. Section 5 then addresses the expectation test, which is a test of: what a reasonable person in the UK would expect in relation to the performing of the type of function or activity concerned. If this relates to performance abroad, the Act specifically excludes custom and practice, unless it is permitted or required by that country’s written law (which includes any written constitution, law or published written financial decisions).

2.3.5 Section 6 – Bribery of a Foreign Public Official (FPO) Section 6 introduces a stand-alone offence of bribing a foreign public official (FPO), notwithstanding that the act of making such a bribe could also fall under the Section 1 offence. The offence concerns an intention to influence so that the payer intends to obtain or retain business, or an advantage in the conduct of business. The bribe could be made directly, or through another person at the FPO’s request or with the FPO’s assent or acquiescence or through a third party.

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However, the offence is not committed if the FPO is permitted or required by the applicable written law of their country to be influenced by the advantage. The influence involves exercising or not exercising their official functions and any use of their position as an official, even if not within their authority. The definition of an FPO is important to understand and is dealt with in Section 2.4.

2.3.6 Section 7 – Failure of Commercial Organisations to Prevent Bribery A commercial organisation is guilty of an offence under this section of the Act if a person associated with the commercial organisation bribes another person, intending to obtain or retain business for the commercial organisation, or to obtain or retain an advantage in the conduct of business for the commercial organisation. The section states that, for the purposes of a commercial organisation being guilty of an offence as a result of bribery by an associated person, the associated person is deemed to have bribed another if they: are, or would be guilty of an offence under Section 1 (Bribing Another Person) or Section 6 (Bribing a Foreign Public Official). The meaning of a person associated with the commercial organisation is described in more detail in Section 2.8. The Act has a broad definition of what comprises a relevant commercial organisation. Section 7(5) defines a relevant commercial organisation as a body or partnership incorporated in the UK, wherever it carries out business, or any other body or partnership (wherever incorporated) which carries on a business, or part of a business, in any part of the UK. The term partnership relates to bodies set up under the Partnership Act 1890, or a limited partnership registered under the Limited Partnerships Act 1907. The Act also states that a trade or profession is a business.

2.3.7 Exempted Offences The Act recognises that on occasion agents of the state may need to undertake activity that fall within the sections outlined above. It contains a defence against bribery offences payments necessary for the proper exercise of any function of: • an intelligence service; or • the armed forces when engaged on active service.

This covers a: a. member of the armed forces who is engaged on active service; or b. civilian subject to service discipline, when working in support of a member of the armed forces, who is engaged on active service.

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2.4

The Definition of a Foreign Public Official (FPO)

Learning Objective 6.2.4 Know the definition of an FPO

According to the Act a foreign public official (FPO) applies to a person who: • holds a legislative, administrative or judicial position of any kind, whether appointed or elected

in another country, or who exercises a public function for the country or for any public agency or public enterprise of that country or territory (or subdivision); or • is an official or agent of a public international organisation.

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This definition is derived from the OECD Convention: i. FPO means any person holding a legislative, administrative or judicial office of a foreign country, whether appointed or elected; any person exercising a public function for a foreign country, including for a public agency or public enterprise; and any official or agent of a public international organisation; ii. foreign country includes all levels and subdivisions of government, from national to local; iii. act or refrain from acting in relation to the performance of official duties includes any use of the public official’s position, whether or not within the official’s authorised competence. For contrast, the UNCAC definition is: 1. any person holding a legislative, executive, administrative or judicial office of a state party, whether appointed or elected, whether permanent or temporary, whether paid or unpaid, irrespective of that person’s seniority; 2. any other person who performs a public function, including for a public agency or public enterprise, or provides a public service, as defined in the domestic law of the state party and as applied in the pertinent area of law of that state party; 3. any other person defined as a public official in the domestic law of a state party.

2.5

Adequate Procedures

Learning Objective 6.2.5 Understand strict liability and the meaning of ‘adequate procedures’

There is strict liability for commercial organisations in that a relevant commercial organisation is guilty of an offence under Section 7 if a person associated with the organisation bribes another person intending to obtain or retain business (or an advantage in business) for the organisation, irrespective of whether they were told or asked to do so. It is worth noting that, for the purposes of this section, bribing another person includes being guilty of offences under Section 1 and 6 whether or not the person has been persecuted for such an offence.

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In terms of the liability of individuals in a commercial organisation, they are only liable under Section 14 on conviction of any person or associated person convicted under the Act. This is not strict liability, but based on consent and connivance. A company being convicted for failing to prevent bribery under Section 7 does not mean that officers of the company will be convicted. However, the Act does supply a defence for a commercial organisation, should an associated person carry out bribery, if they can show that they had adequate procedures in place to prevent it. When organisations are held to account for any criminal or civil investigation, the key in the past has been to identify the guiding or controlling mind – the individual or individuals acting for or directing the organisation. Without that individualisation of intent or intention, addressing organisational responsibility has been a legal problem in terms of individual punishment: It is difficult to penetrate the inner workings of the organisation to know who did what in bringing about the criminal harm. Or sometimes it might be the case that one person possesses the relevant information, another makes a decision to act, and still another carries out the action. In this situation, the diffusion of function makes it impossible to hold a single individual responsible for the crime. These difficulties, plus the general sense that organized action has an increasing impact on the lives of ordinary individuals, have generated pressure towards the prosecution and appropriate punishment of legally created entities that bring about criminally prescribed harms.4 With the Bribery Act it is no longer necessary to prove that a guiding mind of the company decided that a bribe should or could be paid, but that the company procedures were such as to allow it to happen; in other words, no one person or persons was responsible for the result but the actions of several persons (possibly with no intention to lead to an unlawful outcome) collectively contributed to that outcome. The Act assumes the organisation will have adequate procedures and will take action against the organisation if bribery occurs and such procedures are not in place. According to government guidance5: the objective of the Act is not to bring the full force of the criminal law to bear upon well run commercial organisations that experience an isolated incident of bribery on their behalf. So in order to achieve an appropriate balance, Section 7 provides a full defence. This is in recognition of the fact that no bribery prevention regime will be capable of preventing bribery at all times. However, the defence is also included in order to encourage commercial organisations to put procedures in place to prevent bribery by persons associated with them. The commercial organisation will have a full defence if it can show that, despite a particular case of bribery, it nevertheless had adequate procedures in place to prevent persons associated with it from bribing. The question of the adequacy of procedures will depend on the facts of the case, including the level of control over the activities of the associated person and the degree of risk requiring mitigation.

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Fletcher, G.P. (1998). Basic Concepts of Criminal Law. Oxford: OUP. p.201 Ministry of Justice, The Bribery Act 2010: Guidance (issued under Section 9), found at: http://www.justice.gov.uk/ downloads/legislation/bribery-act-2010-guidance.pdf

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One area where procedures need to be clear is in relation to corporate hospitality. The Guidance states: Bona fide hospitality and promotional, or other business expenditure which seeks to improve the image of a commercial organisation, better to present products and services, or establish cordial relations, is recognised as an established and important part of doing business and it is not the intention of the Act to criminalise such behaviour. However, hospitability and entertainment can clearly be used as a method of bribing, so any legitimate examples must be both reasonable and proportionate.

2.6

Bribery Prevention Principles and their Legal Context

Learning Objective 6

6.2.6 Understand the 6 principles for bribery prevention and their legal context

The Guidance on the Bribery Act sets out six principles on which anti-bribery procedure, put in place by commercial organisations, should be based. The principles are neither mandatory nor prescriptive but, along with the Guidance, indicate what prosecutors and judges may be looking for in terms of company policies or statements when companies put forward an adequate procedures defence. The principles are, in brief: • Principle 1 – Proportionate procedures – A commercial organisation’s procedures to prevent

•

•

•

•

•

bribery by persons associated with it are proportionate to the bribery risks it faces and to the nature, scale and complexity of the commercial organisation’s activities. They are also clear, practical, accessible, effectively implemented and enforced. Principle 2 – Top-level commitment – The top-level management of a commercial organisation (be it a board of directors, the owners or any other equivalent body or person) are committed to preventing bribery by persons associated with it. They foster a culture within the organisation in which bribery is never acceptable. Principle 3 – Risk assessment – The commercial organisation assesses the nature and extent of its exposure to potential external and internal risks of bribery on its behalf by persons associated with it. The assessment is periodic, informed and documented. Principle 4 – Due diligence – The commercial organisation applies due diligence procedures, taking a proportionate and risk-based approach, in respect of persons who perform or will perform services for or on behalf of the organisation, in order to mitigate identified bribery risks. Principle 5 – Communication (including training) – The commercial organisation seeks to ensure that its bribery prevention policies and procedures are embedded and understood throughout the organisation, through internal and external communication, including training, that is proportionate to the risks it faces. Principle 6 – Monitoring and review – The commercial organisation monitors and reviews procedures designed to prevent bribery by persons associated with it and makes improvements where necessary.

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2.7 Self-Reporting Learning Objective 6.2.7 Know what is meant by ‘self-reporting’ and related guidance from the Serious Fraud Office (SFO)

Self-reporting to the relevant investigative authority of any activity that could be an offence under the law has been a pre-emptive defence used by US companies under the FCPA (see Section 3.1), either the company has uncovered potential wrongdoing or if it is operating in countries where some of the expected practices are potentially liable for investigation and prosecution. By self-reporting, companies hope to avoid prosecution and settle for civil liability only. In its initial guidance on the Bribery Act, the Serious Fraud Office (SFO), indicated that the expected and preferred outcome for self-reporting would be a civil settlement, support in a comparable settlement with equivalent agencies in other jurisdictions, monitoring and an agreed reform programme. However, in October 2012, it took a somewhat harder line on the issue6, stating: The fact that a corporate body has reported itself will be a relevant consideration to the extent set out in the guidance on corporate prosecutions. That guidance explains that, for a self-report to be taken into consideration as a public interest factor tending against prosecution, it must form part of a genuinely proactive approach adopted by the corporate management team when the offending is brought to their notice. Self-reporting is no guarantee that a prosecution will not follow. Each case will turn on its own facts. In cases where the SFO does not prosecute a self-reporting corporate body, the SFO reserves the right to (i) prosecute it for any unreported violations of the law; and (ii) lawfully to provide information on the reported violation to other bodies (such as foreign police forces). The revised policies make it clear that there will be no presumption in favour of civil settlements in any circumstances.

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SFO, Corporate self-reporting, 9 October 2012, found at: http://www.sfo.gov.uk/bribery--corruption/corporate-selfreporting.aspx

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2.8

Associated Persons

Learning Objective 6.2.8 Understand the liabilities corporate entities face from ‘associated persons’

As noted above, the Act is clear that it is the circumstance of the relationship, and not simply the formal position that will determine the relationship between the commercial organisation and the associated person. What the latter does in the name of the former, without the adequate procedures being in place and known and understood by the associate person, could open the commercial organisation to being charged under Section 7 for the actions and decisions of the associated person.

2.9 Penalties Learning Objective 6.2.9 Know the maximum penalties applicable to individuals found guilty under the Act

The penalties, for all offences apart from those relating to commercial organisations, are: • An individual guilty of an offence is liable on summary conviction, to imprisonment for a term not

exceeding 12 months, or to a fine not exceeding the statutory maximum (£5,000), or to both, and, on conviction on indictment, to imprisonment for a term not exceeding ten years, or to an unlimited fine, or to both. • Any other person guilty of an offence is liable on summary conviction, to a fine not exceeding the statutory maximum, and, on conviction on indictment, to a fine. In relation to commercial organisations, the sanction on conviction on indictment for failing to prevent bribery is an unlimited fine.

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A person associated with the commercial organisation is someone who performs services for or on behalf of the commercial organisation, and their formal or informal status – employee, agent or subsidiary – is immaterial; it is the circumstances rather than just the status that will determine what associated means. In the case of an employee, it will be assumed that they are an associated person by definition. The only defence to the commercial organisation is if they can prove that it has in place adequate procedures, designed to prevent persons associated with the commercial organisation from undertaking such conduct.

2.10 Directors’ and Senior Officers’ Liability Learning Objective 6.2.10 Understand the circumstances under which directors and senior officers of a corporation may be found liable under the Act: consent or connivance; passive acquiescence; failure to implement adequate procedures and potential civil liability

The liability of directors and senior officers is found in Section 14 of the Bribery Act and concerns the consequences of an offence committed under Sections 1 (bribing), 2 (being bribed) and 6 (bribing an FPO) where that offence is proved to have been committed with the consent or connivance of (a) a senior officer of the body corporate or Scottish partnership, or (b) a person purporting to act in such a capacity who, if the offence takes place outside the UK, has a close connection with the UK.

2.10.1 Consent or Connivance The terms are generic, and have a track record not only in AML legislation but also in the UK – see the following table for its inclusion in the 1974 Health and Safety at Work Act (HSWA).

The Terms in Practice: Health and Safety Proceedings under HSWA s37 will require proof of the following elements: • that an offence has been committed under any of the relevant statutory provisions by a body

corporate: that the offence has been committed with the consent or connivance of or has been attributable to any neglect on the part of the accused; and that the person accused is a director, manager, secretary or other similar officer or a person purporting to act in any such capacity, or a member of a body corporate whose affairs are managed by its members. Consent and connivance imply both knowledge and a decision made on such knowledge. In Attorney General’s Reference (No 1 of 1995), the Court of Appeal considered that consent required that the accused knew the material facts that constituted the offence by the body corporate and had agreed to conduct its business on the basis of those facts (ignorance of the law being no defence).

In terms of bribery by commercial organisations, individuals in that commercial organisation will also be liable for prosecution, if the offence is proved to have been committed with their consent or connivance. Consent or connivance demonstrates an explicit or implicit awareness – the Law Commission report discounted careless and, in its consultation paper the same year, noted in relation to liability based on individual consent or connivance:

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In general, companies, and their officers, should not face very different standards of liability depending on which charge they face from amongst such closely related offences. A more consistent approach ought to be developed. In the present context, we do not believe it is right to impose liability on an individual respecting a fraud offence, a fraud-like offence, or a bribery offence if that individual has merely been careless. That is, in this context, a standard of liability that should be regarded as sufficient only to justify civil liability. Nothing short of proof of consent or connivance should be enough in this context to justify individual criminal liability.

2.10.2 Passive Acquiescence

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Passive acquiescence – whether knowing, but doing nothing, about the conduct of an associated person or knowing that an offence may occur, but doing nothing to prevent its occurrence – is no defence, as it may be interpreted as possible consent or connivance and is likely to be seen as having awareness of circumstances and activities relating to the substantive bribery offences. In such circumstances directors or senior officers could be liable to charges.

2.10.3 Failure to Implement Adequate Procedures and Potential Civil Liability As well as possible prosecution under Section 7 of the Bribery Act, failure to have adequate procedures in place could make commercial organisations liable to civil claims in both domestic and overseas courts, if they are sued by NGOs and others for the consequences of corrupt activity. Article 35 of UNCAC states: Each state party shall take such measures as may be necessary, in accordance with principles of its domestic law, to ensure that entities or persons who have suffered damage as a result of an act of corruption have the right to initiate legal proceedings against those responsible for that damage in order to obtain compensation.

2.11 Public Procurement Learning Objective 6.2.11 Understand the potential consequences relating to public procurement that could be incurred by failing to comply with the Act

The potential consequences for failing to comply with the Act are serious for companies and relate to their ability to win future business, as well as the direct consequences, such as fines when found guilty. In addition to action from victims of corruption, Article 34 of UNCAC also states: With due regard to the rights of third parties acquired in good faith, each state party shall take measures, in accordance with the fundamental principles of its domestic law, to address consequences of corruption. In this context, state parties may consider corruption a relevant factor in legal proceedings to annul or rescind a contract, withdraw a concession or other similar instrument or take any other remedial action. Under the EU Public Sector Procurement Directive, a corporate conviction for bribery could result in permanent exclusion from public procurements across the EU.

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At the same time, a conviction may invoke the administrative sanctions regime of a multilateral organisation such as the World Bank, which may lead to debarment. As a consequence, it will also lead to cross-debarment in accordance with the inter-multilateral agency 2010 Agreement for Mutual Enforcement of Debarment Decisions (and where ineligibility may extend to any firm or individual which the debarred firm directly or indirectly controls; and in the case of a debarred individual, ineligibility extends to any firm which the debarred individual directly or indirectly controls).

3. 3.1

The Foreign Corrupt Practices Act (FCPA) (1977) The US Foreign Corrupt Practices Act (FCPA)

Learning Objective 6.3.1 Understand the objectives and scope of the Foreign Corrupt Practices Act (FCPA)

The Foreign Corrupt Practices Act (FCPA) is a piece of US legislation that applies to US national citizens, or anyone acting in a way that could be an offence under the Act, while resident in the US, and to any company listed on a US Stock Exchange. The Act concerns the bribery of a foreign official for: the purpose of obtaining or retaining business for or with, or directing business to, any person. Since 1998 the Act has also applied to: foreign firms and persons who take any act in furtherance of such a corrupt payment while in the US. The Act applies to any individual, firm, officer, director, employee or agent of a firm and any stockholder acting on behalf of a firm. Individuals and firms may also be penalised if they order, authorise or assist someone else to violate the anti-bribery provisions, or if they conspire to violate those provisions. The core components are interpreted as follows: 1. Payments mean anything of value (for which there is no lower limit). 2. The law applies, even if all aspects of the authorisation, and payments, take place abroad, including by or through subsidiaries. 3. There must be intent in terms of seeking to induce the recipient, through the offer, promise or payment to misuse, or use their influence for another to misuse, their office (intent also means that there does not have to be a successful outcome). 4. Misuse includes acting in violation of their official or lawful duty, or to secure any improper advantage, to help the donor obtain or retain business. 5. The recipient should be a foreign official, a political party or party official, or a candidate for political office. 6. The bribe or intended bribe may be to secure obtaining or retaining business, which goes beyond individual contracts (for example, it can relate to tax and customs matters), and does not have to be business with the organisation of the recipient. 7. It is an offence to pay an intermediary where it is known (meaning conscious disregard and deliberate ignorance in the eyes of US law) that the payment is intended to be paid as a bribe.

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8. Facilitation payments are eligible if they are for routine government action. These include: obtaining permits, licences, or other official documents; processing governmental papers, such as visas and work orders; providing police protection, mail pick-up and delivery; providing phone service, power and water supply; loading and unloading cargo, or protecting perishable products; and scheduling inspections associated with contract performance or transit of goods across country. 9. A defence is allowed where the payment (the bribe) is lawful under the written laws of the foreign country or the money was spent as reasonable expenditure for demonstrating a product or performing a contractual obligation. 10. Companies listed on the US Stock Exchange are required to keep reasonable records, have internal controls governing management authority for transactions and access to company assets, and have accurate financial statements.

Differences between the UK Bribery act (2010) and the FCPA (1977) 6

3.2

Learning Objective 6.3.2 Know the key differences between the UK Bribery Act (2010) and the FCPA (1977)

The main differences between these two very important pieces of legislation are: • The FCPA is specifically focused on overseas bribery; the UK Act covers both domestic and overseas

jurisdictions. • The UK Act does not allow facilitation payments (small bribes paid to facilitate Government action,

• • •

•

such as customs clearances, often expected in some parts of the world), in line with the 2009 Recommendation of the OECD7. The UK Act provides for sanctions against commercial organisations for failure to prevent corruption. The UK associated person covers, but not exactly, the FCPA offence of paying an intermediary, knowing it is to be used to pay a bribe. Registration on the US Stock Exchange brings companies within the remit of the FCPA, but the UK approach focuses on where business is carried out, or incorporation in the UK, not simply listing on the London Stock Exchange (LSE). There are no specific record-keeping and internal controls requirements in the UK Act, although the UK Act’s requirements on adequate procedures based on the six Principles covers this in part.

On the key difference facilitation payments, according to their guidance, the UK government recognises the problems that commercial organisations face in some parts of the world and in certain sectors and that eradication of such payments cannot be achieved unilaterally, but rather requires international collaboration. But it was felt that to introduce specific exemptions in the Bribery Act would create artificial distinctions. Facilitation payments are therefore always illegal under the Act, but prosecution for them falls under guidance issued jointly by the SFO and the Director of Public Prosecutions8, and is to the same public interest test. 7 8

Recommendation of the Council for Further Combating Bribery of Foreign Public Officials in International Business Transactions, OECD Bribery Act 2010: Joint Prosecution Guidance of the Director of the Serious Fraud Office and the Director of Public Prosecutions, found at: http://www.sfo.gov.uk/media/167348/bribery_act_2010_joint_prosecution_guidance_of_the_ director_of_the_serious_fraud_office_and_the_director_of_public_prosecutions.pdf

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End of Chapter Questions Think of an answer for each question and refer to the appropriate section for confirmation. 1.

Name four developments that led to the new UK Bribery Act 2010. Answer reference: Section 2.1

2.

What are the components of bribing another person under the new Bribery Act 2010? Answer reference: Section 2.3.2

3.

What is the difference between a foreign public official under the OECD Convention and UNCAC? Answer reference: Section 2.4

4.

What is meant by strict liability under the Bribery Act? Answer reference: Section 2.5

5.

Name two factors that would be analysed to assess the adequacy of anti-bribery procedures a commercial organisation. Answer reference: Section 2.5

6.

What are the six Principles for bribery prevention? Answer reference: Section 2.6

7.

What is the purpose of ‘self-reporting’? Answer reference: Section 2.7

8.

Name two possible consequences for a company convicted of bribery. Answer reference: Section 2.11

9.

What are the main differences between the UK Bribery Act and the FCPA? Answer reference: Section 3.2

10.

How does the UK government view the question of facilitation payments in relation to the Bribery Act? Answer reference: Section 3.2

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Chapter Seven

Combating Financial Crime 187

2. Asset Recovery

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1. Governmental and Quasi-Governmental Approaches to Combating Financial Crime

This syllabus area will provide approximately 11 of the 100 examination questions

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1.

Governmental and Quasi-Governmental Approaches to Combating Financial Crime

1.1

The Role of Government in the Partnership Between Private and Public Sectors

Learning Objective 7.1.1 Understand the role of government in the partnership between private and public sectors

Emerging issues can combine to be assessed through government-sponsored reviews, such as the 2006 Fraud Review in the UK. This followed agency and government concerns about the links between fraud and other crimes. In May 2004, Baroness Scotland, junior minister at the Home Office, announced at the start of a consultation paper, regarding the introduction of a single offence of fraud, that the cost of fraud was £14 billion per year. The same document mentioned, in passing, the links fraud has (or might have) to money laundering, corruption, identity theft and cybercrime. In October 2005, the Attorney General announced that: ‘our response to fraud must be strengthened further’. The review prompted the then government to address cross-cutting problems, which were shared by a range of agencies, but for which a more holistic approach was believed necessary. These included a central fraud reporting unit, an intelligence unit to analyse the reports and an agency responsible for developing strategic approaches at national and local levels. In another example, where there was a cross-cutting issue, without an existing institutional response, proposals were sometimes made for such an agency to lead on the issue and to foster inter-agency working from within government. One significant illustration of this was in the UK Cabinet Office’s Performance and Innovation Unit (2000) report on recovering the proceeds of crime, which argued that: ‘the current lack of strategic direction creates an impression that asset recovery is of low priority. It also means that the collaborative efforts of the various agencies involved suffer from a lack of co-ordination at a strategic level…a major weakness in the system caused by the lack of overarching strategy is the absence of streamlined and mutually supportive organisational objectives.’1 This led to specific legislation – the Proceeds of Crime Act (POCA) 2002 – and the establishment of a public agency, the Assets Recovery Agency (ARA), to implement the legislation. In addition, significant increases in financial investigation resources (driven by financial incentives in terms of proceeds retention, by the police, approved by the Treasury) were made available. Laws and institutional arrangements are kept under review to ensure they continue to provide an appropriate response – thus, POCA was amended several times to deal with practical issues arising from its implementation and the ARA was subsequently disbanded and its functions absorbed by other bodies, such as the Serious Organised Crime Agency (SOCA), which also housed the UK’s FIU. 1

Cabinet Office: Performance and Innovation Unit (2000), Recovering the Proceeds of Crime. London: Cabinet Office.

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Governments have four roles: policy, legislation, resourcing and co-ordination, and they lead on deciding these, both from their own initiatives and from reports or initiatives of key agencies.

In terms of engaging the private sector, and if the government considers it both necessary and acceptable, it can develop policy initiatives through legislative reform to co-ordinate the engagement. Thus, the credit industry fraud avoidance scheme (CIFAS), which started out as the private sector’s mutual information-sharing agency, was designated as a specified anti-fraud organisation (SAFO) under the Serious Crime Act. This enabled public sector organisations to become members of CIFAS and reap the same benefits as the private sector. In the 2012 review of the international AML standards, the FATF recognised the crucial role of governments, not only in providing the right legislative and regulatory framework and resourcing law enforcement sufficiently, but also in risk assessment and national co-ordination. FATF Recommendation 1 requires countries to identify, assess, and understand the ML/TF risks for the country, and to designate an authority or mechanism to co-ordinate actions to assess risks, and apply resources, aimed at ensuring the risks are mitigated effectively. Recommendation 2 expects national AML/CFT policies, informed by the risks identified, to have a designated authority or co-ordination mechanism that is responsible for such policies. Recommendation 34 also requires government agencies, such as law enforcement, the FIU and sector supervisors to establish guidelines, and provide feedback, to assist financial institutions and DNFBPs carry out their obligations, in particular in detecting and reporting suspicious transactions. We will cover methods of complying with this recommendation in Section 1.5 of this chapter.

1.2

Regulatory Implementation

Learning Objective 7.1.2

Know how regulators implement international standards and facilitate cross-border co-operation

Both law enforcement and regulators require the translation of international standards either into domestic legislation (such as the UK’s POCA 2002 and the Bribery Act 2010) or their incorporation as good practice into the regulatory frameworks (which are mandatory for all institutions or individuals designated by law as having to join and comply with the requirements of the framework). On the other hand, the implementation of international standards must also, on occasion, be balanced with domestic requirements, such as overriding principles of domestic law or constraints within the existing regulatory framework.

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The international standards will be implemented domestically through a combination of methods: • Primary legislation, such as POCA, which may create criminal offences. • Secondary legislation, such as the Money Laundering Regulations 2007, which impose requirements

such as CDD and reporting on businesses covered by the money laundering regime. • Regulatory rulebooks, which apply solely to the firms covered by the particular regulator. • Regulatory guidance, which can be either formally part of the rulebook to aid interpretation of the rules themselves, or issued separately to provide examples of good and poor practice. Regulators can also promote their views through a variety of more informal methods, such as meetings with firms or trade associations, conference speeches or articles.

Regulators have similar international agreements. For example, in 2003, the UK’s former regulator, the FSA, signed up to the IOSCO multilateral memorandum of understanding (MoU) – the first global information-sharing arrangement among securities regulators. The MoU set a new international benchmark for co-operation and sharing of enforcement-related information critical to combating securities and derivatives violations. Similar international arrangements exist for insurance and banking supervisors, through the IAIS and the BCBS. These international organisations of supervisors have also established global industry standards. For example, the BCBS issued a statement of principles regarding the prevention of criminal use of the banking system for the purposes of money laundering in 1988, and in 2005 the BCBS, IOSCO and IAIS produced a joint note on initiatives to combat ML/TF.2 In practical terms, Section 169 of the FSMA allows the FCA to co-operate with overseas regulators, including appointing one or more competent persons to investigate any matter with powers under the Act (and permit a representative of that regulator to attend, and take part in, any interview conducted for the purposes of the investigation). In deciding whether or not to exercise its investigative power, the FCA may take into account whether, in the country or territory of the overseas regulator concerned, corresponding assistance would be given to a UK regulatory authority and whether the case concerns the breach of a law, or other requirement, which has no close parallel in the UK or involves the assertion of a jurisdiction not recognised by the UK. It may also take into account the seriousness of the case and its importance to persons in the UK and whether it is otherwise appropriate in the public interest to give the assistance sought. The FCA may decide that it will not exercise its investigative power unless the overseas regulator undertakes to make such contribution towards the cost of its exercise as the FCA considers appropriate.

2

See http://www.bis.org/list/bcbs/sac_1/tid_32/index.htm for a list of Basel Committee publications on ML/TF.

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Facilitation of information is made through domestic and international gateways, international legal agreements (such as mutual legal assistance) and through various law enforcement informationsharing arrangements. A further example of international cross-border co-operation between national authorities is through the organisation and co-operation of the national FIUs through the Egmont Group. Indeed the FATF explicitly supports the co-operation between these groups in sharing of best practice, as well as information on typologies and other information pertinent to AML investigations.

1.3 Jurisdiction Learning Objective 7.1.3

Know the jurisdictional authority of organisations involved in combating financial crime

Law enforcement and regulatory responsibilities are often determined by legislation, which will cover the matter of jurisdiction. Generally, an offence will only be able to be tried in the jurisdiction (ie, within the UK), where the offence must also take place. This may be extended territorially if there is a specific provision in the legislation. Thus, in addition to the Bribery Act 2010, which we covered in Chapter 6, the following Acts allow the UK to exercise extra-territorial jurisdiction against UK citizens: • • • •

sexual offences against children (s.72 of the Sexual Offences Act 2003); murder and manslaughter (ss.9 and 10 of the Offences Against the Person Act 1861); fraud and dishonesty (Criminal Justice Act 1993 Part 1); and terrorism (ss.59, 62–63 of the Terrorism Act 2000).

Section 62 of the 2000 Terrorism Act states in relation to terrorist finance: (1) If–(a) a person does anything outside the United Kingdom, and (b) his action would have constituted the commission of an offence under any of Sections 15 to 18 if it had been done in the UK, he shall be guilty of the offence. Similarly, under the POCA, ML offences apply to criminal property, which is defined as the benefit from criminal conduct either in the UK or that would have constituted an offence in the UK if it had occurred there. This means that ML applies to all criminal property, wherever the predicate crime was committed, provided the crime is recognised in UK law. Many other countries have similar provisions, recognising that ML is a global problem and often cross-border in nature. Regulators, by virtue of their supervisory or legislative responsibilities for companies, may also have some jurisdiction over their activities (or those of their subsidiaries) abroad. This is explicit in UK anti-bribery legislation. The FCA can sanction companies for the conduct of their overseas associates or subsidiaries. Thus in 2009, the FSA fined Aon Ltd £5.25 million for failing to take reasonable care to establish and maintain effective systems and controls to counter the risks of bribery and corruption associated with making payments to overseas firms and individuals. Between 14 January 2005 and 30 September 2007, Aon Ltd failed to assess the risks involved in its dealings with overseas firms and individuals who helped it win business, and failed to implement effective controls to mitigate those risks.

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1.4

The Role of Law

Learning Objective 7.1.4

Understand the role of law and rule-making in combating financial crime

In the case of the UK, regulation of business in general and the financial services industry in particular was recognised from the 1980s as a necessity for the UK to compete internationally and to become a major international financial centre. Initially, however, the compliance framework was primarily posited on self-regulation. Quite often, both public concern and the need to ensure the integrity of the UK markets and financial systems combined to persuade governments to legislate. In the private sector, the early 1990 corporate scandals provided the context for the establishment of the Cadbury Committee on corporate governance which reported in 1992, but also to a much more formal regulatory framework when the FSA was established after the recognition that self-regulation was insufficient.

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1.4.1 Legislation Legislation not only provides the formal powers (and the identification of to whom those powers apply) but also the means of the relevant bodies to access criminal and other sanctions, which place offenders within the ambit of the criminal law and criminal justice system (for example, POCA 2002). Legislation also has the capacity to enable or delegate – that is, to provide a broad policy framework and allow for the institution to propose specific procedures and powers (often through statutory instruments which only require ministerial rather than parliamentary approval). Often this approach provides a legislative patchwork which, in the case of the laws on corruption, sometimes leads to reviews, reform and consolidation. In the UK, the corporate sector is governed by a number of laws (and it is interesting to note the dates of the laws against the dates of the various scandals in the 1980s and 1990s): • The 1985 Companies Act which deals with fraudulent trading. Under this Act it is an offence to be

knowingly involved in any business being run to defraud its creditors or the creditors of any other person, or for any fraudulent purpose. • The 1986 Insolvency Act which includes a number of offences mentioning fraudulent behaviour for company directors and others whose businesses are running out of money, including: the provision of false information to creditors; selling property obtained on credit; concealing, destroying or falsifying company documents; making any gift or transfer of, or any charge on, their property; obtaining credit without disclosing current circumstances; and increasing the debt by gambling or by rash and hazardous speculation. • The Consumer Credit 1974 Act which provides for control of consumer credit and hire and provides certain safeguards to consumers who purchase goods and services on credit and the Consumer Protection Act 1987 which primarily deals with unsafe goods and allows for powers of seizure and forfeiture, and the powers to suspend the sale of suspected unsafe goods. • The 1986 Company Director (Disqualification) Act which bans those who formerly: have been responsible for an insolvent company;

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are deemed unfit to manage a company; have been convicted of an offence involving setting up or running a company; or have been convicted of being in default of requirements on filing company information. Two specific grounds relating to fraud are concerned with fraudulent trading or fraud relating to actions as a liquidator, receiver or manager. • The 1993 Criminal Justice Act covers insider trading in terms of three offences: possession of inside information; encouraging others to trade on the basis of the information; disclosure of the information. • The FSMA provides for a range of offences by business, including: market abuse (which includes insider trading); carrying out a regulated activity (such as investment broking) without authorisation; falsely claiming to be authorised (or exempted from authorisation); promoting investments unless authorised; providing false information to auditors; and providing false information to the market (market rigging). • The 1998 Competition Act prohibits cartels, but in 2002 the civil provision was complemented by its criminalisation in the Enterprise Act. Cartels are agreements between businesses not to compete with each other. The agreement is usually secret, verbal and often informal and may cover: prices; output levels; discounts; credit terms; which customers they will supply; which areas they will supply; and who should win a contract (bid rigging).

Find it yourself See how many corporate scandals and/or official inquiries you can identify prior to any of the above pieces of legislation.

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1.5

The Role of Government

Learning Objective Understand the role of government in providing feedback and updates to regulated and reporting institutions

Governments themselves focus more on policy announcements or summaries of policy success. They rarely provide feedback or updates – the information tends to come from the agencies themselves or their regulators – but they do translate that information into specific or targeted support. Thus, between Tony Blair’s 1999 statement that seizing criminal assets deprives criminals and criminal organisations of their financial lifeblood’ and the 2004 Justice Minister’s feedback that ‘after just one year criminals are feeling the pain of having their assets frozen, seized and confiscated on a greater scale than ever before: £55 million suspect cash seized; £37.6 million criminals’ cash confiscated; and £18.9 million the subject of freezing and interim orders in the courts, lay work by the concerted interagency criminal finances action (CICFA) group, which was responsible for implementing a programme of action in support of the ARA and numerous law enforcement agencies. Through such developments, regulated and reporting institutions will learn of progress in relation to, for example, AML national strategies. In relation to information provided by the institutions, however, one of the major complaints is that FIUs do not routinely feed back to them on the use made of any SARs submitted. This problem is recognised by the FATF, in Recommendation 34: The competent authorities, supervisors and self-regulatory bodies should establish guidelines, and provide feedback, which will assist financial institutions and designated non-financial businesses and professions in applying national measures to combat money laundering and terrorist financing, and, in particular, in detecting and reporting suspicious transactions. Feedback may be specific (ie, what happened on a particular SAR, which creates challenges for those jurisdictions where many thousands of reports are made) or generic, (relating to the types of suspicious activity being seen in the various sectors, for example). The FATF issued best practice guidelines on feedback as long ago as 1998, but the issues remain. FIUs may produce newsletters (with either open or closed circulation), case studies or typology documents as part of their feedback process. They may also have dedicated outreach programmes to liaise with the reporting sectors and the supervisors of those sectors. In sensitive areas, such as TF, groups of MLROs from major institutions, or those at greatest risk, may be vetted and allowed controlled access to some intelligence. Governments also provide information for institutions in the private sector to help them comply better with their obligations under AML/CFT legislation, such as consolidated lists of individuals and entities subject sanctions regimes or current ML/TF typologies and methodologies to help with risk assessments.

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7.1.5

1.6

Control Agencies

Learning Objective 7.1.6

Understand the role and scope of control agencies: intelligence gathering and analysis; investigating financial crime; asset recovery and repatriation

In all jurisdictions, there will be a multiplicity of law enforcement and other investigative agencies, in addition to the regulatory agencies, all with different responsibilities in relation to financial crime. These will include not only police forces (local, regional and national), but also customs and revenue departments, specialist agencies (eg, anti-corruption, anti-fraud, asset recovery), intelligence agencies and the national FIUs. We will use examples from the UK below, but the picture will vary from jurisdiction to jurisdiction. The FATF dealt with this issue in its Recommendation 30. Countries should ensure that: • designated LEAs have responsibility for ML/TF investigations within the framework of national AML/

CFT policies; • designated LEAs should develop a pro-active parallel financial investigation when pursuing money

laundering, associated predicate offences and terrorist financing (at least in major cases); • competent authorities have responsibility for expeditiously identifying, tracing and initiating

actions to freeze and seize property that is, or may become, subject to confiscation, or is suspected of being proceeds of crime; • they make use, when necessary, of permanent or temporary multi-disciplinary groups specialised in financial or asset investigations.

1.6.1 Intelligence Gathering and Analysis The most obvious intelligence gathering agency is, of course, the FIU, in the UK currently housed at the SOCA. The SOCA is responsible for receiving, analysing and disseminating information from the reporting institutions. More broadly, SOCA gathers intelligence on organised crime. However, there will also be agencies specialising in fraud and corruption (eg, in the UK there is the National Fraud Intelligence Bureau, which collects and collates fraud information in order to identify volume and value of fraud, conduct area mapping, and collect evidence of organised crime, and intelligence for police forces). Although the FIU will have responsibility for SARs in relation to terrorist finance, it may need to work with other agencies on this topic. The UK FIU set up a dedicated terrorist finance team after 9/11 to deal with this work, and it works closely alongside other police and intelligence agencies.

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1.6.2 Investigations As financial investigations should happen alongside investigations into serious predicate offences, they are likely to take place in many different agencies, all of whom will require specialist financial investigators. Thus, there may be arrangements made centrally for training and accrediting financial investigators and sharing expertise and resources between and within agencies. Investigations will be triggered by a number of factors, including reports of suspicion from institutions, traditional law enforcement intelligence or other tipoffs, such as whistleblowing lines.

TF investigations are generally led by those agencies with the lead in terrorism, and here too, in the UK, there is a national unit, the National Terrorist FIU, part of the Counter Terrorism Command at New Scotland Yard. Other agencies with roles to play in combating terrorist finance include the Charity Commission, which has a counter-terrorist finance strategy designed to protect the charity sector from abuse by terrorist finance, and HMRC, which includes terrorist-financing issues in its supervision of the money service business sector.

1.6.3 Asset Recovery All the agencies involved in financial investigations should also be involved in asset recovery, as one of the key drivers for carrying out such work is removing the proceeds of crime from offenders. Partly thanks to incentivisation schemes, a number of police forces in the UK set up teams – regional asset recovery teams (RARTs) – with other agencies to facilitate joint asset recovery work. The work of the RARTs is now formalised as part of the government’s asset recovery strategy, with regional teams formed from officers and staff seconded from various police forces, HMRC, SOCA, and the CPS, with links to other agencies such as the Food Standards Agency, Trading Standards Agency and UK Border Agency. There may also be national-level asset recovery agencies, such as the UK’s ARA, whose work was subsequently taken over by SOCA, or Ireland’s Criminal Assets Bureau (CAB), which identifies assets of persons which derive, (or are suspected to derive), directly or indirectly from criminal conduct. It then takes appropriate action to deprive or deny those persons of the assets and the proceeds of their criminal conduct, using a multi-disciplinary and multi-agency approach.

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The UK has over 50 police forces, all of whom have some financial crime investigative capacity, dealing with ML, fraud and corruption. However, serious and organised crime cases often need a national response, and this is provided either by central specialist bodies, such as the SFO, or by one agency having lead status, such as the City of London Police for fraud and overseas corruption (for which there is a specially funded unit). Similarly, HMRC and SOCA itself will carry out financial investigations in their own areas of competence.

1.7

Best Practice in Combating Financial Crime

Learning Objective 7.1.7

Understand the role, evolution and practical application of best practice in combating financial crime and establishing international standards

The costs of financial crime are viewed as being significant, primarily because of their negative impact on the integrity and hence functioning of the financial system. If underlying integrity is compromised, it is argued that confidence in the regulatory systems themselves will also suffer. As has already been discussed in various sections of this manual, such as Chapter 3, Section 2.1 and Chapter 5, Section 2.4, international co-operation involves not only governments but also the international organisations such as the IMF, World Bank, UN, FATF, Egmont and the OECD. There is recognition that such agencies are well placed to share best practice amongst their members. They draw attention to linkages between the individual crimes such as money laundering, bribery, tax avoidance and financial fraud. In practice, the UK government has consistently sought engagement at international and regional level in both discussions about and participation in initiatives to address a number of issues, and signed the relevant conventions. One consequence has been the realignment of domestic legislation and policies, and the extension of the formal remits of specific agencies to implement good practice. The UK also engages with the appropriate review processes, including the FATF, GRECO and the OECD, agreeing changes where the reviews have found failures or weaknesses in following international standards. One of the calls that is frequently made at international level, for example, relates to the need for greater transparency and the role that MLA can play in combating financial crime. International forums have a role to play in discussing the use of new technologies for control, detection, investigation and international co-operation. The approach of requiring global adherence to standards of best practice such as the FATF Recommendations is seen as having been exemplary in ensuring a co-ordinated response. There can be little doubt that the system of peer pressure that has been applied through mutual evaluations and public naming and shaming has been very effective in ensuring that governments, in all but the most recalcitrant countries, have had to adhere to the best practice principles or face exclusion from the global payments system – an extremely effective stick! In addition to the role of the FATF in combating ML/TF, the OECD has a number of co-operative activities that are focused on combating bribery and corruption in international commercial transactions,as well as tax fraud and evasion. In the interests of promoting transparency in activity they are and have been very active in promoting global best practice principles of corporate governance.

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1.8

The UK Proceeds of Crime Act (POCA) 2002

Learning Objective 7.1.8 Understand the factors that necessitated the advent of POCA (2002)

The arrival of POCA 2002 was widely regarded as contributing a significant weapon to the armoury deployed in the fight against crime in the UK, as it provided a far wider range of powers covering not only criminal but also civil recovery. The rationale for AML was grounded in the presumption that criminals could be dissuaded from engaging in socially undesirable activity simply by making it unprofitable to pursue. The Labour Party Manifesto 1997 promised to be tough on crime and tough on the causes of crime, a mantra that became embedded in the philosophy of government departments.

• reinvestment of criminal assets perpetuates a cycle of crime; • imprisonment is insufficient, as criminals either continue to operate their enterprises from prison or

re-establish them on release; and • lack of fairness to the majority of law-abiding individuals.

The origins of POCA can be traced back to a famous 1978 judgement, when investigators failed to get their hands on £750,000 accumulated by defendants from making and selling LSD (known as Operation Julie). The House of Lords decided that the existing legislation – the 1971 Misuse of Drugs Act – was about forfeiture and not a means of stripping drug dealers of the total profits of their unlawful enterprises, which prompted a review of the confiscation regime. The 1986 Drug Trafficking Offences Act allowed for confiscation of the proceeds from drug trafficking on conviction. If a person appeared before the Crown Court to be sentenced in respect of drug trafficking offences, the Court had to first determine if the person had benefited from drug trafficking and, if so and before sentencing, determine the amount to be recovered. Confiscation in relation to non-drugs crime was incorporated into the 1988 Criminal Justice Act. By the late 1990s, legislative inconsistencies were compounded by poor implementation. The courts were reluctant to give time for requests for, or even to grant, confiscation orders. There were perceived delays within the CPS’s central confiscation branch, which was responsible for orders – including processing the affidavits for the restraint (or freezing) of assets – across England and Wales. Magistrate’s courts were ineffectual at enforcing orders (confiscations were handled like any other court-imposed fine) and the police were not very interested in providing the resources necessary to carry out orders. During the 1990s, the number and value of orders dropped with less than half the money actually being collected. The UK then looked to the example of Ireland, whose response both to international directives on money laundering and to the mix of apparent immunity from prosecution, accumulation of wealth and use of violence by organised crime and drug trafficking figures was the establishment of the CAB in 1996. The CAB was provided with robust tools to deal with ML – to seek confiscation (under a civil burden of proof), to investigate assets obtained from a criminal lifestyle whether or not there had been a conviction, and to share information between agencies (thus, for example, the Irish revenue authority staff in the CAB could use information collected as part of CAB activities to raise tax bills).

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Significantly, the arguments supporting the approach were that:

In 2000 the importance of asset recovery was addressed by a Cabinet Office performance and innovation unit (PIU) report. The core assumption behind the proposals was that, if criminals were taxed enough, so that trying to live from crime became uneconomic, they might begin to give up crime. The report initiated the POCA 2002 and the establishment of the ARA which was to be focused on three areas: • investigating the activity of laundering of assets, with a view to prosecution; • investigating benefit from crime, with a view to tracing the benefit and recovery; and • statutory training in financial investigations under the Act, to accredit personnel to work under

POCA 2002.

1.8.1 Alternatives to the Proceeds of Crime Act (POCA) Learning Objective 7.1.9 Know various domestic legal alternatives to POCA (2002)

Although confiscation and forfeiture have long been part of the UK criminal justice processes, the concept of ML only entered the legislative arena in 1986. At that time, in common with other countries, ML was largely associated with drugs. Hence, there were separate offences for drug ML under the Drug Trafficking Offences Act 1986 and the Criminal Justice Act 1988, as well as the Prevention of Terrorism Act 1989. The shift in focus from drugs to a wider range of criminal activity occurred in 1991 with the first EU Money Laundering Directive, implemented in the UK through the 1993 Criminal Justice Act and through the 1993 Money Laundering Regulations. Some of these offences remain on the statute books and the Drug Trafficking Act 1994 and the Criminal Justice Act 1988 can still be used for the prosecution of ML offences and for the recovery of assets, if the offences were committed before the introduction of POCA in 2003. Scotland and Northern Ireland had their own pre-POCA asset recovery provisions, such as the Criminal Justice (Scotland) Act and Proceeds of Crime (Scotland) Act 1995 and the Criminal Justice (Confiscation) (NI) Order 1990 and the Proceeds of Crime (NI) Order 1996. Thus, in the UK there are the following alternatives to POCA: • • • • • •

Drug Trafficking Act 1994. Criminal Justice Act 1988 (as amended). Anti-Terrorism Crime and Security Act 2001. Proceeds of Crime Scotland Act 1995. Criminal Justice (Confiscation) (NI) Order 1990. Proceeds of Crime (NI) Order 1996.

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2.

Asset Recovery

2.1

Prevention, Deterrence and Justice

Learning Objective 7.2.1

Understand the importance of recovery for prevention, deterrence and justice

The UK Cabinet Office PIU report mentioned in Section 1.8, highlighted the factors below as benefits of confiscation and asset recovery, noting that for the vast majority of crimes, the decision to commit them involves the expectation of some kind of financial benefit (two-thirds of recorded crimes in England and Wales are theft, fraud and burglary, ie, crimes motivated by financial gain):

•

•

•

•

application of asset removal will reinforce messages from sentencing policy that crime does not pay. It will also remove the demotivation of law enforcement officers that comes from seeing the criminals they have worked hard to convict continuing to benefit from their crimes. such a policy could contribute to both aims of the criminal justice system to: reduce crime and the fear of crime and its social and economic costs; and dispense justice fairly and efficiently and promote confidence in the rule of law. removing assets from criminals can disrupt criminal organisations in much the same way that excessive taxation undermines legitimate business, by cutting into profits, reducing the availability of working capital for existing enterprises and removing reserves for start-up of new criminal enterprises. attacking money trails can also be an effective complementary technique in tackling drugs crime. Removing drugs from criminal organisations deprives them of the commodity that can often most readily be replaced, and at a low cost. The seizure of the drugs also often occurs before the risk and expenditure of the distribution system have been incurred, for example on import. But a loss of money, particularly at a later stage in the business chain, represents a loss of the full ultimate value of the product. organised gangs and individuals who occupy key positions of activity – fences, major drugs suppliers, criminal financiers – and who facilitate the wider (and often more disorganised) criminal markets and networks are most likely to be disrupted because, typically: the facilitators are financially motivated; they exert influence in their communities and often encourage others into crime; as successful criminal entrepreneurs, they are likely to take a more rational approach to the disincentives to crime; and disruption of key facilitators can disrupt the wider markets and networks.

More generally, removing the proceeds of crime from serious and organised criminals reduces their power in society, such as their capacity and potential to corrupt legitimate actors and interests, for example, government or law enforcement officials.

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• the basis of criminals’ lifestyle is removed. In this way, a comprehensive, effective and routine

2.2

Victim States and Private Parties

Learning Objective 7.2.2

Understand the impact of non-recovery on victim states and private parties

One of the key concepts in relation to asset recovery has been the right of states and individuals to seek restitution or compensation for loss or damage (both direct or indirect, for example, in terms of environmental damage). With limited budgets or limited amounts of donor funds, the failure to seek restitution simply adds a further cost against those funds. At the same time, failure to seek restitution, or the reluctance of recipient countries to accept cases for restitution, will only enhance the awareness that, once expropriated funds or assets have been moved out of the victim state, corrupt officials are safe to enjoy the benefits. This provides incentives for corruption and the impact on states which lose huge sums of expropriated funds in this way is vast. According to the World Bank3: By conservative estimates, $20 to $40 billion is stolen from developing countries each year. This is about 20 to 40% of annual international development assistance. The costs go far beyond the amount of money lost, however. Corruption of this kind undermines trust and confidence in government officials and agencies, companies, and banks. It degrades public institutions, hinders the delivery of basic services, and discourages private investment – slowing economic growth and poverty alleviation. In short, corruption undermines the legitimacy of states, challenges the rule of law, and – in the worst cases – contributes to the economic ruin of entire countries.

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World Bank website, Stolen Assets & Development found at http://www1.worldbank.org/finance/star_site/stolen-assets. html

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Similarly, the effects of financial loss through crime can be devastating to private parties, such as businesses and individuals. According to the UK’s Crimestoppers website: Individuals who fall victim to fraud can experience physical, psychological, financial and social damage. The impact of fraud can also be detrimental for corporate victims. Small- and medium-sized companies are sometimes unable to recover from the financial or reputational damage caused. Large multi-national organisations can feel the effects through the increased cost of doing business.4 In total, the UK National Fraud Authority (NFA) estimated that in 2012 alone, fraud cost the UK more than £70 billion. Of this, £6 billion was at the cost of individuals (primarily mass marketing and identity fraud) and £45 billion against the private sector.

2.3

The Stolen Asset Recovery (StAR) Initiative

7.2.3 Understand how the UNODC–World Bank Stolen Asset Recovery (StAR) initiative aims to assist developing countries

The stolen asset recovery (StAR) initiative, a partnership between the World Bank and the UNODC, was established in 2007 to end safe havens for corrupt funds. StAR helps developing countries to recover stolen assets, by helping to set up institutions, use appropriate legal tools, and build skills and knowledge of practitioners in the asset recovery process. The StAR assessment5 argued that, aside from the realities facing developing countries in asset recovery, at least three other sets of events have shone a spotlight on the problem of assets stolen by corrupt leaders: • First, starting in 1997, several important pieces of international legislation against corruption,

bribery, and transnational organised crime have been adopted. The landmark UNCAC, which came into force in December 2005, included a chapter exclusively devoted to asset recovery, attesting to the need to address this problem urgently. • Secondly, the 9/11 terrorist attacks in the US in 2001 intensified the campaign against TF/ML. The main financial centres of the world, in being seen as safe havens for the stolen assets of corrupt leaders, criminals, and terrorists, face a higher reputational risk today than they did ten years ago. • Thirdly, developing countries themselves were gearing up to recover stolen assets and use the proceeds to fund development programmes and facilitate the achievement of the MDGs. On the other hand, it argued that: while there is clearly positive momentum and support for recovery of stolen assets, the challenges are immense. Differences in legal systems across jurisdictions where the theft occurs and money is laundered and parked present a formidable impediment to asset recovery.

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Crimestoppers website, The effects of fraud, found at: http://www.crimestoppers-uk.org/fraud/about-fraud/the-effects-offraud See World Bank/UNODC (2007). Stolen Asset Recovery (StAR) Initiative: Challenges, Opportunities, and Action Plan. World Bank

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Learning Objective

Against this background the WBG, in partnership with UNODC, launched the StAR initiative. The roles of these institutions are framed by their respective mandates: in the case of UNODC by its responsibility as the custodian of UNCAC and Secretariat to the Conference of State Parties; and in the case of the WBG by the GAC strategy, which recognises the need for global action on stolen asset recovery. Thus the StAR initiative undertakes a number of functions, including policy advice. It does not take on individual cases, although it will help in the dissemination of relevant information and knowledge products. One of its core functions is to fund, organise and deliver training to agencies in developing countries in asset recovery work. The key objective is to enhance the capacity of a country’s anticorruption and LEAs in analysing, investigating and prosecuting international corruption, bribery and ML cases. Most importantly, the training will also assist them in enhancing their staff’s ability to handle international requests and to succeed in co-operation with foreign jurisdictions to repatriate stolen assets. The training activities potentially increase the quality of ongoing investigations, the likelihood of launching new investigations and the quantity and quality of international MLA requests.

Find it yourself Look at a StAR Knowledge Product: A Good Practices Guide For Non-Conviction-Based Asset Forfeiture (to be found on http://www1.worldbank.org/finance/star_site/publications.html)

The training is organised through a scoping mission to obtain all relevant information relating to the legal system, investigative capabilities and procedures, trial process and the functions of the key government law enforcement bodies. The training is based on real documentation and cases, through an interactive programme designed to take the practitioner from the basics of corruption and ML violations and MLA to a very advanced level by actually requiring the participants to perform a complex financial investigation. Relevant blocks of instruction are interspersed into this highly interactive exercise to provide the participants with the skills needed to successfully complete the case; including: • • • • • •

an analysis of the elements of the relevant criminal statutes; the use of MLAs; financial investigative techniques and evidentiary requirements; the fundamentals of asset forfeiture/recovery and tracing of funds; the use of computers to organise, analyse, and present large volumes of financial evidence; and an introduction to the source and application of funds technique of isolating criminally derived proceeds from commingled legitimate funds.

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2.4

Civil and Criminal Remedies in the UK

Learning Objective 7.2.4 Know civil and criminal remedies to recovering assets

Using legislation such as POCA 2002 in the UK, the authorities are able to instigate confiscation investigations (criminal remedy) and civil recovery investigation.

Civil recovery was provided within the Act as a particular power for the ARA but is now used by SOCA. This power allows the investigation and removal of criminal assets such as cash and bank accounts and physical assets such as houses and cars, without the need for a criminal conviction, through opening a civil case against offenders where the proof is on balance of probabilities. Civil recovery, of course, is not simply an option for law enforcement alone. As Eion O’Shea argues in the case of bribery: The civil law essentially allows private rights of action against those involved in decisions or actions which cause loss or harm. Civil claims are an essential part of any economic crime toolkit. They have the potential to enable those suffering loss to make a recovery and to prevent dishonest individuals or businesses profiting from their misdeeds. However litigation is rarely straightforward, particularly where large sums of money are at stake...bribery amounts to the tort of civil fraud, and the principal is entitled to damages as a result – as he or she would in other cases of economic crime.6 In wider terms, certainly for companies, civil remedies for fraud are more significant, and much more focused on recovery or compensation than the criminal route, where the investigation and prosecution is on behalf of the state to seek retributive justice (and where issues of compensation or other benefits for the victim or victims may come second). Indeed, the victim in the latter circumstances is likely to be a witness rather than taking a much more active and direct role as plaintiff in terms of timetables, options and remedies, over which he also has much more control.

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O’Shea, E. (2011). ‘The Civil Route’ in Doig, A. (ed). (2012), The Counter-Fraud Practitioners Handbook. Gower.

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Criminal confiscation enables the court to calculate the benefit that the criminal has derived from his activity and to recover that amount from him/her. If the defendant fails to pay this sum, a receiver may be appointed to seize his/her property and assets and to sell them in order to pay off the debt. These proceedings can only take place once the defendant is found guilty, and the sum is decided by the court, having heard evidence from both the prosecution and the defence over the actual amount of assets belonging to the defendant (which may vary according to the number of convictions and consequential lifestyle assessments).

Civil remedies may include taking action because of a breach of contract or duty as well as a breach of statute; use of search and seize orders; use of freezing orders (including worldwide freezing orders), to preserve assets pending a court case; and asset recovery from third parties. There are a large number of lawyers and commercial investigation companies, which makes access to expertise relatively easy (if costly), and facilitates the management of the focus, cost and purpose of the inquiry, as well as reputational and other issues. If the case does go to court, this in turn provides a number of benefits to the initiator of the process, including control over the process, the use of civil law procedures, the balance of probabilities in the judgement, and the pursuit of costs associated with the case. The specific powers available to non-law enforcement investigations in the civil courts to assist with asset recovery include:7 • The use of freezing orders (formerly Mareva injunctions) – going to the civil court with affidavit

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evidence, almost always ex parte (in the absence of prior knowledge of those against whom the order is sought) to prevent the disposal of assets or their removal from the jurisdiction. Search orders (formerly Anton Pillar orders) – again with affidavit evidence of a strong case, where there is a risk that relevant documents might be destroyed by the defendant(s) if permission is not granted to search premises and seize the documents. Disclosure or information orders – access to information from another company or organisation to help identify wrongdoers or to trace funds, including, for banks, disclosure of information on funds held by a suspected fraudster or accomplice, which takes precedence over the confidential bank/customer relationship, if there is strong evidence of ownership, of fraud and of the possible dispersal of the money before any court case. Those caught up in wrongdoing, even innocently, are under a duty at law to assist those who have been defrauded. Tracing – establishing in court a claim over the assets of others in which the claimant can demonstrate an interest or ownership. Monitoring – under the 2000 Telecommunications (Lawful Business Practice) (Interception of Communications) Regulations made under the Regulation of Investigatory Powers Act (RIPA) 2000, businesses can record evidence of transactions relating to the business to prevent and detect crime, as well as to prevent unauthorised use and to establish the existence of facts, including telephone calls and billing information, emails, post, internet use and material stored on a work computer.

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See Doig, A. Fraud. Cullompton: Willan; Thackeray, S. and Riem, A. (2005). ‘Freezing Injunctions and Related Process’ in Brown, A., L. Dobbs, A. Doig, G. Owen, and G. Summers, (2005). Fraud: Law, Practice and Procedure. London: LexisNexis and Goldspink, R. and Cole, J. (eds). (2002). International Commercial Fraud. London: Sweet and Maxwell.

Combating Financial Crime

2.5

The Implications of a Freezing Order

Learning Objective 7.2.5 Understand the implications of a freezing order

The purpose of a freezing order, as the Australian New South Wales Supreme Court has noted, however, is: to prevent frustration or abuse of the process of the Court, not to provide security in respect of a judgment or order. In other words, it is intended to stop a defendant doing anything with potentially illicit assets that may then negate any sanction or decision imposed by the court. In practice, executing a freezing order has meant that LEAs have focused much of their investigative effort at identifying defendants’ assets, usually at the start of any inquiry. This has meant a shift in expertise and, with incentivisation of police forces (in receiving a percent of confiscated funds), a shift in the staff resources devoted to financial investigation work. At the same time, seizing assets carries a number of maintenance, interest and insurance issues, particularly if the defendant is found not guilty and is entitled not only to the return of the assets in the condition at the time of seizure, but also any financial benefits that they would normally have been expected to accrue during the period of the trial. (It should be remembered that seizure does not transfer title or possession.) These are normally the responsibility of a court-appointed management receiver, while both prosecution and defence lawyers have to engage with the court in terms of the use of some assets and suitable living expenses by the defendant during the period of the trial. Finally, a freezing order must be viewed against rights-based legislation. As the House of Lords says of asset seizure in relation to TF: As the Supreme Court several times emphasised in Ahmed, freezing orders have extremely grave consequences. Lord Hope, Deputy President of the Court, stated in his leading judgment, for example, that ‘the restrictions strike at the very heart of the individual’s basic right to live his own life as he chooses…It is no exaggeration to say…that designated persons are effectively prisoners of the state. I repeat: their freedom of movement is severely restricted without access to funds or other economic resources, and the effect on both them and their families can be devastating’.8 8

House of Lords (2010). Select Committee on the Constitution: 2nd Report of Session 2010–11 Terrorist Asset-Freezing etc. Bill – Report. London: TSO. p5.

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Investigating authorities or plantiffs are able to ask the courts to impose a freezing order when they believe that the person under investigation might attempt to move their assets. Under these circumstances, for example, an investigating officer will apply to the court for a restraint order. If the person under investigation is subsequently convicted of an offence under the Act, the court will require confiscation of those assets deemed to be the proceeds or benefit of criminal activity. An application for a restraint order can be made at the commencement of a criminal investigation and prevents a criminal or a suspected launderer from moving or making use of suspected funds whilst they are the subject of an investigation.

End of Chapter Questions Think of an answer for each question and refer to the appropriate section for confirmation. 1.

What are the main roles of government in relation to combating financial crime? Answer reference: Section 1

2.

What are four ways international standards can be implemented? Answer reference: Section 1.2

3.

Name three laws that provide extra-territorial jurisdiction in the UK? Answer reference: Section 1.3

4.

Name four Acts that cover the conduct of businesses in the UK. Answer reference: Section 1.4

5.

Name two types of feedback provided on SARs. Answer reference: Section 1.5

6.

What four things does the FATF say countries should do with regard to investigating authorities? Answer reference: Section 1.6

7.

Which bodies play roles in countering terrorist finance? Answer reference: Section 1.6

8.

Name three bodies in the UK with financial investigation capacity. Answer reference: Section 1.6.2

9.

Name three international agencies that undertake review processes of the UK’s response to combating corruption and terrorist finance. Answer reference: Section 1.7

10.

What are the arguments in favour of asset recovery? Answer reference: Section 1.8

11.

Name at least three UK laws that allow for asset recovery. Answer reference: Section 1.8.1

12.

How does removing assets disrupt criminal organisations? Answer reference: Section 2.1

13.

Name three effects of the removal of stolen assets from victim countries. Answer reference: Section 2.2

14.

What is the international initiative that supports international asset recovery? Answer reference: Section 2.3

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15.

What are the advantages of civil recovery of assets? Answer reference: Section 2.4

16.

What is the purpose of a freezing order? Answer reference: Section 2.5

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Combating Financial Crime

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Chapter Eight

The Role of the Private Sector 1. Considerations for the Private Sector

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2. Practical Business Safeguards

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3. Specific Responsibilities of Regulated Financial Institutions

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This syllabus area will provide approximately 16 of the 100 examination questions

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The Role of the Private Sector

1.

Considerations for the Private Sector

1.1

The Impact of Financial Crime on Firms

Learning Objective 8.1.1

Understand how financial crime can directly impact on firms: embezzlement; fraudulent customer activity; defrauded by organised criminals; limiting access to data; data compromise

Embezzlement, particularly by senior executives, can be devastating for organisations, both large and small. Embezzlement is the misappropriation of property (usually money) by those to whom it is entrusted. It not only leads to serious reputational damage, with loss of customers, suppliers and revenue, but, in the most serious cases, can lead to the complete collapse of the company and smaller scale, embezzlement can simply be theft of stock or false expenses claims by members of staff. This can be bad enough, impacting on cash flow and profit over time, but embezzlement is at its most serious when carried out by those with power to extract large sums from the company, either by virtue of their executive position or control over accounts. Although public scandals in large companies tend to make the headlines, the effect on small companies can be just as devastating, leading to loss of livelihood, particularly in difficult economic times. According to the Association of Certified Fraud Examiners (ACFE) in their 2012 Report to the Nations1, occupational fraud is a significant threat to small businesses, which typically have fewer antifraud measures than larger firms, increasing their vulnerability to fraud. Participants in the survey estimated that a typical organisation loses 5% of its revenues to fraud each year. In the ACFE’s study, nearly half of all victim organisations did not recover any losses suffered from embezzlement and the median loss was $140,000. More than 20% of cases resulted in losses of over $1 million. However, the smallest organisations suffered the largest losses. In its June 2012 Fraud Barometer2, KPMG found that management are the biggest perpetrators of fraud, but that economic turbulence was increasing both the opportunity and motivation for staff fraud. Their report highlighted a case of an assistant accountant who transferred money to her account on a weekly basis, after being given additional responsibility and power following the removal of three executives, leading to a loss of £105,000.

1.1.2 Fraudulent Customer Activity The range of fraudulent customer activity is extensive, but two strands can be approximately distinguished: genuine customers undertaking fraudulent conduct and those becoming customers in order to commit fraud. 1 2

ACFE, 2012 Report to the Nations, found at: http://www.acfe.com/rttn-highlights.aspx KPMG, Company insiders unmasked as biggest fraud perpetrators, July 2012, found at: http://www.kpmg.com/UK/en/ IssuesAndInsights/ArticlesPublications/NewsReleases/Pages/Fraud-Barometer-July-2012.aspx

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1.1.1 Embezzlement

In relation to general insurance, for example, the ABI noted in 2009 that: the most common and costly form of general insurance claims fraud is opportunistic retail fraud. Opportunistic retail fraud is where individuals exaggerate or inflate genuine claims to increase the value of a payout. In a minority of cases opportunistic fraudsters will fabricate an entire claim, including, for example, deliberately causing damage so as to be able to claim. Opportunistic fraud in commercial general insurance is similar to opportunistic retail fraud but the policyholders are firms, rather than individuals. One of the reasons for this, it noted, including an apparent increased likelihood of making small claims, could be recession-related as claims that people would not have made in the past were now being made as customers were experiencing – or anticipating – harder times. An alternative explanation suggested was that customers may have a heightened sense of entitlement during a difficult economic period. It was also felt that some of this increase in small claims could be fraud, with fraudsters trying to get in under the radar.3 In banks, the greater threat comes from criminals who have the resources and networks, often facilitated by controlled insiders, to bypass the increasingly sophisticated systems now used by banks, for a range of offences from loans to credit card fraud to setting up accounts for ML. In particular they seek to mask their activities by appearing to be genuine customers, and are identified by the UK’s City of London Police as the main threat to a secure online banking system where one of the most common types of cybercrime involving an economic element is account takeover.4

1.1.3 Fraud by Organised Criminals There are a number of ways organised crime enterprises exploit business. A 2006 FSA report noted that KPMG had claimed that the two biggest classes of perpetrators were managers and organised criminals, which together accounted for almost 90% of cases. It also highlighted a Norwich Union report on the involvement of criminal gangs in organised motor insurance fraud, who: seek to defraud insurers and consumers by submitting high volumes of false motor insurance claims for damaged vehicles, personal injury and associated losses of earnings and suffering.5 Amongst the most long-standing organised crime activity are the two frauds noted by Action Fraud in the UK6: • Long firm fraud – this starts with the criminals placing lots of small orders with wholesalers and

paying them promptly. Having established a good credit history and won the trust of their suppliers, the fraudsters then place several larger orders with those suppliers. But, once they receive the goods, they promptly disappear and sell the goods elsewhere. 3 4 5 6

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See ABI (2009). General insurance claims fraud: Research Brief. London: ABI See House of Commons Treasury Committee, Supplementary written evidence submitted by the City of London Police, 2011 (www.publications.parliament.uk/pa/cm201011/cmselect/cmtreasy/430/430we33.htm) FSA (2006). Firms’ High-Level Management of Fraud Risk. London: FSA, found at: http://www.fsa.gov.uk/pubs/other/fraud_ risk.pdf Action Fraud website, Short and long firm fraud, found at: www.actionfraud.org.uk/fraud_protection/long_term_and_ short_term_fraud

The Role of the Private Sector

• Short firm fraud – this is similar to long firm fraud but it takes place over a much shorter timescale.

Usually, the business does not try to establish any form of credit history or credibility, apart from perhaps filing false accounts at Companies House if it is a limited company. The fraudulent business has no day-to-day trading activity. Instead, the fraudsters use credit to obtain goods that are delivered to third-party addresses, often on multi-occupancy trading estates. Again, the goods are sold on for cash and the criminals then disappear. These kind of long and short firm fraudsters are happy to deal in any goods or services with a market value. They obviously prefer goods that are not traceable, which turn over quickly and which are easily disposable – such as electrical goods, computers, toys, toiletries, wines, spirits, fancy goods and confectionery. Fraud of this nature not only results in immediate serious financial loss; victim organisations may also suffer from low staff morale, adverse publicity or disruption by a major investigation.

Given the scale of the use of data, and the use of electronic systems to use and manage that data, any threat to limit its use can have significant impact on both business continuity and customer confidence. Denial of service attacks – denying business access to its own data – were once the preserve of hackers but are now the domain of organised crime enterprises and even governments aiming to destabilise business. Europol has stated that: the internet has considerably facilitated communication and promoted global development and interaction. At the same time, new, modern challenges have emerged in the form of cybercrime as criminal groups exploit these technological advances. The EU is a key target for cybercrime because of its advanced internet infrastructure, high number of internet users and widespread use of electronic banking and payment systems. Europol’s 2011 internet-facilitated organised crime threat assessment (iOCTA)7 argues that: The longer we spend online, the easier it is for potential fraudsters to access our data. With the increasing availability of wireless internet access points and hotspots, users are unwittingly exposing their personal data in these environments. Criminals use open access internet connections or private wireless accounts that aren’t password–protected, to mask online criminal activities that the account holder could later be held liable for. Hardware developments have likewise enabled more flexible access to the internet and greater portability of data. Preventing cybercrime is no longer simply a case of protecting home computers: laptops, smartphones, and even games consoles, can all be online and vulnerable to attacks – some of the most common and dangerous vulnerabilities are found in internet browsers.

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Europol, Threat Assessment: Internet Facilitated Organised Crime, 2011, found at: www.europol.europa.eu/sites/default/ files/publications/iocta.pdf

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1.1.4 Limiting Access to Data

Crimeware already exists to access data on smartphones, while infected games consoles can be incorporated into botnets designed to launch denial of service (DoS) attacks, which typically disrupt high-profile web sites and servers such as banks and credit card payment processors. The iOCTA outlines how internet, facilitated organised crime will continue to increase in line with broadband internet uptake, finding new offenders and victims in areas of the world where internet access was previously limited. Increasing bandwidth, automation and criminal technical skills will also fuel the growth in cybercrime. The growth in popularity of cloud computing – internet-based computing where resources, software and data are stored and shared online – enables remote access to data from any location and therefore makes data vulnerable to external attacks. This raises concerns about whether security measures will be properly enforced by the storage provider, or understood by the data owner or customer. The key to cloud computing’s success will be whether the convenience of remote access will be matched by confidence in its security provisions.

1.1.5 Data Compromise This is much more likely to be undertaken by organised criminals than ordinary citizens, although hacking for the purpose of attacking systems, rather than for economic gain, remains a significant issue. Thus the 2010 annual security and fraud review issued by the UK Payments Council noted: The main emerging threat comes from increasingly well organised and resourced crime gangs. They are often able to develop attacks at a high pace, and the industry needs to move more quickly in order to remain ahead. Many gangs, particularly those specialising in remote channel attacks, tend to be loosely coupled and global in nature, and are heavily involved in card and internet banking fraud. They also tend to display high levels of technical competence leading to the development of sophisticated malware and botnets, and are believed to be supporting research into uncovering vulnerabilities in computer systems. Malware is likely to continue to increase in sophistication, and present considerable security and fraud challenges for the industry. Of particular concern are automated malware attacks using man-in-the-browser techniques that target multifactor authentication systems. This type of malware improves attackers’ ability to carry out fully automated fraud on customer bank accounts in real time. Wholesale data theft of the type seen at TJX, RBS World-pay, Heartland and elsewhere will continue as organised criminal gangs attempt to capture large quantities of data rather than on a card by card basis. However, deployment of existing and new prevention tools and techniques will help to mitigate this threat. The UK’s EMV chip infrastructure in particular means that losses attributable from mass card data theft in the UK has not yet yielded the same level of fraud losses as seen in magnetic stripe-driven markets.8

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Payments Council, Annual Security and Fraud Review, 2010, found at: www.paymentscouncil.org.uk/files/payments_ council/new_website/annual_fraud_review.pdf

The Role of the Private Sector

Loss of personal data not only impacts firms, but also the customers whose data has been compromised and who will need to spend time and money to recover from the loss, eg, by cancelling credit cards and dealing with debts run up in their names. The UK’s NFA estimated that identity fraud cost UK adults an estimated £1.2 billion during 2011, although not all such cases will arise from loss of data by firms. Nonetheless, both data protection authorities and regulators take the loss of data by firms very seriously. In 2010, the former UK regulator, the FSA, fined Zurich Insurance over £2 million for failing to have adequate systems and controls in place following the loss of 46,000 customers’ confidential information, including identity details and some credit card and bank details9.

1.2

Exploitation of Firms

Learning Objective 8.1.2

Understand how firms can be exploited as a vehicle for financial crime: criminals using the firm’s services to launder the proceeds of crime; customer payments to terrorists; theft of customer data to facilitate identity fraud

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1.2.1 Criminals Using the Firm’s Services to Launder the Proceeds of Crime All firms may unwittingly find themselves targeted by criminals and have to be aware of this possibility. For example, companies may receive unexpected sums remitted into their accounts in error that are later reclaimed by the payer. Criminals may buy high-value goods and return them for the refund from a legitimate business (or resell them for discounted prices, willing to forgo the loss on the discount to receive clean money). These may be deliberate attempts to obscure the criminal origin of the funds through layering. Complex laundering operations may include trade-based money laundering and structuring practices. The launderers’ task is made easier by the ability to install nominee directors and keep secret the actual beneficial owners of the company. Ease of incorporation is seen as one of the strengths of some countries’ competitive regulatory environments and there may be bona fide reasons why small privately held companies do not necessarily wish details of their ownership to be made public. There is in some cases an objective difficulty in attributing beneficial ownership of companies to individuals other than trustees, which can be exploited by criminals. Virtually any type of firm may be exploited by criminals, for example, import/export companies are abused for the purposes of trade-based money laundering. However, as discussed in Chapter 3, Section 3.7.5, the FATF has identified various DNFBPs that are at a higher risk of being used for ML. Each of these sectors has particular characteristics that make them more attractive and the FATF’s typologies and risk-based approach documents for the sectors cover these vulnerabilities. Some of those characteristics are: • Casinos – deal predominantly in cash, operate accounts for customers, may offer value transfer and

exchange services.

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FSA Press Release, 24 August 2012, found at: http://www.fsa.gov.uk/library/communication/pr/2010/134.shtml

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• Dealers in precious stones and metals – deal in commodities of high intrinsic value, which can

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be bought and sold easily, often anonymously for cash. Metals, such as gold, and gems are easily concealed for smuggling purposes, enabling value to be transferred across borders. The trade in illegal diamonds is a factor in armed conflicts, possibly with terrorist involvement. Real estate – many money laundering operations involve the purchase and sale of property. Not only do successful criminals enjoy living in luxurious housing, and need property in which to carry out further criminal activity, such as drugs trafficking, but commercial property activity can create legitimate income, from assets purchased with illegitimate money. Buying and selling properties can help in the layering stage of ML. Accountancy and legal professions – the gatekeepers – accountants and lawyers play vital roles in ordinary (legal) commercial activity, so it is unsurprising that their services are sought by those hoping to disguise their criminal activity. They provide services connected to the formation, management and sale of companies, which will be attractive to money launderers, particularly in areas where nominees are allowed to be used, effectively hiding the actual ownership and control of the company. Professional services are also used in property transactions and sometimes financial transactions may be carried out on behalf of clients. An introduction to financial institutions from a professional firm may provide an air of legitimacy for the launderer. Company and trust formation agents and service providers – again this profession can be extremely useful to the launder, who may wish to use often complex company structures to hide their ownership and control of illicit assets, and will enlist the services of a professional in the field to establish them. Obviously, those firms operating in the financial markets (banking, securities and insurance) are also at high risk from money launderers, as their businesses are all about moving, storing and transferring money. Banks have traditionally been very important for ML and will continue to be so. Criminals will seek to deposit their proceeds of crime in banks, and then use their services such as electronic transfer of funds to move them around in the layering stage. Normal accounts (and debit and credit cards) allow criminals to access their money and use it for both lifestyle and illicit purposes. Private banking services, offered to high-net worth individuals, offer a discreet and personalised way of managing assets. Traditionally very confidential, private banks have proved popular with PEPs in particular. Insurance companies may find that they have sold policies that are then redeemed within a short period of time, requiring them to send through a company-endorsed payment and unwittingly this may have helped a criminal to clean or disguise their funds. Securities – although cash is seldom used in the securities markets (such as stocks and shares) it has been recognised that they still represent a ML opportunity, particularly at the layering stage. The markets tend to be international in nature, transactions can be made very quickly (and often remotely, through online dealing accounts) and can involve the use of nominee or trustee accounts, which allow concealment of the actual beneficiaries. All these characteristics appeal to money launderers. Money transfer and exchange firms – criminals need both to convert and transfer their money, often in cash. The legitimate business of this sector is to do precisely that (often more quickly and cheaply than the banking sector) and therefore their services are naturally very attractive to the money launderer. They may offer a combined service, allowing funds to be made available in a destination country in the local currency. A Bureaux de Change can be used by criminals to deposit money in small denomination notes and transfer it into larger denominations of a different currency.

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The Role of the Private Sector

1.2.2 Customer Payments to Terrorists There are a number of ways in which firms can be exploited as vehicles for financial crime, in terms of customer payments to terrorists, such as the use of customer accounts to transfer funds to proscribed organisations. As we saw in Section 1 of Chapter 4, ML and TF share some characteristics, particularly similar methods to store and transfer money, however it has been raised. Thus many of the ML vulnerabilities for the various sectors outlined above are also exploited by terrorist financiers.

However, this UK activity has been dwarfed, in terms of impact on institutions, by fines levied by authorities in the US. Several European banks have been fined hundreds of millions of dollars for carrying out transactions for clients and stripping details from messages sent to the US (because the transactions were denominated in dollars and settled through the US). ING, Lloyds TSB, Credit Suisse, ABN AMRO, HSBC and Barclays all found themselves caught up in investigations into transactions involving countries such as Iran, Libya, and Sudan. In August 2012, Standard Chartered reached a settlement, paying $340 million to the New York Superintendent of Financial Services for transactions with Iranian clients, which the regulator alleged left the US financial system vulnerable to terrorists, weapons dealers, drugs kingpins and corrupt regimes. The not-for-profit sector (such as charities) has been identified as a particular risk when it comes to TF. Charities have good reason for collecting and transferring money to countries in conflict zones, often where terrorist groups need to have access to funds. Charities can either be exploited for that purpose, for example, by subverting staff and diverting or stealing funds, or they can be entirely bogus fronts established for TF. Institutions with charities as customers should pay close attention, ensuring they are correctly licensed or regulated (for example, through the Charity Commission (CC) in the UK) and that the actual transactions match the expected behaviour, given the charity’s purpose.

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A specific risk relating to customers and TF, to which regulators have paid close attention in recent years, is the area of sanctions lists (which is described in Sections 1.4 and 4 of Chapter 4). In 2010, the former regulator, the FSA, fined RBSG £5.6 million for failing to have adequate systems and controls in place, to prevent breaches of UK financial sanctions – providing financial services to persons on the HM Treasury sanctions list. The ML Regulations 2007 required that firms maintain appropriate policies and procedures, in order to prevent funds or financial services being made available to those on the sanctions list. During 2007, RBSG processed the largest volume of foreign payments of any UK financial institution adequately, but failed to screen both their customers, and the payments they made and received, against the sanctions list. This resulted in an unacceptable risk that RBSG could have facilitated transactions involving sanctions targets, including TF.

There are examples of actual payments, from a corporate customer to a proscribed organisation. Chiquita, a multinational fruit and vegetable business, pleaded guilty in the US in 2007 pursuant to a written plea agreement. Under the terms of the plea agreement, Chiquita’s sentence included a $25 million criminal fine, the requirement to implement and maintain an effective compliance and ethics programmes, and five years’ probation. The plea agreement arose from payments that Chiquita had made for years to the right-wing terrorist organisation United Self-Defence Forces of Colombia – an English translation of the Spanish name of the group, Autodefensas Unidas de Colombia (AUC). The AUC had been designated by the US government as a foreign terrorist organization (FTO) on 10 September 2001, and as a specially designated global terrorist (SDGT) on 31 October 2001. These designations made it a federal crime for Chiquita, as a US corporation, to provide money to the AUC. In April 2003, Chiquita made a voluntary self-disclosure to the government of its payments to the AUC, giving rise to this investigation10. At the end of the case, one of the US Department of Justice lawyers said: like any criminal enterprise, a terrorist organisation needs a funding stream to support its operations. For several years, the AUC terrorist group found one in the payments they demanded from Chiquita Brands International. Thanks to Chiquita’s co-operation and this prosecution, that funding stream is now dry and corporations are on notice that they cannot make protection payments to terrorists. Another noted: funding a terrorist organisation can never be treated as a cost of doing business, American businesses must take note that payments to terrorists are of a whole different category. They are crimes.

1.2.3 Theft of Customer Data to Facilitate Identity Fraud When opening accounts in banks and other financial organisations, criminals will use data from legitimate persons to provide information for applications and other purposes which, when checked against normal credit reference, postal and other databases, will seem to confirm the genuine nature of the application. Key to this is accessing breeder documents – those documents, such as passports, that allow those who possess them to apply for or obtain other documentation and thus build up a profile or history that can satisfy basic CDD. The information may either be used quickly, before the source of the data is alerted, or used in such ways – for example, as a facilitator for other identities – as not to alert the source. CIFAS, the UK’s fraud prevention service – explains the types and purposes to which data can be put11: Identity fraud (or identity theft) is the fastest-growing type of fraud in the UK and can take one of two forms: • Identity Theft – (also known as impersonation fraud) is the misappropriation of the identity (such as

the name, date of birth, current address or previous addresses) of another person, without his or her knowledge or consent. These identity details are then used to obtain goods and services in that person’s name. • Identity Fraud – is the use of a misappropriated identity in criminal activity, to obtain goods or services by deception. This usually involves the use of stolen or forged identity documents, such as a passport or driving licence.

10 Department of Justice, Press Release, March 2007 found at: www.justice.gov/opa/pr/2007/March/07_nsd_161.html 11 CIFAS website, Identity Fraud, found at: http://www.cifas.org.uk/identity_fraud

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The Role of the Private Sector

Identity theft and identity fraud are definitely not victimless crimes. In 2011 alone, CIFAS identified and protected over 96,000 victims of identity theft. Identity theft can be a harrowing experience for the victim. It can be months before the fraudster’s actions are discovered, and in some cases it can take just as long to sort out the mess left behind.

In 2009, the former regulator, the FSA, fined three HSBC firms over £3 million for not having adequate systems and controls in place to protect their customers’ confidential details from being lost or stolen. During its investigation into the firms’ data security systems and controls, the FSA found that large amounts of unencrypted customer details had been sent, via post or courier, to third parties. Confidential information about customers was also left on open shelves or in unlocked cabinets and could have been lost or stolen. In addition, staff were not given sufficient training on how to identify and manage risks like identity theft. Despite increasing awareness of the need to protect people’s confidential details, all three firms failed to put in place adequate procedures to manage their financial crime risks. In April 2007, HSBC Actuaries lost an unencrypted floppy disk in the post, containing the personal information of 1,917 pension scheme members, including addresses, dates of birth and national insurance numbers. In July 2007, all three firms were warned by HSBC Group Insurance’s compliance team about the need for robust data security controls. However, in February 2008 HSBC Life lost an unencrypted CD containing the details of 180,000 policyholders in the post. The confidential information on both disks could have helped criminals to steal customers’ identities and commit financial crime.12

Find it yourself Full details of what is customer data and its protection – the FSA guidance: www.fsa.gov.uk/smallfirms/resources/factsheets/pdfs/data_security.pdf

12 FSA, Press Release, July 2009, www.fsa.gov.uk/pages/Library/Communication/PR/2009/099.shtml

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Criminals often seek access to the larger data sets – preferably those held by companies – either using an inside member of staff or hacking (as in the cases from 2010 and 2011 involving McDonald’s, Sony and Honda), or by volume emails to individuals, or even by purchasing volume datasets from illicit sources. This gives a possibility of a greater conversion rate, as well as frustrating attempts to mitigate post-theft consequences.

1.3

Propagation of Financial Crime

Learning Objective 8.1.3

Understand how a firm or its representatives may collude in the propagation of financial crime: misstatement of financial circumstances; corporate malfeasance

1.3.1 Misstatement of Financial Circumstances Valuation of financial circumstances is only as reliable as the underlying financial data. Companies or individuals may, and can, deliberately misstate their value of their assets in order to hide assets or to lower profits or even to overstate their inherent profitability (as in the case of Enron). As an example, in 2003 two former directors of Corporate Services Group plc were found guilty after a case brought by the SFO relating to accounting irregularities aimed at overstating profits: The circumstances (which predated the management of the company under its present board) revolved around the company’s financial statements for the years ending 31 December 1997 and 31 December 1998. The defendants conspired with others to defraud existing and potential investors in the company. The defendants dishonestly caused and permitted the company’s financial statements for 1997 to be prepared in such a way as to overstate the true extent of its profitability and they sought to do so in 1998. In 1997, the overstatement amounted to just over £3 million. In 1998, the accounting irregularities came to light before the statements could be published. The potential overstatement of profit for 1998 is estimated to exceed at least £25 million. The defendants instructed company employees to make false and misleading entries in its books when accounting for PAYE, leasing, loan and other liabilities; to draw up fictitious sales invoices; and to reinstate invoices that had previously been written off. The defendants were also responsible for disguising the true nature of (i) a number of the company’s acquisition agreements, ie, concealing the debtors figure, allowing the company to boost its profits, and (ii) the training division sale agreement. In 1998, it was also intended that a substantial amount of the company’s UK costs should be charged to the books of a recently acquired American company.13

13 SFO, Press release, 17 September 2003, found at: http://www.sfo.gov.uk/press-room/press-release-archive/pressreleases-2003/company-directors-conspired-to-falsify-profits.aspx

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1.3.2 Corporate Malfeasance

Nevertheless, with the profits from his existing companies, Maxwell bought the Mirror Newspaper Group (Daily Mirror, Sunday Mirror and Sunday People) in 1984. The newspaper suffered the usual over-manning and restrictive practices that bedevilled Fleet Street. Maxwell pruned costs and staffing levels but could still not emulate the success of the Murdoch-owned The Sun. Maxwell then insisted on setting up a short-lived rival – the London Evening News – to the Evening Standard, part of the Daily Mail group, as well as undertaking newspaper ventures in France, Australia, the US and Israel. Over-stretched on loans linked to a percentage of the share value of the hub of his business empire, the Maxwell Communications Corporation, Maxwell took to selling assets, share manipulation, window-dressing company accounts and ultimately looting the newspaper’s pension fund, to keep his empire financially solvent. Maxwell fell from his yacht and died in 1991, shortly before the collapse of the share prices of the Corporation and Mirror Newspaper Group and the uncovering of multi-millionpound company debts.

1.4

Implications of Business Strategies

Learning Objective 8.1.4

Understand the relevant implications of business strategies: corporate structure; outsourcing and oversight; use of middlemen

1.4.1 Corporate Structure One of the consequences of the various iterations of governance arrangements in business is the focus on the importance of strategy – the company objectives – and the structure necessary to devise, monitor and oversee the implementation of that strategy. As the Combined Code14 suggests:

14 Financial Reporting Council. (2010) The UK Corporate Governance Code. London: FRC.

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Corporate malfeasance generally refers to unlawful activity committed by a company as an entity itself, including misstatement of financial circumstances. It includes any deliberate decisions or actions by those who control or guide companies, which are dishonest or fraudulent. These include actions or decisions that affect employees and shareholders. One of the most significant cases in recent history was the Maxwell case. A Czech émigré who joined the British army and fought in the Second World War, Robert Maxwell began his business career in scientific publishing, book and journal distribution, and ultimately general printing (the British Printing Corporation, later to be named the Maxwell Communications Corporation). He served as a Labour MP for a number of years until 1970, although a judge was to comment about him in a court case that: it is questionable in my view whether that averment taken by itself provides any indication of a person’s standing in public life. Indeed in 1971 his business dealings, merger and takeover tactics, and company management relating to a takeover bid for Pergamon from Leasco, an American financial and data processing group, were severely criticised by a Department of Trade and Industry (DTI) report. The report concluded that: he is not in our opinion a person who can be relied on to exercise proper stewardship of a publicly quoted company.

Every company should be headed by an effective board which is collectively responsible for the longterm success of the company. There should be a clear division of responsibilities at the head of the company between the running of the board and the executive responsibility for the running of the company’s business. No one individual should have unfettered powers of decision… The directors should include in the annual report an explanation of the basis on which the company generates or preserves value over the longer term (the business model) and the strategy for delivering the objectives of the company… The strategy will determine markets and context, management and measurement and performance and, in so doing, will address the organisational structure, in terms of the strategy proposed for implementation which will in turn determine the organisational shape. Institutional strategy is about the formulation, implementation and responsibility for plans and related activities vital for the central direction and functioning of the enterprise as a whole.15 From this comes organisational design: an understanding of the strategic roles of the divisions, departments or subsidiaries of the organisation, as well as the role of the corporate centre...there are different styles of managing the parenting role of the corporate centre, ranging from the centralised masterplanner approach through to a highly devolved approach and organisational configuration: how this is made up of different building blocks and co-ordinating mechanisms...the issue is the extent to which a particular configuration best fits or supports different kinds of strategies.16 Specifically in relation to financial crime, and because of the risk of launderers and terrorist financiers infiltrating and perverting the functionality of organisations or their systems, products and services, it is important that the architecture of the organisation and its transactional arrangements present a hard target. A robust structure and resilient processes combine to provide the best possible base for countering these forms of crime and also provide protection against other threats. The basic building blocks of design are standards, transparency, scrutiny, accountability and reporting. Organisations must set a general standard, that precludes any one product line, geographic area or business unit falling outside the scope of standards, scrutiny and reporting on threats and incidents of ML or TF. The various parts of an organisation must check on the others, and if this is not effective, then it must be done by independent external parties. No individual or position, employee or office-holder can be free of the duty to guard against ML or TF and the obligation to account for their actions. Structures and roles need to be defined and implemented to give effect to intentions, to provide the means of monitoring efficiency and effectiveness and to take action where deficiencies are apparent. An organisation where responsibilities are clearly defined and allocated is easier to monitor and highly likely to be more resilient to threats. 15 Booth, S. (1993). Crisis Management Strategy. London: Routledge. p.63 16 Johnson, G. and K. Scholes, (1997). Exploring Corporate Strategy. Hemel Hempstead: Prentice-Hall. p.402

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1.4.2 Outsourcing and Oversight One consequence of business driving down the costs of making and providing products and services, including use of third parties, is the use of outsourcing domestically and internationally. One example is real-time sourcing from abroad, using contracted staff or overseas subsidiaries, for financial services through call centres and other facilities. As a strategic decision, the issues revolve around operational risk management, as defined by the FSA in 200217 as:

In 2008, the former regulator, the FSA, published a report on data security in financial services.18 In general, they found that most firms were over-reliant on third parties and there was little evidence that firms checked on data security at third parties, before entering into outsourcing contracts, or carrying out audits to check on standards throughout the term of the contract. Despite giving examples of good and bad practice for the information of firms, in 2010, the FSA again examined outsourcing in the context of data security in small financial services firms.19 It found that over half the firms examined shared customer data with third parties for various reasons, but that less than a quarter of those firms had confidence that the third parties had robust procedures in place for dealing with data security issues. The FSA reiterated that firms must understand that, if they use third parties, they are still responsible for the security of data. Outsourcing can also be an issue with regard to CDD (firms may rely on third parties to carry out checks) and checking sanctions lists (many firms deploy commercially available tools to check their customers and transactions against the various lists). Again it is important for firms to understand that they cannot outsource their responsibility and they remain liable for the accuracy of such work carried out on their behalf.

1.4.3 Use of Middlemen Business often use other firms to deliver their products and services; thus insurance companies sell insurance or mortgages through a range of third-party agencies, such as brokers, independent financial advisers (IFAs) and supermarkets. Businesses also use local contacts in countries in which they operate, as lobbyists, middlemen or intermediaries. Each brings particular issues, such as the degree of independent advice provided in relation to the first (selling tied products), and the possibility of bribery in terms of commissions and facilitation payments being paid.

17 FSA, Operational Risks and Controls, July 2002, found at http://www.fsa.gov.uk/pubs/cp/cp142.pdf 18 FSA, Data Security in Financial Services, April 2008, found at http://www.fsa.gov.uk/pubs/other/data_security.pdf 19 FSA, The Small Firms Financial Crime Review, May 2010, Part 3 found at: http://www.fsa.gov.uk/smallfirms/pdf/financial_ crime_report.pdf

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a. a firm’s customers may suffer losses, if the firm mishandles their assets, or otherwise fails to discharge adequately its customer obligations; b. a firm may suffer losses, with the potential for damaging confidence in the financial system and for knock-on losses to consumers; and c. a firm may be more susceptible to financial crime.

In regulated industries, such as financial services, the use of middlemen is usually subject to regulations, which require that the firm using the intermediaries have some form of control and responsibility over their actions. In terms of bribery, as we saw in Chapter 6, firms can be held criminally accountable for the payment of bribes by associated persons acting on their behalf, unless adequate procedures are in place to prevent it.

1.5

Anti-Money Laundering (AML), Combating Financial Crime (CFC) and Anti-Corruption (AC) Initiatives

Learning Objective 8.1.5

Understand the responsibilities of directors and senior management in relation to anti-money laundering (AML), combating financial crime (CFC) and anti-corruption (AC) initiatives

The directors and senior management of companies are subject to various different laws and regulations governing their conduct generally, as well as very specific responsibilities for preventing financial crime. In the UK, for example, the formal legal framework includes various Companies Acts, POCA and the Bribery Act 2010. In addition the FSMA applies additional and specific requirements for regulated companies. The 2006 Companies Act, for example, places a formal duty on directors: • • • • • • •

to act within powers; to promote the success of the company; to exercise independent judgment; to exercise reasonable care, skill and diligence; to avoid conflicts of interest; not to accept benefits from third parties; and to declare interest in a proposed transaction or arrangement.

Such duties are applicable to non-executive directors and expected of senior management. The corporate sector is also governed by a range of legislation, including employment law, health and safety and corporate manslaughter, which now place obligations and responsibilities on directors of companies. Publicly-listed companies are also subject to the Combined Code (see Section 2.2.3). In the financial services sector, control over the directors and senior management of firms is exercised through an approved persons regime, whereby individuals holding certain positions have to be approved by the regulator. Such people must be fit and proper for the role they hold, and the FCA takes into account: • honesty, integrity and reputation; • competence and capability; • financial soundness20.

20 FCA website, Approved persons, found at: http://fshandbook.info/FS/html/FCA/FIT/1/3

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The Role of the Private Sector

1.5.1 Anti-Money Laundering (AML) The directors and senior management of firms at risk of ML, and which are therefore covered by the AML legislation, have the overall responsibility for reviewing and approving the AML procedures, processes and controls in the firm (including making the right level of resources available), fulfilling the obligations that a firm has under the AML/CFT legislation and ensuring there is a compliance culture throughout the organisation. This is often known as setting the tone from the top. With the emphasis on the risk-based approach, senior management should also know about the ML/TF risks the firm faces and ensure that steps are taken to mitigate those risks. They should document the firm’s AML risk assessment and receive informative and objective information, including annual reports from their MLRO, which is sufficient to enable them to meet their AML/CFT obligations. In addition to this regular reporting, there should be an escalation process in place, so that senior management can be informed of potential risks as they arise, and senior management sign-off should be required for the most risky business relationships, such as PEPs.

There are less formally stated requirements for financial crime generally, as opposed to AML/CFT requirements described above. However, increasingly firms take an overall view of their financial crime risks and similar measures are often in place. In the UK, the former regulator, the FSA, issued guidance on financial controls for firms in the financial services sector.21 This makes clear that they expect senior management to take clear responsibility for managing financial crime risks, as they do all other risks facing their business. How the firm chooses to do so is a matter for them to decide, but the FCA will expect to see active engagement by senior management and that they are kept up to date on financial crime issues.

1.5.3 Anti-Bribery and Corruption (ABC) As we discussed in Chapter 6, Section 2, when considering the UK Bribery Act 2010, firms are now expected to have in place adequate anti-bribery measures. Principle 2 of the guidance issued by the UK authorities is that the top-level management of a firm must be committed to preventing bribery by persons associated with it. They must foster a culture in which bribery is never acceptable. The guidance seeks to encourage the involvement of senior management in the determination of the anti-bribery procedures and in key decision-making relating to any bribery risk. In the US, the Federal Sentencing Guidelines (Chapter 8 B1(a)(2)), state that a company shall promote an organisational culture that encourages ethical conduct and a commitment to compliance with the law. Such compliance and ethics programmes shall be reasonably designed, implemented, and enforced so that the programme is generally effective in preventing and detecting criminal conduct.

21 FSA, Financial crime; a guide for firms, found at: http://media.fsahandbook.info/Handbook/FC1_20121101.pdf

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1.5.2 Combating Financial Crime (CFC)

1.6

Private Sector Responsibilities

Learning Objective 8.1.6

Understand the responsibilities of the private sector in dealing with relevant authorities: protection of customer confidentiality; responses to information requests; responses to investigation orders; civil recovery, forfeiture and confiscation; global investigation, prosecution and confiscation; presentation of evidence in court

1.6.1 The Protection of Customer Confidentiality The issue of customer confidentiality applies to the protection of client or customer information by the organisation, with whom they have dealings, and to what information may be provided to other organisations. This is likely to be governed by two main factors: • the general law on data protection (which imposes obligations on firms holding personal data,

relating to their customers, such as limiting the purposes for which it is collected, ensuring it is accurate and keeping it safe); and • the contractual relationship between the firm and their customers, which may have implied or explicit duties of confidentiality. People expect their dealings with their bank and professional advisers to be kept confidential. Any contractual relationship has implications of confidentiality. In the case of UK banking, for example, this has been tested in the courts, where it was ruled that the duty of confidentiality is not absolute and that a bank could disclose customer information, where it was compelled by law, or had a public duty to do so, or where it was in the bank’s interests, or if the customer agreed. Otherwise, however, disclosure is a breach of the bank’s duty to its customers and the bank is liable for the consequences; mistaken or careless disclosure does not invalidate the liability. Similarly the UK Data Protection Act contains a number of exemptions, such as when disclosure is required by law or is necessary for legal proceedings. There are two circumstances where firms may find themselves required to disclose confidential customer information. The first is in relation to reporting required under AML/CFT legislation, such as SARs. The FATF recognised that the duty to report suspicious activity to the authorities was in conflict with firm’s responsibilities to keep customer information confidential. Recommendation 21 deals with this subject (as well as tipping-off) and states that: Financial institutions, their directors, officers and employees should be protected by law from criminal and civil liability for breach of any restriction on disclosure of information imposed by contract or by any legislative, regulatory or administrative provision, if they report their suspicions in good faith to the FIU, even if they did not know precisely what the underlying criminal activity was, and regardless of whether illegal activity actually occurred. This provision is usually implemented in a country’s AML law, such as POCA, where the relevant provisions protect persons making SARs from any potential breaches of confidentiality, whether imposed under contract, statute (for example, the Data Protection Act), or common law. Firms may also be required to disclose confidential information in response to requests from the authorities.

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1.6.2 Responses to Information Requests Generally, it is possible for companies to provide law enforcement and other agencies with information on an informal basis, in line with the requirements of the Data Protection Act. The view of the Information Commissioner is that: There is an exemption under the Data Protection Act that can be applied if the police need some information to prevent or detect crime or catch or prosecute a suspect. However, there are limits on the information you can release. If you are satisfied that the information is going to be used for this purpose and that if you did not release the information it would be likely to prejudice (that is, significantly harm) any attempt by the police to prevent a crime or catch a suspect then you can disclose this information.22

In respect of any further information requested, or information required to support the intelligence provided in a SAR for use in a prosecution, only release the information in response to a properly served production order or other order that effectively compels the disclosure. This shows to any persons involved in the prosecution or defence that the reporter was acting only in response to a binding legal duty23. Formal customer information requests can be made under Section 363 of POCA that requires banks to disclose details of accounts currently or previously held by the subject of a confiscation order or ML investigation. Section 364 sets out what is meant by the term customer information.

1.6.3 Responses to Investigation Orders Law enforcement authorities have wide powers, under a variety of laws, to obtain confidential information, usually by obtaining an order from a court for the material to be produced or a search warrant to search for it. As financial investigations often involve confidential material (eg, banking records), it is common for special powers to be granted under AML/CFC laws, in line with FATF Recommendation 31 which states that: When conducting investigations of money laundering, associated predicate offences and terrorist financing, competent authorities should be able to obtain access to all necessary documents and information for use in those investigations, and in prosecutions and related actions. This should include powers to use compulsory measures for the production of records held by financial institutions, DNFBPs and other natural or legal persons, for the search of persons and premises, for taking witness statements, and for the seizure and obtaining of evidence.

22 ICO, Data Protection Good Practice Note releasing information to prevent or detect crime, found at http://www.ico. org.uk/for_organisations/guidance_index/~/media/documents/library/Data_Protection/Detailed_specialist_guides/ SECTION_29_GPN_V1.ashx 23 ICAEW, Making SARs safely – preserving confidentiality for yourself and your clients, found at: http://www.icaew.com/en/ technical/legal-and-regulatory/money-laundering/uk-law-and-guidance/making-sars-safely-preserving-confidentialityfor-yourself-and-your-clients

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However, this exemption only covers the data protection issue and not client confidentiality. Firms with a duty of confidentiality to their customers may receive requests for information from LEAs, either as part of their investigations or as a follow up to a SAR. Firms must assess each such request on their merits, but the Institute of Chartered Accountants in England and Wales (ICAEW) gives the following advice:

Once an order or warrant has been served by the court the firm (usually through the MLRO) should ensure that all information listed is provided, but is not under obligation to provide more than is asked for. By acting only in accordance with their legal obligations, the firm and MLRO ensure that they will have a good defence against any subsequent possible charge of breach of customer confidentiality.

1.6.4 Civil Recovery, Forfeiture and Confiscation Taking the proceeds of crime from convicted defendants is not new. The 1889 Prevention of Corruption Act stated that, on first conviction, the court could fine or imprison the defendant, bar them from public office for seven years, and order them to pay the amount or value of any gift, loan, fee, or reward received by him of any part thereof. Not surprisingly, such sanctions have rarely, if ever, been used (or even known about), although both confiscation (the value) and forfeiture (the amount, asset or object) of the proceeds of or from crime are long-established sanctions in English law. Forfeiture is also concerned with handing over, on the instructions of the courts, assets/instruments used to commit crime. Confiscation is a court requirement to pay an amount of money as a penalty, equivalent to the amount the court determined was made as a result of criminal activity (crime or criminal life). Of the two, forfeiture could be more effective, since it transfers ownership of all the specified assets away from the convicted defendant, while a confiscation order is like a fine, leaving the convicted offender to determine how they will pay the order. Civil recovery is a newer form of power (provided initially to the ARA in the UK). It does not require a court case. Rather it uses the same powers, as any plaintiff in a civil case, to go to court to recover assets it claims the defendant has obtained illicitly, and to request an interim receiver be appointed to quantify and value assets. For companies, it is important to understand what types of order have been made against their customers and to ensure that, where necessary, they can freeze assets as required. Again, as with disclosure of information, they should ensure they comply fully with any order, but do not exceed the legal obligations placed upon them.

1.6.5 Global Investigation, Prosecution and Confiscation While there are established law enforcement processes for undertaking investigations, these are governed by procedures and treaties. There are two means by which material overseas may be sought: investigator-to-investigator request (via Interpol or directly), or via a formal letter of request issued by a court or designated prosecutor.

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The CPS further states that: which of these methods is chosen will depend upon the country in which the material is held. Certain countries (notably the US) prefer that investigator-to-investigator routes be used unless a coercive power or intrusive measure is sought. Conversely certain European states will provide material on an investigator-to-investigator basis only on the condition that such material is not used during judicial proceedings. In such a situation a letter of request should be used to obtain material. A letter of request may be issued under Section 7 of the Crime (International Co-operation) Act (CICA) 2003 in order to obtain unused material from abroad.24 Similarly, international co-operation exists on confiscation matters, in accordance with FATF Recommendation 38, which requires countries to:

For private companies, it is important to remember that, as with requests made by their domestic authorities, care must be taken with respect to client confidentiality. If evidence is being sought, the method used will depend on the legal situation in the requesting country, for example, either a signed statement or evidence under oath may be required. Foreign police officers may be involved in the investigation and it is important to understand the status of any conversations with them, or the use of any information passed to them. Companies may wish to engage with the investigators to understand the nature of the investigation and the request, to ensure that the information or documentation passed is limited to that which is both relevant and necessary.

1.6.6 Presentation of Evidence in Court If a company pursues the criminal option in terms of financial crime, then those with relevant information will be required to present that information in court, at a place and time determined by the prosecutor. Most police will assess any witness in terms of hostility and credibility; they will also take a very dim view of any company that initiates criminal proceedings and then refuses or is reluctant to give evidence in court. One option is to opt for the civil route and focus on disciplinary proceedings and confiscation against offenders. The procedures in criminal and civil cases are now subject to comprehensive and detailed procedural rules. The general principles for any participant in a criminal case, including presenting evidence, are governed by procedure, admissibility, use and full disclosure; for example:

24 CPS, Disclosure Manual, Chapter 35: International Disclosure Issues, found at: http://www.cps.gov.uk/legal/d_to_g/ disclosure_manual/disclosure_manual_chapter_35/

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Have the authority to take expeditious action in response to requests by foreign countries to identify, freeze, seize and confiscate property laundered; proceeds from money laundering, predicate offences and terrorist financing; instrumentalities used in, or intended for use in, the commission of these offences; or property of corresponding value.

Evidence Unlike in some jurisdictions, evidence in UK criminal trials revolves, at the initial stages, around witness statements, where a witness sets out their evidence in full, in a formal signed document, and the exhibits to that statement, the documents that the witness relies on are produced as part of their evidence. The general rule in English law is that all evidence that is relevant to the issues in a case is admissible unless a rule of evidence precludes it.

Sufficiency of Evidence Following on from a consideration of the potential admissibility of the evidence, the trial advocate will have to consider the question of sufficiency of evidence, ie, is there sufficient evidence to bring charges against a defendant and what should those charges be?

Disclosure of Unused Material The used material in a case is all the evidence that the prosecution intends to rely on at trial (made up of witness statements and exhibits). The unused material is all the other material that has been gathered during the course of the investigation. The law says that the prosecution has an obligation to consider the unused material in a case before the trial and to disclose to the defence any unused material that either (a) undermines their case or (b) might assist a defendant’s case.25

Suspicious Activity Reports (SARs) as Evidence SARs made to an FIU are generally regarded as confidential reports and in any case may not amount to evidence, for which actual transaction records may need to be produced. In particular, there is a need to protect the identity of individuals making SARs, for their own safety. However, there is not necessarily any blanket exemption from disclosing SARs, particularly if they should harm the prosecution case or assist the defendant’s. In cases where firms become aware that SARs may be disclosed or used in evidence, advice should be sought from the FIU. In the UK, the Home Office and SOCA have issued guidance on this subject.26

25 See May. A. (2011) ‘The Prosecution Route’ in Doig. A. (ed). The Fraud Practitioner’s Handbook, London: Gower. (2012). See also the Criminal Procedure Rules 2012, Part 22, Disclosure, found at: http://www.justice.gov.uk/courts/procedure-rules/ criminal/docs/crim-proc-rules-2012-part-22.pdf 26 Home Office Circular 53/2005, Money Laundering: The Confidentiality and Sensitivity of SARs and the Identity of Those Who Make Them, 2005, found at: http://www.soca.gov.uk/about-soca/library/doc_download/161-home-office-circular532005-sar-sensitivity

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1.7

The Risks Associated with Non-Compliance

Learning Objective 8.1.7

Understand the risks associated with non-compliance for the private sector: financial; reputational, including risks arising from adverse publicity in corruption cases reported by news media and civil society advocacy organisations; legal; operational; systemic

1.7.1 Financial Risk

Financial risk may also be included in the consequences of regulatory non-compliance. With the increasingly large fines for failure of ML controls, described in Section 1.2.2 of this chapter, banks are finding themselves having to make provisions in their accounts (and publicly announcing them). Although some critics say the fines still do not go far enough, they have been seen to have an effect on both share price (Standard Chartered shares fell by over 16% on the day that the New York State Department of Financial Services announced its allegations27) and profits (HSBC was forced to announce that it had set aside $1,500 million to cover a potential fine from US federal prosecutors, when it announced results in November 201228). In its paper Customer Due Diligence issued in October 2001 the BCBS noted: The inadequacy or absence of KYC standards can subject banks to serious customer and counterparty risks, especially reputational, operational, legal and concentration risks29. It goes on to provide definitions of reputation, legal and operational risks which, although written in the context of banking, have an application and interpretation which is equally relevant to other commercial organisations.

1.7.2 Reputational Risk Reputation is a concept that is very hard to define and indeed to value, and is often referred to as an intangible item. To the chagrin of a number of companies, however, it can have a devastating impact if it is lost. One only has to think of the impact of Enron on the operations of one of the largest single firms of accountants, no longer in existence, Arthur Anderson. As Jackie Harvey notes:

27 BBC News, Standard Chartered shares plunge on laundering charges, 7 August 2012, found at: http://www.bbc.co.uk/ news/business-19159286 28 Reuters, HSBC fears US money laundering fine to top $1.5 billion, 5 November 2012, found at: http://uk.reuters.com/ article/2012/11/05/uk-hsbc-results-idUKBRE8A40AF20121105 29 BCBS, Customer due diligence for banks, p3, 2001, found at: www.bis.org/publ/bcbs85.pdf

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In general terms financial risk refers to the situation in which a company does not have sufficient funds available with which to meet its obligations. The FSA stated that prudential risk management challenges for banks, building societies and insurance companies are created by the combination of the macroeconomic environment, the changing regulatory regime, and the future withdrawal of funding and liquidity support.

In theory, loss of reputation can result in direct costs (loss of income), indirect costs (client withdrawal and possible legal costs) and opportunity costs (forgone business opportunities) all of which will reduce the overall profitability of the firm.30 For the regulated sector, reputational risk poses a major threat, since the nature of the business requires maintaining the confidence of depositors, creditors and the general marketplace. Reputational risk is defined as the potential that adverse publicity, regarding business practices and associations, whether accurate or not, will cause a loss of confidence in the integrity of the institution. Banks are especially vulnerable to reputational risk, because they can so easily become a vehicle for, or a victim of, illegal activities perpetrated by their customers. They need to protect themselves by means of continuous vigilance, through an effective KYC programme. Assets under management, or held on a fiduciary basis, can pose particular reputational dangers. Such issues are also applicable to businesses in general. Certainly, a company like British Aerospace has had a bruising time since 2007, at the hands of the media, over bribery allegations, which it has consistently denied. As the Woolf Committee Report, commissioned by the company itself, put it: Any global company wanting to ensure its long-term legitimacy and reap the benefits of an enhanced reputation in the global market will need to have, and be seen to have, high ethical standards based on their values. The defence industry faces some particular complexities and challenges but also has the duty to achieve and demonstrate such standards.31 The issues may even extend collaterally to governments. Such was the furore over the Labour Government’s pressure on the SFO to halt one investigation, that the House of Commons Foreign Affairs Select Committee warned in 2007 that: The Government’s decision to halt the inquiry into the al-Yamamah arms deal may have caused severe damage to the reputation of the UK in the fight against corruption. Indeed, both the company and the government faced severe criticism when it was an NGO, Cornerhouse, that requested and won a judicial review into having the investigation reopened (although the SFO itself was to appeal and win).

1.7.3 Legal Risk This is the possibility that lawsuits, adverse judgements or contracts, that turn out to be unenforceable, can disrupt or adversely affect the operations or condition of a business. Businesses in the regulated sector, for example, may become subject to sanctions or lawsuits, resulting from the failure to observe mandatory KYC standards or from the failure to practise due diligence. Consequently, they can, for example, suffer fines, legal liabilities and special penalties imposed by regulators. Indeed, a court case involving a bank may have far greater cost implications, for its business, than just the legal costs. Banks will be unable to protect themselves effectively from such legal risks if they do not engage in due diligence, in identifying their customers and understanding their business. 30 Harvey, J. (2004). ‘Compliance and Reporting Issues Arising for Financial Institutions from Money Laundering Regulations: A Preliminary Cost Benefit Study’ Journal of Money Laundering Control, Vol. 7 No. 4 p.337 31 BAE Systems, Woolf Committee Report, 2008, found at: http://ir.baesystems.com/investors/storage/woolf_report_2008. pdf

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1.7.4 Operational Risk Operational risk is defined in the Basel Committee CDD paper as the risk of direct or indirect loss, resulting from inadequate or failed internal processes, people and systems or from external events. Most operational risk in the KYC context cite weaknesses in the implementation of company programmes, ineffective control procedures and failure to practise due diligence. A public perception that a financial services institution is not able to manage its operational risk effectively can disrupt or adversely affect its business, or attract significant regulatory sanctions for inadequate systems and controls. Such sanctions may not be sufficiently large as to amount to material financial risk to the institution, but may include requirements to implement new control systems, which also carry a cost.

1.7.5 Systemic Risk

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This is a term that is generally applied to the banking sector and refers to the situation in which an incident affecting one institution is of such magnitude that there are fears that it could spread to other institutions. It is also referred to as contagion risk. Governments are rightly fearful of systemic risk and this is often the justification for government intervention in financial markets (due to their inter-dependence with the rest of the economy), as evidenced by bailouts of banks around the world during the 2007–08 financial crisis.

2.

Practical Business Safeguards

2.1

Facilitating Practical Solutions

Learning Objective 8.2.1

Know the role industry groups and guidance bodies play in facilitating practical solutions for business

There are a range of organisations and groups that provide either direct operational support or guidance to their members. CIFAS32 is a not-for-profit membership association, representing the private and public sectors. CIFAS is dedicated to the prevention of fraud, including staff fraud, and the identification of financial and related crime. CIFAS operates two databases: • National Fraud Database; • Staff Fraud Database.

32 www.cifas.org.uk

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CIFAS has over 250 member organisations, spread across various business sectors. These include financial services, retail, telecommunications, customer service and call centres and the public sector. Although at present CIFAS members are predominantly private sector organisations, public sector bodies may also share fraud data reciprocally through CIFAS to prevent fraud. Its work is intended to build on crime prevention data-sharing to encompass both the private and public sectors in the public interest and protect the interests of CIFAS members from the actions of criminals, by pooling information on fraud and prevented fraud. In the financial sector there are a number of associations representing member institutions providing financial services, such as the Council of Mortgage Lenders (CML)33, UK Payments Administration Ltd34 (formerly the Association for Payment Clearing Services), and the British Bankers Association (BBA)35, who are involved in addressing fraud from a number of perspectives. The FSA was also keen to promote the role of trade associations in providing good practice guidance, effective liaison, accurate statistics and consumer advice, a stance the FCA is likely to adopt. The CML, for example, is the trade association for mortgage lenders in the UK, and its members undertake around 98% of UK residential mortgage lending. Like other associations, the CML represents its members’ interests, provides an industry forum, offers research and issues good practice guides. UK Payments is a product association, dealing with payment systems and controls (with 30–40 members and a fraud intelligence branch). The BBA is the main trade association for banks in the UK, with over 250 member banks from 60 countries, which collectively hold 90% of the UK banking sector’s assets and account for 95% of all banking employment in the UK. In relation to financial crime, the BBA, for example, sees its main responsibilities as lobbying on any legislative developments (such as the FSMA or the POCA) or practitioner issues (on cheque, account opening or transfer fraud) that might impact on members’ work. It has a fraud unit dealing with: • good practice advice to members (and especially those not members of the BBA’s fraud liaison

group); warning notices on current issues; presentations; consumer advice; producing the Fraud Managers’ Reference Guide (which is used for bank managers’ benchmarking meetings) and a crime-watchers magazine; • intelligence on current threats; and • advice on physical security. • It has extensive working group and liaison group networks.

• • • •

33 www.cml.org.uk 34 www.ukpayments.org 35 www.bba.org.uk

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A distinctive feature of the UK AML/CFT regime is the possibility of industry guidance being recognised by HM Treasury. Such recognised guidance must be taken in to account by a court or regulator when assessing if a firm has complied with its AML/CFT obligations. One body producing such approved guidance is the Joint Money Laundering Steering Group (JMLSG), made up of the leading UK trade associations in the financial services industry. Its aims are to promote good practice in countering money laundering and give practical assistance in interpreting the UK Money Laundering Regulations. This is primarily achieved by the publication of the JMLSG Guidance36 which includes: • Part I – general guidance for the UK financial sector. • Part II – sector specific guidance. • Part III – specialist guidance.

2.2 Auditing Learning Objective Understand how auditing contributes to corporate governance, accounting and reporting requirements: audit committees; internal audit; external auditors

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8.2.2

2.2.1 Audit Committees In the early 1990s, corporate scandals, involving senior management, and conduct that was visible (and on occasion had been raised as matters of concern, but was not picked up by regulators or auditors), led to pressure for a review to address corporate governance. The Cadbury Committee (formally the Committee on the Financial Aspects of Corporate Governance) was set up in May 1991 by the Financial Reporting Council (FRC), the LSE and the accountancy profession. Cadbury proposed a range of measures on the roles and responsibilities of the executive and non-executive directors, the transparency and accuracy of corporate information, the role of remuneration and audit committees, and the use of codes of conduct throughout the business. It was also the first of a number of similar reports on corporate governance, which ultimately led to the emergence of the Combined Code, to which listed companies were required to subscribe. Its core principles established how companies should conduct themselves. Thus UK companies listed on the LSE are required to establish an audit committee of at least three, or in the case of smaller companies, two, independent non-executive directors. In smaller companies the company chairperson may be a member of, but not chair, the committee, in addition to the independent non-executive directors, provided that they were considered independent on appointment as chairperson. The board of the company should satisfy itself that at least one member of the audit committee has recent and relevant financial experience. The main role and responsibilities of the audit committee should be set out in written terms of reference and should include: • monitoring the integrity of the financial statements of the company and any formal announcements

relating to the company’s financial performance and reviewing significant financial reporting judgements contained in them; 36 JMLSG Guidance, found at: http://www.jmlsg.org.uk/industry-guidance/article/guidance

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• reviewing the company’s internal financial controls, unless expressly addressed by a separate board

risk committee, composed of independent directors, or by the board itself. Specifically, the audit committee should have responsibilities for internal and external audit. This includes: • monitoring and reviewing the effectiveness of the company’s internal audit function; • reviewing the company’s internal control and risk management systems; • making recommendations to the board, for it to put to the shareholders, for their approval in general

meeting, in relation to the appointment, re-appointment and removal of the external auditor and to approve the remuneration and terms of engagement of the external auditor; and • reviewing and monitoring the external auditor’s independence and objectivity and the effectiveness of the audit process, taking into consideration relevant UK professional and regulatory requirements.

2.2.2 Internal Audit Internal audit is established by the management of the organisation and, although operating independently, is part of the overall management function of the organisation. The Chartered Institute of Internal Auditing (CIIA) defines internal auditing as: An independent, objective assurance and consulting activity, designed to add value and improve an organisation’s operations. It helps an organisation accomplish its objectives, by bringing a systematic, disciplined approach to evaluating and improving the effectiveness of risk management, control and governance processes. The CIIA provides ‘International Standards for the Professional Practice of Internal Auditing’.

2.2.3 External Audit External audit’s overall purpose is to carry out an appraisal of management’s discharge of its responsibilities. Key elements of the quality of actual external audit comprise the scope/coverage of the audit, and adherence to appropriate auditing standards, including independence of the external audit institution. It will focus on significant and systemic financial management issues in its reports, and performance of the full range of financial audit, such as reliability of financial statements, regularity of transactions and functioning of internal control and procurement systems. Inclusion of some aspects of performance audit (such as value for money in major infrastructure contracts) will also be expected of a high-quality audit function. The audit committee will normally take a view on the follow-up of the audit findings, through correction of errors and system weaknesses, identified by the auditors. The Combined Code sets out the requirements intended to achieve objectivity, through the establishment of formal and transparent arrangements for considering how they should apply the corporate reporting and risk management and internal control principles and for maintaining an appropriate relationship with the company’s auditor as follows:

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The terms of reference of the audit committee, including its role and the authority delegated to it by the board, should be made available. A separate section of the annual report should describe the work of the committee in discharging those responsibilities. The audit committee should review arrangements, by which staff of the company may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters. The audit committee’s objective should be to ensure that arrangements are in place for the proportionate and independent investigation of such matters and for appropriate follow-up action. The audit committee should monitor and review the effectiveness of the internal audit activities. Where there is no internal audit function, the audit committee should consider annually whether there is a need for an internal audit function and make a recommendation to the board, and the reasons for the absence of such a function should be explained in the relevant section of the annual report.

The annual report should explain to shareholders how, if the auditor provides non-audit services, auditor objectivity and independence is safeguarded.37 Audit standards are supported by professional associations, such as the Chartered Institute of Public Finance and Accountancy and the CIIA, and there is guidance available from the FRC, which is the UK’s independent regulator, responsible for promoting high-quality corporate governance and reporting and, since July 2012, setting audit standards. The FRC promotes high standards of corporate governance through the UK Combined Code. It sets standards for corporate reporting and actuarial practice and monitors and enforces accounting and auditing standards. It also oversees the regulatory activities of the professional accountancy bodies and operates independent disciplinary arrangements for public interest cases involving accountants and actuaries.

Find it yourself The Chartered Institute of Internal Auditors http://www.iia.org.uk/ The differences between generally accepted accounting principles and UK auditing standards: www.icaew.com/en/library/subject-gateways/auditing/knowledge-guide-to-uk-auditingstandards#sources

37

Financial Reporting Council (2010). The UK Corporate Governance Code. London: FRC. pp.19–21

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The audit committee should have primary responsibility for making a recommendation on the appointment, reappointment and removal of the external auditor. If the board does not accept the audit committee’s recommendation, it should include in the annual report, and in any papers recommending appointment or re-appointment, a statement from the audit committee explaining the recommendation and should set out reasons why the board has taken a different position.

2.3

Due Diligence

Learning Objective 8.2.3

Know the purpose and key elements of due diligence

2.3.1 General Although it has some specific meanings in relation to financial crime, it is worth bearing in mind that due diligence, as a formal requirement, does not only apply to areas relating to customers. It has particular relevance to company procedures where, for example, a particular law has strict liability in that it does not allow for a person or company to argue that they did not intend to do wrong or were unaware of the requirements, but where the fact that a law has been contravened is sufficient to allow a court to convict. Therefore, to balance the scales of justice, lawmakers provided various defences and alternatives. This means that the law is recognising the efforts made by businesses to comply with its demands. This system includes the defence of due diligence (or adequate procedures). For example, working in partnership with the policy lead at the Department for Business, Innovation and Skills (BIS), the National Measurement Office (NMO) has thus described in general detail how, in relation to the area of hazardous waste, companies should respond in terms of demonstrating due diligence: To use this defence, a person must prove that they took all reasonable steps and exercised all due diligence to avoid committing the offence. If they can do so they are entitled to be acquitted. Whether or not a defence will be successful depends on the circumstances surrounding each case. What amounts to a successful due diligence defence has exercised the minds of many judges over many years and has resulted in a number of appeal cases which in themselves help us to understand more clearly what businesses have to do to avoid prosecution. Reasonable precautions and due diligence generally requires a business or person to have: • taken all reasonable steps or precautions; • exercised all due diligence to avoid committing the offence.

Once you have done this you must ensure that the system of checks is being carried out. If you have a system that nobody knows about, or cares about, the system is useless and any defence is likely to fail.38 Essentially all companies required to undertake due diligence need to understand legal requirements, assess risks, establish what they are going to do about it, and put in place reasonable safeguards, that either eliminate any chance of anything going wrong or control the risks, so that errors will be detected early on and put right, before too much damage is done.

38 National Measurement Office, Due Diligence web page, found at: www.bis.gov.uk/nmo/enforcement/rohs-home/duediligence

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The Role of the Private Sector

2.3.2 Bribery As we saw in Chapter 6, due diligence is one of the key principles on which bribery prevention measures should be based. In particular, this applies in respect of persons who perform or will perform services for or on behalf of the organisation, in order to mitigate identified bribery risks. As part of their wider good governance, firms should consider anti-bribery due diligence as both part of a risk assessment (identifying those third parties, relationships and areas or business that pose a higher – or lower – risk of bribery) and as a mitigation, by carrying out due diligence on third parties such as intermediaries. Due diligence in this context might include understanding and auditing the third parties’ own anti-bribery procedures.

2.3.3 Outsourcing and Middlemen

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Sections 1.4.2 and 1.4.3 above considered the use of outsourcing and middlemen as part of a business strategy. Due diligence is important in managing the risks posed by such arrangements, not only in respect of bribery, but also where data is shared with the third party or reliance is placed upon them to carry out functions on behalf of a firm. As the ultimate responsibilities remain with the firm that has entered into outsourcing arrangements with the third parties, they should carry out due diligence to satisfy themselves that appropriate arrangements are in place, before entering a contractual arrangement and that they are effectively carried out during the contract.

2.3.4 AML/CFT – Customer Due Diligence Due diligence on customers is a vital part of AML controls in firms, as established by FATF Recommendation 10. We will discuss this in detail in Section 3.4 of this chapter.

2.4

Data Analysis Techniques

Learning Objective 8.2.4

Understand how data analysis techniques may be utilised by a firm to detect fraud

Most companies operating high-volume processes or transactions – for example, banks, or telephone companies – that want to look for patterns of activity, that may predict or identify fraudulent activities, cannot rely primarily on human input. This particularly results from a shift to electronic provision of services, business re-engineering, which strips out layers of control and supervision, and delivery of remote or centralised infrastructure. At the same time, however, this technology has also rendered huge data sets into manageable and accessible material for information-gathering or verification. For example, the Postcode Address File is the most up-to-date and complete address database in the UK, containing over 28 million addresses, while the Electoral Register is now online and not only includes the names and addresses of most UK citizens over the age of eighteen, but also provides access to historical data.

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There are a range of commercial software systems that sit in front of or within the processes to manage information through data matching and data mining. They can be relatively unsophisticated – verification and authentication of application details, expenditure patterns on credit cards, landline phones and addresses that don’t match geographically – or more sophisticated, using techniques like: • scoring according to set criteria (usually called rules-based) or activities (called transaction scoring,

based on usage patterns); • exception reporting (identifying patterns atypical of the past or normal expenditure patterns of the customer or particular groups); • fuzzy logic (inexact matching, such as grouping names sounding like ‘smith’ but written in different ways in searching); and • neural networks (which predict or aggregate activities or actions, under a range of dynamic criteria across time, and thus can adjust identifiers, scoring, or red flags. There are industry-wide, cross-sector and commercial organisations like the Association of British Insurers Fraud Intelligence Bureau, CIFAS, Experian, and Equifax which provide a means to read-across both their own and other databases to provide focused analysis; similar software sources exist for investigations and case management. The value of such techniques is to manage and make sense of significant data flows, and to be able to prevent fraud, through screening out attempts at fraud, through managing payments and expenditure patterns, and through identifying use of financial services for financial crime. On the other hand, such techniques have to be matched by strategic human input, for example analysis and interpretation, in order to be used effectively.

2.5

Assessing and Managing the Impact of Risks

Learning Objective 8.2.5

Understand how to assess and manage the impact of risks on a firm’s business activities: products and services; customers; industry; countries

According to the accepted international standards relating to risk management, risk is defined as the effect of uncertainty on objectives.39 According to the International Organization for Standardization (ISO): Risks affecting organisations can have consequences in terms of economic performance and professional reputation, as well as environmental, safety and societal outcomes. Therefore, managing risk effectively helps organisations to perform well in an environment full of uncertainty.

39 International Organization for Standardization, ISO 31000 – risk management, found at: http://www.iso.org/iso/iso31000

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The Role of the Private Sector

So, risk arises out of uncertainty and the level of risk is the combination of the likelihood of a risk occurring, and the consequences if it does occur. Action taken to manage or treat the risk, and therefore change the level of risk, will need to address either the likelihood of any event occurring, or the consequences if it does occur, or both, and prioritise risks according to materiality (ie, how important to the organisation the consequences are, which could range from financial costs to reputational damage). Risks generally include, but are not limited to: failure to recognise and take advantage of opportunities; failure of a project to reach its objectives; client dissatisfaction; unfavourable publicity and reputation; a threat to physical safety; a breach of security; a threat to critical infrastructure; and mismanagement.

The assessment of risk concerns the robustness of the decision-making processes, the modelling of existing information, the appetite for risk or risk-taking, the options – accepting, ignoring, displacing or mitigating risk – and the process for managing any consequential and unanticipated risk (often termed residual risk). There are a number of recognised processes for assessing and managing risk, and the goal of risk management is to move uncertainty away from risk and towards opportunity through a number of key processes: • • • • • •

Risk identification – what are likely risks on the project/activity? Risk quantification – how can you evaluate the risks to assess possible outcomes? Risk prioritisation – how to balance likelihood, materiality and consequences? Risk response development – how do you plan to respond to known or expected risks? Risk costing – what are the financial implications? Risk response control – what actions will you take when unforeseen or unexpected risks actually do arise?

2.5.1 Products and Services Companies risk-assess all products and services from the size of the potential market and the speed of access to services, to the impact on competitors and vulnerability to financial crime. Crime risks should be considered at an early stage of product design, to build in fraud prevention features. However, risk assessment should be an ongoing process and actual fraud events can be used to highlight vulnerabilities. The development of Chip and PIN security for debit and credit cards is a good example of this – the financial product has remained essentially the same, but the anti-fraud features have improved. Certain products and services carry higher risks than others. With regard to AML/CFT, high risk products or services may include private banking facilities, anonymous and cash transactions, non-face-to-face business and receiving payments from unknown third parties.

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• • • • • • • •

The threat of credit card fraud, for example, is a function of the quality of the customer base – the bigger the base and the wider the access, the greater the potential for fraud. Of course, all institutions, particularly the regulated sector, have issues to do with the cost of compliance, but there are benefits, in terms of reducing financial crime against the company or reducing the risk of regulatory sanction, of avoiding the risks discussed above and of reducing client default/other customer-related financial risks. These mitigate the total cost and in fact may help the profitability and longevity of a company.

2.5.2 Customers Part of a firm’s overall risk assessment includes the likely response of customers, while at the same time assessing the economic climate or changes in attitudes. For example, until the mid-1990s, individual insurance companies were coming to grips with changing perceptions on the part of the public. Rather than the utmost good faith mantra that traditionally regulated the relationships between companies and those they insured, insurers found themselves treated as another profitable industry, whose products and services were seen as an investment to be drawn upon by legitimate policyholders, who then decided, when the opportunity for making a claim occurred, to make a fraudulent or exaggerated claim. Customer risk is also important in AML/CFT risk assessment. Higher risk customers may be those with an unusual business relationship, non-residents, companies with unusual structures, such as nominee shareholders and cash-intensive businesses. As discussed earlier in Section 3.7.2 of Chapter 3, politically exposed persons (PEPs) are a specific class of high-risk customer identified by the FATF.

2.5.3 Industry Often the industry, or parts of an industry, undergoes significant re-engineering as to the procedures and approaches to delivering products and services. In order to compete in the market, other consequences follow. Thus the online application and delivery of financial and insurance services offers faster access and customer service, as well as an increase in technological solutions and a decrease in staff costs. On the other hand, the changes shift the types of risk that individual companies may face, and the levels of change and investment necessary to compete. Emerging technologies are also specifically identified in the FATF Recommendations as ML risks. According to Recommendation 15: Countries and financial institutions should identify and assess the money laundering or terrorist financing risks that may arise in relation to (a) the development of new products and new business practices, including new delivery mechanisms, and (b) the use of new or developing technologies for both new and pre-existing products. In the case of financial institutions, such a risk assessment should take place prior to the launch of the new products, business practices or the use of new or developing technologies. They should take appropriate measures to manage and mitigate those risks. Also, by bringing the DFNBPs in to the realm of AML/CFT regulation, the FATF has identified those specific industries as representing a higher risk. This has implications not only for firms in those sectors, but those (such as banks) who have them as their clients.

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The Role of the Private Sector

2.5.4 Countries The risk assessment of countries is particularly relevant for international banks and other financial services institutions, who are now accountable for a range of regulatory requirements, including their dealings with correspondent banks, and for the illicit movements of the proceeds of corruption, through PEPs. Such assessments will address country risks that relate to, for example, conflict zones and political stability, drug transit routes, levels of organised crime, countries of concern for proliferation, TF and ML.

For financial services, such profiling is embedded in their ML, CFT or financial crime departments, which in larger organisations may be separate departments. International businesses involved in contracts or inward investment, on the other hand, are more likely to rely on assessments from commercial agencies and advice from their embassies or foreign affairs ministries. In terms of AML/CFT, higher-risk countries are jurisdictions generally thought to be countries where ML risks originate or which have firms and institutions which can be exploited for ML purposes. They can include: • countries identified by credible sources as having inadequate AML/CFT systems; • countries subject to sanctions or embargos, such as those issued by the UN; • countries identified, by credible sources, as having significant levels of corruption or other criminal

activity; • countries identified, by credible sources, as providing TF, or that have designated terrorist organisations operating in their territory.

The pressure for a more methodological approach to corruption is developing through advice from non-governmental agencies and national governments. For example, the OECD provides guidance to business on risk-assessing, investing and working in weak governance countries40, while the Business Anti-Corruption Portal, managed by the Global Advice Network41, co-funded by the Danish International Development Agency, gives anti-corruption guidance for companies operating in developing countries. The latter invites companies to: develop a flowchart using the described examples supplemented with information from the information network and country profiles when elaborating an anti-corruption strategy that fits the company’s products and the markets in which the company operates.

40 OECD (2006). OECD Risk Awareness Tool for Multinational Enterprises in Weak Governance Zones. Paris: OECD. 41 Business Anti-Corruption Portal, found at: www.business-anti-corruption.com

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Corporate institutions can refer to elaborate pre-emptive warning matrices, that will draw on the reports of the FATF, the lists of proscribed countries produced by OFAC of the US Department of the Treasury, International Narcotics Control Strategy reports, reports by international institutions (eg, the World Bank, Heritage Foundation, Freedom House, TI and the OECD) and media reports. A number of corporate institutions use consultancy firms (who have also long advised on security for companies) and have access to political risk insurance (PRI), which will cover them from adverse developments from political change.

2.6

Minimising Financial Crime Opportunities

Learning Objective 8.2.6

Understand what measures can be adopted to minimise financial crime opportunities within a firm: conflicts of interest policies; information barriers/Chinese walls; limiting access to data; effective sign-off protocols; gifts and entertainment policies; objective audit processes; IT security; whistleblowing; employee vetting

2.6.1 Conflict of Interest Policies Conflict of interest policies – see Chapter 5, Section 1.2 – are intended to ensure that there is no conflict between an employee’s or public official’s contractual or public duties and any personal or private interests they hold, directly or indirectly, that may be reasonably assumed to affect the performance of their duties. In the UK, there is a legal requirement under the 2006 Companies Act, that directors must avoid a situation in which they have, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company. This applies, in particular, to the exploitation of any property, information or opportunity and it is immaterial whether the company could take advantage of the property, information or opportunity. It is an offence for a director of a company who is, in any way, directly or indirectly, interested in a transaction or arrangement, that has been entered into by the company, not to declare the nature and extent of the interest, to the other directors. Of course, conflicts of interest can arise at any level of an organisation, so the general principle of avoiding conflicts, or the appearance of conflicts, and managing them, when they do occur, is very often extended to the workforce by companies. Although generally this will not be a legal requirement, such requirements are usually outlined in a company’s code of conduct. This will outline what a conflict is, how it may come about and reporting procedures for members of staff. The value of a designated member of staff to deal with conflicts issues is not only in the ability to offer advice in individual cases, but also in providing training and updating the policy and procedures. As an example of corporate policy and institutional procedures, the conflict of interest procedures of the former UK regulator (FSA) can be taken as a good practice example of corporate guidelines

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Example General Principles All of us must take steps to ensure that any conflict of interest to which we may be subject does not affect, or reasonably appear to affect, a decision taken by the FSA. We must disclose all interests which could conflict, or appear to conflict, with our duties at the FSA. None of us must exploit, or reasonably appear to exploit, to our personal advantage any personal or professional relationships with a relevant organisation, (or an officer or employee of a relevant organisation) or an organisation with which the FSA has a contractual relationship (or an officer or employee of such an organisation). It is important that the FSA can publicly defend the actions of its staff in relation to this code in order to prevent reputational damage. It is your responsibility to bring potential or actual conflicts of interest to the attention of your line manager as soon as you become aware of them. What is a Conflict of Interest?

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A conflict of interest arises when our work for the FSA could be affected by a personal interest or personal association. It becomes significant if an independent third party might reasonably take the view that there is a risk of our resultant actions (or those of a personal associate) being affected, whether or not they are actually affected. Conflicts of interest may arise in various ways. For example as the result of: a. a direct or indirect financial interest; b. a direct or indirect financial interest held by a commercial undertaking with which we have connections; c. a personal association or relationship with those affected, or likely to be affected, by the information or issue in question; d. an expectation of a future interest (for example, future employment); e. in some cases, a previous association with the information or issue in question; f. an interest arising from a common interest grouping, such as a trade association or other public or private society. This list is not exhaustive, nor will all of the examples necessarily give rise to significant conflicts of interest. If you are in doubt about whether a conflict has arisen, please consult the Ethics Officer. Procedure for Disclosure of Interests When you start work at the FSA you must complete the Disclosure of Interests form and provide your line manager with details of the following: a. any post, other employment or fiduciary positions that you hold, or have held in the past five years in connection with a relevant organisation or an organisation that presently, to your knowledge, has a contractual relationship with the FSA; b. any other significant relationship, including a professional, personal, financial or family relationship, held in connection with or capable of affecting a relevant organisation; c. the names of organisations with which you hold securities and/or related investments, pension products, investments with life assurance content, mortgages, endowment policies, collective investment schemes, holdings in investment portfolios (including where full or partial discretion is given to the investment manager), interests in hedge funds and private equity funds;

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d. the names of family members that hold positions or are employed by a relevant organisation or a firm connected with the FSA’s business, such as a supplier or professional adviser; e. details of any connected person who works at the FSA. You must immediately notify the Ethics Officer, and your line manager, of all changes in the information disclosed above. The Ethics Officer will keep a permanent record of all disclosures made under this section of the Code. That information will be kept confidential and will not be disclosed except where there is: a. a requirement for disclosure for the purposes of managing potential or actual conflicts; b. a requirement for disclosure to your new line manager, following your move to another position within the FSA; c. a requirement for disclosure for the purposes of disciplinary proceedings; d. any legal or regulatory obligation to disclose the information.

In addition to disclosures above, you are under a duty to declare to your line manager, or others as appropriate, any potential conflict of interest that arises in the course of your work, for example at meetings or during discussions. A general disclosure of interests under the provisions of the Code is not a substitute for this. You should recognise that a relationship disclosed under these rules as potentially giving rise to a conflict of interest might lead to your Head of Department (or appropriate line management) moving you to another role.42

2.6.2 Information Barriers/Chinese Walls Principle 8 (Conflicts of Interest) of the FCA’s Principles for Businesses requires a firm to manage a conflict of interest fairly, both between itself and its customers and between a customer and another client. One of the methods by which a firm may manage conflicts of interest is to establish and maintain internal arrangements, restricting the movement of information within the firm, usually termed Chinese walls. This is an arrangement that requires information held by persons in the course of carrying on one part of its business to be withheld from, or not to be used by, persons with, or for, whom it acts in the course of carrying on another part of its business.

2.6.3 Limiting Access to Data Chinese walls limit access to data between two parts of the same business, where conflicts may arise. As was discussed in Section 1 of this chapter, there are other legal requirements to protect data, particularly confidential personal data, such as client details, and price-sensitive data, which could lead to insider dealing. Specifically in the AML/CFT field, information relating to SARs must be kept confidential and it is good practice to limit access to fraud investigations. For all these reasons, firms should have strict data protection policies and procedures in place, including clear guidelines on access to various data and these should be enforced by system audits. In its 2008 review of data security in its regulated firms43, the FSA identified some good practice principles for access rights: 42 FSA, Code of Conduct, found at: www.fsa.gov.uk/pubs/staff/code_conduct.pdf 43 FSA, Data Security in Financial Services, 2008, found at: http://www.fsa.gov.uk/pubs/other/data_security.pdf

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• Access controls:

Specific information technology (IT) access profiles for each role in the firm, which set out exactly what level of IT access is required for an individual to do their job. When a staff member changes roles or responsibilities, all IT access rights are deleted from the system and the user is set up using the same process, as if they were a new joiner at the firm. Clearly defined process to notify IT of forthcoming staff departures, in order that IT accesses can be permanently disabled or deleted on a timely and accurate basis. A regular reconciliation of HR and IT user records to act as a failsafe, in the event of a failure in the firm’s leaver’s process. Regular reviews of staff IT access rights to ensure that there are no anomalies. • Monitoring access to customer data:

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Risk-based, proactive monitoring of staff’s access to customer data, to ensure it is being accessed and/or updated for a genuine business reason. The use of software designed to spot suspicious activity by employees with access to customer data. Such software may not be useful in its off-the-shelf format so it is good practice for firms to ensure that it is tailored to their business profile. Strict controls over superusers’ access to customer data and independent checks of their work to ensure they have not accessed, manipulated or extracted data that was not required for a particular task.

2.6.4 Effective Sign-Off Protocols These relate to a structured approach by an organisation, prior to an activity or agreement that commits the organisation to a specific course of action and/or expenditure. Effective sign-offs are those that specify who is authorised to sign off at what level or value, after documenting those procedures and risk assessments, considered relevant to the action and/or expenditure. These may include confirming expenditure against a prior agreement or business plan, payment methods, risk, quality and performance measures, diversity, health and safety or other issues, agreement variations, reporting formats and audit access. Such protocols will also be subject to any audit committee review. After the nominated individuals above have made their checks, they sign and date the relevant section of the sign-off form, and pass the document to the next nominated person, as delegated by the organisation, up to and including board level. They will also include a template pro-forma that specifies the procedures to be followed and the means of retaining a formal record of accountability.

2.6.5 Gifts and Entertainment Policies Policies in this area are intended to ensure that, firstly, the provision of gifts and hospitality does not create any conflict of interest or, secondly, depending on the nature, value and frequency, something that could be construed as a bribe. Such matters are required to be addressed by the FCA’s Conduct of Business (COBS) rules but, more importantly, need to be addressed as part of a firm’s anti-bribery and corruption (ABC) policy and procedures. Typically, this will involve a limit on the entertainment and gifts that can be received and a register to declare them.

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As a typical example, Aviva’s code states: You must ensure you are not compromised by gifts or entertainment when doing business with suppliers, business introducers or other third party agents. Business entertainment can form part of a normal business relationship, however there is a limit to the cost of this entertaining. All Aviva employees are required to keep a hospitality register for gifts and entertainment received. The threshold for registering entertainment is £100 (or equivalent in local currency) and £25 (or equivalent) for gifts. Why is this important? Accepting gifts and hospitality will be treated under the UK Bribery Act and the US Foreign Corrupt Practices Act (FCPA) if the gift is lavish or disproportionate to the situation. Acceptance of gifts and hospitality in contravention of the above guidelines is a serious disciplinary offence for Aviva employees, as well as potentially being a criminal offence under the above laws.44

2.6.6 Objective Audit Processes The measures outlined in this section are often included in policies and procedures within a firm, in codes of conduct, employee handbooks or disseminated through various types of training. In order to satisfy themselves that the requirements are actually being carried out, testing should be included in the audit procedures that were outlined in Section 2.1 above. For example, in connection with data security, the FSA recommended that good practice for firms includes: seeking external assistance where they do not have the necessary in-house expertise or resources. Compliance and internal audit conducting specific reviews of data security, which cover all relevant areas of the business, including IT, security, HR, training and awareness, governance and third-party suppliers. Firms using expertise from across the business to help with the more technical aspects of data security audits and compliance monitoring.

2.6.7 Information Technology (IT) Security IT security is crucial to mitigate many of the financial crime risks discussed throughout this workbook. Poor IT security can lead to loss of data and vulnerability to serious fraud, issues that the authorities take very seriously. Companies have sophisticated systems to control, manage and monitor the use of IT systems, ranging from password and time-out requirements to audit logs and access monitoring. Policies cover the use and security of laptops, remote access, USBs and other devices. The previous regulator, the FSA, identified a number of components for good practice controls in its 2008 review: • Passwords and user accounts:

Individual user accounts – requiring passwords – in place for all systems containing customer data. 44 Aviva plc., Business Ethics Code, January 2013, found at: http://www.aviva.com/corporate-responsibility/trust-andtransparency/business-ethics/

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Password standards at least equivalent to those recommended by Get Safe Online – a government-backed campaign group. At present, their recommended standard for passwords is a combination of letters, numbers and keyboard symbols, at least seven characters in length and changed regularly. Measures to ensure passwords are robust. These may include controls to ensure that passwords can only be set in accordance with policy and the use of password-cracking software, on a riskbased approach. Data back-up: Firms conducting a proper risk assessment of threats to data security, arising from the data back-up process – from the point that back-up tapes are produced, through the transit process to the ultimate place of storage. Firms encrypting backed-up data that is held offsite, including while in transit. Regular reviews of the level of encryption, to ensure it remains appropriate to the current risk environment. Back-up data being transferred by secure internet links. Due diligence on third parties that handle backed-up customer data, so the firm has a good understanding of how it is secured, exactly who has access to it and how staff with access to it are vetted. Staff with responsibility for holding backed-up data off-site being given assistance to do so securely. For example, firms could offer to pay for a safe to be installed at the staff member’s home. Firms conducting spot checks to ensure that data held off-site is done so in accordance with accepted policies and procedures. Access to internet and emails: Giving internet and email access only to staff with a genuine business need. Considering the risk of data compromise when monitoring external email traffic, for example by looking for strings of numbers that might be credit card details. Where proportionate, using specialist IT software to detect data leakage via email. Completely blocking access to all internet content which allows web-based communication. This content includes web-based email, messaging facilities on social networking sites, external instant messaging and peer-to-peer file sharing software. Firms that provide cyber-cafes for staff to use during breaks ensuring that web-based communications are blocked, or that data cannot be transferred into the cyber-cafe, either in electronic or paper format. Key-logging devices: Regular sweeping for key-logging devices in parts of the firm where employees have access to large amounts of, or sensitive, customer data. (Firms will also wish to conduct sweeps in other sensitive areas, for example, where money can be transferred.) Use of software to determine whether unusual or prohibited types of hardware have been attached to employees’ computers. Awareness-raising of the risk of key-logging devices. The vigilance of staff is a useful method of defence. Anti-spyware software and firewalls in place and kept up to date. Laptops and USBs: The encryption of laptops and other portable devices containing customer data. Controls that mitigate the risk of employees failing to follow policies and procedures. Maintaining an accurate register of laptops issued to staff.

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Regular audits of the contents of laptops, to ensure that only staff who are authorised to hold customer data on their laptops are doing so and that this is for genuine business reasons. The wiping of shared laptops’ hard drives between uses. Ensuring that only staff with a genuine business need can download customer data to portable media, such as USB devices and CDs. Ensuring that staff authorised to hold customer data on portable media can only do so if it is encrypted. Maintaining an accurate register of staff allowed to use USB devices and staff who have been issued USB devices. The use of software to prevent and/or detect individuals using personal USB devices. Firms reviewing regularly, and on a risk-based approach, the copying of customer data to portable media to ensure there is a genuine business reason for it. The automatic encryption of portable media attached to firms’ computers. Providing lockers for higher-risk staff, such as call centre staff and superusers and restricting them from taking personal effects to their desks. • Physical security: Appropriately restricted access to areas where large amounts of customer data is accessible, such as server rooms, call centres and filing areas. The strategic use of robust intruder deterrents such as keypad entry doors, alarm systems, grilles or barred windows, and closed circuit television (CCTV). Robust procedures for logging visitors and ensuring adequate supervision of them, while on-site. Training and awareness programmes for staff to ensure they are fully aware of more basic risks to customer data, arising from poor physical security. Employing security guards and cleaners directly to ensure an appropriate level of vetting and reduce risks that can arise, through third-party suppliers accessing customer data. Using electronic swipe card records to spot unusual behaviour or access to high-risk areas. Keeping filing cabinets locked during the day and leaving the key with a trusted member of staff. An enforced clear-desk policy.

2.6.8 Whistleblowing In 1999 the Public Interest Disclosure Act (PIDA) came into operation in the UK. While it does not require companies to establish any formal procedures, it does provide protection for a disclosure by an employee to an employer, made in good faith, of information based on a reasonable belief that one of the following may have been committed, may be being committed, or could be likely to be committed: • • • • • •

a criminal offence; a failure to comply with a legal obligation; a miscarriage of justice; danger to the health or safety of an individual; damage to the environment; or deliberate concealment of information about the above.

Employee is a broad term, covering contractors, trainees and agency staff. It does not matter that the disclosure was not substantiated, so long as it was made in good faith.

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Setting up formal whistleblowing procedures within an organisation strengthens corporate governance and ethics in the organisation, as well as being a useful risk management tool. Whistleblowing procedures in an organisation encourage individuals to disclose concerns, using appropriate channels, before these concerns become a serious problem, damaging an organisation’s reputation through negative publicity, regulatory investigation, fines and/or compensation. There is a hierarchy of disclosure internally and externally, as well as special provision for disclosures to prescribed persons, such as HMRC or the FCA. The discloser is protected through employment legislation, whereby dismissal or negative treatment can lead to a claim before an employment tribunal (where any award is uncapped).The tribunal’s decision will be influenced by whether the discloser followed the hierarchy and whether or not the company has whistleblowing procedures (a function often proposed for the audit committee45). The importance of the Whistleblowing Act, in regulated financial services firms, is emphasised by reference to it being included in the FCA Handbook, under senior management responsibilities.

One of the biggest threats to companies, including fraud, theft of data and access to confidential information, comes from employees. Most companies now verify information on previous experience and qualifications for new employees. This may include: • proof of identity information – including passport, driving licence, original birth certificate (or

similar if born outside of UK), P45/P60 statement from last employer, marriage certificate, financial documentation to prove address and relevant qualifications; • proof of record – including convictions, bind-overs, cautions or reprimands, warnings or criminal charges pending and county court judgements; • proof of health – including a positive health declaration that there are no issues that will affect employment prospects; • proof of employment – including references and any gaps in employment history.

For example, the online retailer thetrainline.com has a comprehensive security vetting and previous employment references policy, because some members of staff have access to unencrypted payment card data. Their published policy states: To ensure that we are compliant with the highest standards we require every employee to consent in writing, as part of their contract of employment, to their personal details being checked with the Criminal Records Bureau or Disclosure Scotland for a Criminal Record Certificate showing any fraudrelated criminal convictions. Whilst everyone in the company is covered by this requirement, so as to allow for any future changes in roles or responsibilities, we only actually conduct checks on employees in the limited number of roles who have access to unencrypted card data. These roles currently include employees working in the contact centre, fraud management and systems support teams. 45 ICAEW Whistleblowing webpage found at: http://www.icaew.com/en/technical/legal-and-regulatory/information-lawand-guidance/whistleblowing

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2.6.9 Employee Vetting

If the role you perform requires a fraud-related conviction check, you will be advised of this. You may, on request, receive a copy of any such information provided to us, including your criminal record certificate. We use a reputable third party to manage and follow up all such security checks. The checks are carried out when you first start in such a role and then every 12 months thereafter. thetrainline.com retains the right to use relevant information obtained in the criminal record certificate to make decisions on an employee’s future role and employment, which may result in the termination of recruitment, restriction of an employee from handling sensitive client information, transfer to another role or any other action up to and including dismissal. We also use a third party to verify every employee’s right to work in the UK and to check previous employment references. At all times we comply with the requirements of the Data Protection Act to protect your sensitive personal data.46 Other controls are permutations of the above on promotion, or seeking to confirm any changes of circumstances (for example, a financial stability check), or when undertaking exit interviews to understand any internal issues that may persuade staff to move on, rather than report internally. Such vetting will also apply to agency or outsourced staff. Find it yourself Why and how would employees commit fraud? Read: Chartered Institute of Personnel and Development, Tackling Staff Fraud and Dishonesty: Managing and Mitigating The Risks at: www.cipd.co.uk/NR/rdonlyres/710B0AB0-ED44-4BD7-A527-B9AC29B28343/0/empfraud.pdf How to vet staff CIFAS/Fighting Fraud Locally, Slipping Through the Net: Staff Vetting Guide for Local Authorities www.cifas.org.uk/secure/content/PORT/uploads/documents/reports

46 trainline.com, Security vetting policy and previous employment references, found at: http://www.thetrainlinejobs. com/images/uploads/docs/Security%20Vetting%20and%20Previous%20Employment%20References%20Policy%20 November%202010.pdf

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2.7

Internal Policies and Procedures

Learning Objective 8.2.7

Understand how internal policies and procedures on AML, CFC and AC are formulated and implemented: introduction handbooks; regulations; codes of conduct; best practice and steering group guidance

Companies will use a variety of means to inform staff, although handbooks tend to reflect primarily employment law and practice, rather than specific AML, CFC and AC requirements, which are often included in regulations or codes of conduct. The FCA’s Employee Handbook, for example, is primarily about terms and conditions of service, while its Code was more specific for areas of risk and threat. The development of company policies and guides will either come from the staff, such as HR, or from internal audit or the audit committee, which is responsible for the control environment, or from the compliance function or a company’s legal advisers. On occasion, external audit will provide appropriate guidance. Where business puts the designated policies and procedures will depend on each company. Some issue them through codes of conduct and/or on company intranets, where there is often an online training and annual revision and sign-off process. Others publish their policies on their public websites.

2.7.1 Introduction Handbooks The UK’s Advisory, Conciliation and Arbitration Service (ACAS) notes that companies do not have to produce a company handbook by law, but are legally required to give written statements (which summarise employees’ main particulars of employment) to all employees who have been in employment for at least one month. Employees should receive this written statement within two months of starting work. The law allows written statements to refer to other documents for information on certain aspects of employment. A company handbook can be an ideal place in which to put this information and normally covers: • • • • • • •

information on the company; diversity; recruitment; pay and benefits; hours of work; holidays and leave of absence; career development;

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Companies’ HR, legal, audit, compliance, MLROs and risk management departments will draw upon legislation, regulator guidance, industry good practice (supported by other material from sources, such as conferences and industry representative bodies) to draft policies and procedures that are compliant with both legal requirements and good practice standards, domestically and internationally. In practice the key legal requirements relate to AML/CFT and the Bribery Act 2010, which in turn have led to roles for specific staff. More general financial crime policies and procedures tend to be industry-driven, as good business practice, to minimise and mitigate potential losses, although the FCA takes a more prescriptive approach to the regulated sector.

• • • • • •

communication and consultation; union membership or employee representation; disciplinary and grievance procedures; company rules; health and safety; redundancy, retirement and pensions.

2.7.2 Regulations Within the handbook, ACAS indicates possible rules, including those linked to financial crime, such as: • Personal conduct – due to the nature of our business and the high standards of cleanliness we

must observe, you must not smoke or eat in the plant at any time. You must not drink alcohol, except during recognised social activities, or gamble on company premises. • Search – for security reasons, it may be necessary to search you, your effects, and your vehicle. These searches will be carried out by your line manager, in the presence of a senior manager, who will be female, in the case of female employees. • Out of hours – you are not permitted on company premises outside normal working hours, unless you have a special authorisation form from your supervisor or you are participating in recognised social activities. • Personal property – the company will not accept responsibility for loss of or damage to your property, whilst it is on company premises. However, if you lose or find any article please notify the general office without delay. Depending on the company or sector, these more formal requirements may include matters such as misuse of IT, data confidentiality and reporting ML suspicions.

2.7.3 Codes of Conduct As noted in Section 2.7.1, codes of conduct are used by companies to set out what is and is not acceptable conduct by employees across a range of personal and work-related activities. When incorporated within employee terms and conditions of service, it becomes a formal means to ensure employees understand the employment implications and also what actions a company may take as a consequence. The FCA’s Code for its own staff provided an example as follows: 1.1 Staff of the Financial Services Authority (FCA) are required by their contract of employment to comply with the Code of Conduct (Code). The Code covers: a. conflicts that may arise between the interests of the FCA and the personal interests, associations and relationships of individual members of staff; b. personal dealings in securities and related investments in relevant organisations; c. the provision of products and services by relevant organisations; and d. the policy on the acceptance of gifts and hospitality.

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1.2 You are requested to: a. read the Code and familiarise yourself with it. If you have any questions about it please consult the Ethics Officer; b. complete the declaration in Appendix A online, using Chrysalis as soon as possible; c. sign and date Appendix C and send it to the Human Resources Division; d. keep a copy of the Code and the guidance for your own information. 1.3 Compliance with the Code is mandatory. Breach of the Code may result in disciplinary action including, where appropriate, dismissal.

2.7.4 Best Practice and Steering Group Guidance

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In Section 2.1 of this chapter, we noted that there are a number of industry bodies, representation associations, commercial associations and other informal groups, which devise and disseminate good practice to their membership, and a wider audience. Some guidance may have a formal status, such as that produced by the JMLSG in the UK, some may come from regulators themselves and some may simply be the distilled wisdom of practitioners in the sector. It is all valuable source material for producing internal policies and procedures, demonstrating a willingness to learn from best practice and adopt tried and tested methods for mitigating financial crime risks.

3.

Specific Responsibilities of Regulated Financial Institutions

3.1

Compliance Risk

Learning Objective 8.3.1

Know the Basel Committee on Banking Supervision’s definition of ‘compliance risk’

The BCBS produced a definition of compliance risk within its 2005 paper Compliance and the compliance function in banks. It is defined as: the risk of legal or regulatory sanctions, material financial loss, or loss to reputation a bank may suffer as a result of its failure to comply with laws, regulations, rules, related self-regulatory organisation standards and codes of conduct applicable to its banking activities.47 Critically, it is seen as resulting either in a material financial loss or in a loss to reputation. Reputation is a difficult concept to define or value, but it is something that tends to acquire materiality once it has been lost. See Section 1.7.2.

47 BCBS, Compliance and the compliance function in banks, paragraph 3 2005, found at: http://www.bis.org/publ/bcbs113. pdf

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3.2

Compliance Culture

Learning Objective 8.3.2

Understand how a compliance culture may be created and maintained: Appointment of Compliance/Money Laundering Reporting Officers; information gathering and analysis; application in routine operations; raising awareness; training; updates

We described in Section 1.5 of this chapter how senior management of a firm has a responsibility to set the tone from the top. A good description of a compliance culture can be found in the same BCBS report on compliance in banking: Compliance starts at the top. It will be most effective in a corporate culture that emphasises standards of honesty and integrity and in which the board of directors and senior management lead by example. It concerns everyone within the bank and should be viewed as an integral part of the bank’s business activities. A bank should hold itself to high standards when carrying on business, and at all times strive to observe the spirit as well as the letter of the law. Failure to consider the impact of its actions on its shareholders, customers, employees and the markets may result in significant adverse publicity and reputational damage, even if no law has been broken. This description makes it clear that compliance is the responsibility of all employees, taking their direction from senior management.

3.2.1 Appointment of Compliance/Anti-Money Laundering Reporting Officers (MLROs) Notwithstanding the duties of the board of directors to have overall responsibility for compliance, banks and other regulated institutions are expected (and often required by law or regulation) to have a senior member of staff with overall responsibility for co-ordinating the identification and management of the bank’s compliance risk and for supervising the activities of other compliance function staff. This officer will be often referred to as the compliance officer, head of compliance or compliance oversight. With respect to money laundering, there is a responsibility (again usually imposed by law or regulation) to appoint a specific senior person to have overall responsibility for AML/CFT matters. This post is known as the money laundering reporting officer (MLRO), although some commentators suggest prevention officer sets a better tone than reporting officer, and the FATF uses the term compliance officer at the management level. In the UK, the Money Laundering Regulations and POCA refer to a nominated officer, specifically for the responsibility of reporting suspicions to the FIU, but they may carry out the wider MLRO role too. The MLRO’s responsibilities will include ML/TF risk assessment, design and implementation of the AML/ CFT policies, procedures and controls for the firm, and staff training. In the UK, there is a requirement for the governing body of a financial services firm to commission a report from the MLRO at least annually. The JMLSG has included a pro-forma reporting format on their website.

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According to the FCA’s current financial crime guide, good practice will require that the MLRO: • is independent, knowledgeable, robust and well-resourced, and poses effective challenge to the

business where warranted; • has a direct reporting line to executive management or the board.

3.2.2 Information Gathering and Analysis A MLRO has to understand the totality of corporate business and the money flows associated with them, in order to perform a range of AML/CFT roles and responsibilities that would normally form the basis of their annual report, including the collection, collation and analysis of relevant information. How the AML/CFT effort is organised in a firm, and how much of it is centralised in the MLRO’s department and how much is embedded in business lines, varies with each institution. However it is organised, the MLRO remains responsible and must gather sufficient information to keep himself, and ultimately the board, informed about the operation and effectiveness of the AML/CFT procedures and controls. In particular, information about the following matters should be readily available:

• • • • • • • • • •

(including exception reporting, ie, where these have failed). CDD carried out on new and existing customers, especially high-risk cases such as PEPs and any third parties relied on. Sanctions screening compliance. Product profile of the firm, risk-rated for ML/TF. New products and technologies under development. Business area operations and changes that impact on ML/TF risks, such as new countries of operation and new customer bases. Staff training. Reports of suspected money laundering made internally and externally to the FIU. Record-keeping systems. Court orders and similar requests for information, including how they have been complied with. Staff training programme content, take-up and effectiveness.

3.2.3 Application in Routine Operations MLROs have personal responsibility for ensuring that the routine operations of their business comply with AML/CFT laws, regulations and the firm’s own policies and procedures. This is why they need to have comprehensive understanding of their firm’s business and applicable AML/CFT standards.

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• AML/CFT risks (and crystallised events, ie, actual cases of suspected or actual ML). • AML/CFT policies and procedures and an assessment of compliance with systems and controls

There must also be a recognition that both business lines and compliance requirements can change. As an example, any business that is subject to the EU’s payments regulation must ensure that the detail of such payments is compliant, ie, that electronic transfers of funds are accompanied by complete information relating to the payer. This information will typically be the customer’s name and account number, and will allow law enforcement to trace payments if necessary. When such a requirement is introduced, the compliance/MLRO function must ensure that the firm’s routine systems are altered to ensure that the requirement is complied with, and then must monitor to make sure this is happening. The importance of horizon scanning is that such changes can be technically difficult in automated systems and must be planned long before the change is introduced. CDD is usually the responsibility of business lines in the first instance, rather than the MLRO or compliance function (until high-risk cases get escalated). Again, the collection of the right data, and the need for it to be verified, has to be embedded in the routine operations of the firm, such as account opening and approval forms.

3.2.4 Raising Awareness/Training Because all employees of the firm have some responsibility for AML/CFT, to a greater or lesser degree, they will require training. This is usually enshrined in law or regulation, and is required as part of the firm’s AML/CFT programme, under FATF Recommendation 18. The amount and content of training should be tailored to roles and responsibilities in the firm. For example, customer-facing staff may be more involved in CDD and be in a better position to spot suspicious activity than others, so will require more training in those areas. The MLRO should be responsible for a training strategy that covers: • • • • • • • •

The nature of training required. How often it must be carried out. How it is to be delivered. Who must be trained. Standard of training (general, geared towards a specific function). Training records that must be kept. Handling feedback. Keeping training effective, up to date and relevant.

As an example of the sorts of things AML/CFT training should cover, HMRC provides the following advice to money service businesses in the UK: • Training your employees to comply with the Money Laundering Regulations

If you have any employees you must make sure they’re aware of the laws covering money laundering. In particular, employees who deal with customers – including receptionists and anyone who answers the telephone – should receive regular training to make sure your business complies with the regulations. You should train employees on how to recognise suspicious transactions and what to do if they identify one. They should understand how your anti-money laundering policies and procedures affect them. It’s a good idea to have your anti-money laundering policies and procedures written down and available to all your staff.

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Make staff aware of the penalties for committing offences under the Money Laundering Regulations and related legislation. • Examples of good practice when you train your employees

Important examples of best practice in employee training include:

It’s a good idea to keep a log of all the training your employees receive. Getting employees to sign and date the log can help emphasise just how important it is that they follow their training at all times. An up-to-date training log also demonstrates to HMRC that your business is giving its staff the money laundering training they need.48 Of course training is only one part of employees’ training. Another is to test to establish if they have adequately understood the training that has been provided. The most popular ways of conducting tests are; online and/or a written test, directly following the training. Testing will provide senior management and the regulator with comfort that the employees have been adequately trained, and where employees have failed the test, the MLRO has taken appropriate action.

3.2.5 Updates Things seldom stand still for long in the financial crime arena. Criminals will always seek out new vulnerabilities and methods; law, regulation and good practice will evolve to counter them. As we have seen in Section 3 of this chapter, in 2012 the FATF published their revised standards. The cascade effect of that will continue for some time – there will be a new EU directive to reflect the new recommendations, national laws and regulations will change to implement them, industry guidance will be updated to incorporate them and ultimately firms will need to update their policies, procedures, systems and controls. However, firms should already be considering the new developments, issuing updates to their staff through training and information notices, and planning their responses long before new requirements are imposed upon them.

48 HMRC, Appointing a nominated officer and training your employees, found at: http://www.hmrc.gov.uk/mlr/your-role/ nominated-officer.htm#4

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making sure all employees know who the nominated officer is and what they’re there for; giving employees clear guidance on spotting suspicious activity and reporting it to the nominated officer or their deputy; explaining clearly the steps your business has taken to make sure it’s not used for money laundering or terrorist financing; writing down all anti-money laundering policies, procedures and risk assessments, and giving employees access to them at all times – written policies also help to demonstrate that your businesses takes its obligations under the Money Laundering Regulations seriously; encouraging employees to refer to your written documents whenever they need to, and to get more guidance if they need it; making sure employees know where to go for more help or information about the Money Laundering Regulations, including guidance available on the HM Revenue & Customs (HMRC) website.

To keep on top of all the changes, firms should monitor the activities of the FATF and their relevant FSRB, their country’s government’s departments responsible for financial crime, their sector regulator and trade bodies. Professional services firms, such as consultancy firms and law firms, often publish information free and there is a growing industry in compliance monitoring, who will filter, tailor and deliver this information at a cost.

3.3 Technology Learning Objective 8.3.3

Know the benefits of utilising technology to support a compliance culture and the limitations of over-reliance on systems

Section 2.4 outlined some of the uses of technology to analyse large amounts of data to detect fraud and monitor transactions for behaviour that may indicate ML or TF. All such monitoring systems ultimately require human intervention and intelligence to verify the patterns detected and reject false positives, although the systems should be capable of learning better detection techniques from such interventions. Technology can be more widely used in building the compliance culture. As mentioned in Section 3.2.4, training can be carried out online, including testing, which gives an immediate audit trial of who in the firm has undergone training, when they did it and how well they understood it. Policies and procedures can be disseminated through internal systems such as intranets (or indeed published on a firm’s website) and email or news systems used to keep staff up to date. Automated systems and controls can be built into the systems the firms used (for example, making sure that the right identification details are captured on account opening forms) and if automatic systems are used, record-keeping (and retrieval) becomes considerably easier. However, automation is never the only or complete answer. Some training is best done face-to-face to provide opportunities for employees to ask questions and to better understand the reasons for things having to be done in a certain way. Role-playing can be more effective than answering questions online, for demonstrating understanding. Firms, particularly small ones, relying on old or manual systems, may not be able to automate their controls fully. In all cases, the best approach, proportionate to the risk, must be found. The FCA regard the following as best practice (from their Financial Crime Guide): • A large retail firm complements its other efforts to spot potential money laundering by using an

automated system to monitor transactions. • Where a firm uses automated transaction monitoring systems, it understands their capabilities and

limitations. Small firms are able to apply credible manual procedures to scrutinise customers’ behaviour.

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3.4

Know Your customer and Customer Due Diligence

Learning Objective 8.3.4

Know how regulated financial institutions implement Know Your Customer (KYC) and Customer Due Diligence (CDD) procedures

Customer Due Diligence (CDD) is a term used by the FATF to describe a series of measures: • Identifying customers and verifying their identity, with the help of reliable independent sources. • Identifying the beneficial owner, eg, where the customer is a company, who owns and controls the

Although it has come to have these very specific AML/CFT meanings, CDD is also a matter of good business practice. Knowing who your customers are and what they do also helps to prevent becoming the victim of fraud and identify relationships of higher risk from bribery and corruption. It also makes commercial sense. Back in 2001, in their note on CDD for banks, BIS pointed out the purpose and value of CDD: Sound KYC procedures have particular relevance to the safety and soundness of banks, in that: • they help to protect banks’ reputation and the integrity of banking systems by reducing the likelihood

of banks becoming a vehicle for or a victim of financial crime and suffering consequential reputational damage; • they constitute an essential part of sound risk management (eg, by providing the basis for identifying, limiting and controlling risk exposures in assets and liabilities, including assets under management). The inadequacy or absence of KYC standards can subject financial services institutions, for example, to serious customer and counterparty risks, especially reputational, operational, legal and concentration risks. It is worth noting that all these risks are inter-related. However, any one of them can result in significant financial cost to, for example, banks (eg, through the withdrawal of funds by depositors, the termination of interbank facilities, claims against the bank, investigation costs, asset seizures and freezes, and loan losses), as well as the need to divert considerable management time and energy to resolving problems that arise. It would certainly attract regulatory sanctions. Regulated businesses follow procedures, when establishing a business relationship or conducting transactions. The procedures involve identifying the client and verifying their identity, on the basis of documents, data or information, obtained from a reliable and independent source; and identifying, where there is a beneficial owner who is not the client, the beneficial owner and taking adequate measures, on a risk-sensitive basis, to verify identity so that the firm is satisfied that it knows who the beneficial owner is. This includes understanding the ownership and control structure of a legal person, trust or similar arrangement, and obtaining information on the purpose and intended nature of the business relationship.

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firm. • Establishing the purpose and intended nature of the customer’s business. • Checking on the ongoing business transacted for consistency with expected business patterns, AML risk profile and sources of funds.

Identification of a client or a beneficial owner is simply being told or coming to know a client’s identifying details, such as their name and address. Verification is obtaining some evidence, which supports this claim of identity. The procedures, which are mandatory, in the UK must be risk-based, depending on the relationship and customer activities, as well as the application of risk in terms of the potential for ML and TF. Although the FATF recommendation and interpretive notes on CDD are amongst the most detailed of the 40 Recommendations, firms should take careful note of exact definitions in their own national laws and regulations (for example, what is a business relationship, what is the threshold for requiring CDD when an occasional transaction is carried out by someone who does not hold an account?). Sector body and regulatory guidelines will also provide good sources of information. However, the recommendation sets out when CDD should take place. Financial institutions should be required to undertake CDD measures when: • establishing business relations; • carrying out occasional transactions:

above the applicable designated threshold (USD/EUR 15,000); or that are wire transfers in the circumstances covered by the interpretive note to Recommendation 16; • there is a suspicion of ML or TF; or • the financial institution has doubts about identification previously taken. In line with the risk-based approach, not all customers require the same amount of scrutiny of their identification, because they do not pose the same level of risk. Examples of customers presenting low risks, where simplified procedures may be permissible, include: • financial institutions and other firms subject to effective ML regulation and supervision; • public companies listed on a stock exchange and subject to requirements to ensure adequate

transparency of beneficial ownership; • public sector departments and enterprises. On the other hand, some customers, such as PEPs pose higher risks, and should be subject to enhanced due diligence (EDD). Situations that present a higher ML risk might include, but are not restricted to: • customers linked to higher-risk countries or business sectors; or • who have unnecessarily complex or opaque beneficial ownership structures; and • transactions which are unusual, lack an obvious economic or lawful purpose, are complex or large or

might lend themselves to anonymity. Three particular scenarios are highlighted in the FCA’s Financial Crime Guide – the current source for regulatory guidance – as always being higher risk and requiring EDD by virtue of the ML Regulations (as these follow the FATF Recommendation, they are good practice, even if local law or regulation is not so specific): • Non-face-to-face CDD – this is where the customer has not been physically present for identification

purposes, perhaps because business is conducted by telephone or on the internet.

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The Role of the Private Sector

• Correspondent banking – where a correspondent bank is outside the European Economic Area

(EEA), the UK bank should thoroughly understand its correspondent’s business, reputation, and the quality of its defences against ML and TF. Senior management must give approval to each new correspondent banking relationship. • Politically exposed persons (PEPs) – a PEP is a person entrusted with a prominent public function in a foreign state, an EU institution or an international body; their immediate family members; and known close associates. A senior manager, at an appropriate level of authority, must approve the initiation of a business relationship with a PEP. This includes approving the continuance of a relationship with an existing customer, who becomes a PEP after the relationship has begun. It should be noted that a more formal definition is included in the JMLSG, reflecting ML Regulation 14 that states that a PEP is an individual ‘who is or has, at any time in the preceding year’ held such an office as described above. EDD should give firms a greater understanding of the customer and their associated risk than standard due diligence. It should provide more certainty that the customer and/or beneficial owner is who they say they are and that the purposes of the business relationship are legitimate; as well as increasing opportunities to identify and deal with concerns that they are not.

8

In 2011, the former regulator, the FSA published49 current good and poor practice for both CDD and enhanced CDD:

Good Practice: CDD

Enhanced CDD

Where electronic checks are used for CDD purposes, the firm understands their limitations.

All high-risk relationships are checked by the MLRO or their team.

The firm can cater for customers who lack common forms of ID (such as the socially excluded and those in care).

The firm establishes the legitimacy of, and documents, high-risk customers’ source of wealth and source of funds.

The firm does not rely entirely on a single source, such as a commercial PEP database, to identify riskier customers.

Where money laundering risk is very high, the firm obtains independent internal or external intelligence reports.

The firm understands and documents the ownership and control structures, including the reasons for any complex or opaque corporate structures, of customers and their beneficial owners.

Staff knowledge is documented and challenged during the CDD process. The firm satisfies itself that it is appropriate to rely on due diligence performed by other entities in the same group. The firm proactively follows up gaps in, and updates, CDD during the course of a relationship.

49 FCA, Banks’ management of high money-laundering risk situations (How banks deal with high-risk customers (including politically exposed persons), correspondent banking relationships and wire transfers), 2011, found at: http://www.fca.org. uk/your-fca/documents/fsa-aml-final-report

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CDD

Enhanced CDD A correspondent bank seeks to identify PEPs associated with their respondents. A correspondent bank takes a view on the strength of the AML regime in a respondent bank’s home country, drawing on discussions with the respondent, overseas regulators and other relevant bodies. A correspondent bank gathers information about respondent banks’ procedures for sanctions screening, PEP identification and management, account monitoring, and suspicious activity reporting.

Bad Practice: CDD

Enhanced CDD

Procedures are not risk-based: the firm applies the same CDD measures to products and customers of varying risk.

Senior management does not give approval for taking on high-risk customers. If the customer is a PEP or a non-EEA correspondent bank, this breaches the regulations.

The firm has no method for tracking whether checks on customers are complete.

The firm fails to consider whether a customer’s political connections mean that they are highrisk despite falling outside the regulations’ definition of a PEP.

The firm allows cultural difficulties to get in the way of proper questioning to obtain necessary CDD information.

The firm does not distinguish between the customer’s source of funds and their source of wealth.

Staff do less CDD because a customer is referred by senior executives or influential people.

A firm relies on intra-group introductions where overseas standards are not UK-equivalent or where due diligence data is inaccessible, because of legal constraints.

The firm has no procedures for dealing with situations requiring enhanced due diligence.

The firm considers the credit risk posed by the customer, but not the ML risk.

This breaches the regulations.

The firm disregards allegations of criminal activity from reputable sources.

The firm does not look beyond the 25% shareholding threshold when identifying the customer’s beneficial owner. This breaches the regulations.

The firm ignores adverse allegations simply because customers hold a UK investment visa.

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A firm grants waivers from establishing a customer’s source of funds, source of wealth and other due diligence without good reason.

The Role of the Private Sector

CDD

Enhanced CDD A correspondent bank conducts inadequate due diligence on parents and affiliates of respondents. A correspondent bank over-relies on the Wolfsberg Group AML questionnaire, without making use of other material from the Wolfsberg Group or other sources.

Ongoing monitoring is an important part of CDD; it should not be regarded as a tick box exercise at the start of a business relationship. If doubts arise about the original identification, or a client’s identity changes in some way, further CDD should be carried out. Activity should also be monitored, using manual or automatic procedures, as appropriate and proportionate to the risk. Systems should identify if the profile of the account is different to what would be expected, given the nature of the client. This in itself may not be suspicious, but could require further investigation and possibly further due diligence. This is where the training of staff to spot and challenge unusual behaviour is very important and a firm should have procedures in place to review activity and transactions, and update the client’s risk profile.

Reporting Suspicious Activities and Trading Activity

8

3.5

Learning Objective 8.3.5

Know how and why regulated financial institutions report suspicious transactions and trading activity

The international AML/CFT standards require firms to report ML suspicions to the authorities and to be punished for failure to do so. In each country there will be detailed requirements contained in the relevant AML/CFT laws and regulations. The national FIU, which may be a law enforcement body, a regulator or an administrative unit in a government department, will be the central place to which all such reports should be made by regulated firms. As FATF Recommendation 20 says: If a financial institution suspects or has reasonable grounds to suspect that funds are the proceeds of a criminal activity, or are related to terrorist financing, it should be required, by law, to report promptly its suspicions to the financial intelligence unit (FIU). There are no rules that say what constitutes suspicious behaviour, although on occasion courts have considered the issue. It is generally accepted that it must go beyond unusual behaviour, such as account activity that is not consistent with the client’s regular income or business activity and have some factual basis, not just a feeling. This is why human intervention in analysing reports from transaction monitoring systems is so important and why the training of staff to identify suspicious activity is vital. Firms may have to search through many thousands of transactions each day, so monitoring systems must be risk-based, proportionate to the size of the firm and the AML/CFT risks posed by its areas of operations, customers and products.

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Once a member of staff is suspicious, they should pass a report internally to the MLRO. Internal reports should contain sufficient information to identify the suspect behaviour and, crucially, why the member of staff thinks it is suspicious. Internal reports will be analysed and further investigated by the MLRO (and his team, if he has one). If, in the light of their wider knowledge and understanding of the firm’s risks and all the information available in the firm about the client and the activity (which may not have been available to the member of staff making the internal report), the MLRO decides the activity is indeed suspicious, they will report it as soon as possible to the FIU. If they decide not to report, a detailed note of the reason why should be kept, to protect the firm (and the MLRO) should offences come to light later. The MLRO may decide not to report, but to increase the monitoring of the account on a risk sensitive basis. In the UK a ‘consent’ regime exists, whereby SARS reported to the MLRO before a transaction or activity takes place must be reported to SOCA and consent sought to proceed. In these circumstances it is an offence for the MLRO to give consent, unless nothing is heard from SOCA within seven working days of the working day following the date of disclosure. The FIU will have published and disseminated the method by which reports are to be made. There will be a set format and many FIUs now allow electronic filing, either through secure websites or proprietary secure systems. Electronic filing provides an immediate audit trail of the filing. If manual methods are used, detailed records should be kept and the FIU should provide an acknowledgment. The reports made to FIUs should contain comprehensive information to allow the FIU to carry out its analysis and decide if the report requires further investigation by the authorities. The report should include full identifying details of the customer, taken from the CDD records held by the firm, details of the transactions or activity concerned and an explanation of why they were found to be suspicious. Although the report should be comprehensive and helpful to the authorities, without them necessarily having to seek further information from the firm (see Section 1.6.2 of this chapter), firms should be mindful of their duty of confidentiality to their client and not include material in the report beyond what is required by law.

Find it yourself The UK FIU at SOCA has produced a guide to the legal basis for reporting under the UK AML/CFT legislation. SOCA also produces other guidance on reporting, which can be found at the same web site. http://www.soca.gov.uk/about-soca/the-uk-financial-intelligence-unit/what-happens-to-yourreports Other reporting requirements may relate to suspicions of market abuse, for which separate (but similar) systems apply. The FIU may not be the appropriate body for such reports (although if the activity also gives rise to suspicions of ML a parallel report to the FIU may be required). In the UK, the current procedure, under the remit of the FCA since April 2013, is as follows:

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The Role of the Private Sector

Firms arranging transactions in certain financial instruments are required to report suspicious transactions to the FCA without delay. A suspicious transaction is one in which there are reasonable grounds to suspect it might constitute market abuse, such as insider dealing or market manipulation. A firm will need to explain the basis on which it is reporting a suspicious transaction when submitting a form. Details of the obligation to report suspicious transactions, and of the relevant financial instruments involved, can be found in the FCA Handbook: SUP 15.10. The obligation to report suspicious transactions arises from the Market Abuse Directive (MAD), which was implemented in the UK on 1 July 2005. The suspicious transaction reporting form can either be filled in online or printed off and filled in by hand. The online version is submitted directly to the FCA’s Market Abuse inbox.50

3.6

Reporting Currency Transactions and Exemptions

Learning Objective Know the circumstances in which financial services firms are obliged to report currency transactions and those circumstances that are exempt

Cash is very important in ML, associated with many predicate crimes, such as drugs trafficking. Criminals often acquire significant amounts of cash, which they need to place in the financial system, as the first stage of the laundering cycle. Thus, not only are cash transactions regarded as potentially high-risk and should be monitored for potential suspicious activity reporting, but some countries have also introduced requirements for all cash transactions above a certain level to be reported. The FATF states (in the interpretative note to Recommendation 29 on FIUs): Countries should consider the feasibility and utility of a system where financial institutions and DNFBPs would report all domestic and international currency transactions above a fixed amount. Such requirements, if introduced, may apply to all regulated firms or just to some high-risk sectors, such as casinos and money service businesses. Different thresholds may apply to different types of firm. Where such requirements do apply (or indeed where they are perceived to apply, sometimes criminals do not fully understand the requirements) firms must be alert to attempts to avoid the reporting threshold by so-called structuring – breaking down large amounts into repeated smaller transactions below the reporting threshold, such as $9,000 deposits. Such activity may in itself give rise to an SAR.

50 FSA website, Market Abuse, Reporting suspicious transactions, found at: http://www.fsa.gov.uk/pages/About/What/ financial_crime/market_abuse/reporting/index.shtml

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8.3.6

3.7 Record-Keeping Learning Objective 8.3.7

Understand the reasons why financial institutions may have record-keeping requirements and the circumstances in which they are required to comply

Accurate record-keeping by financial institutions is just as important as effective due diligence/customer identification procedures and transaction monitoring. These records will form the basis of intelligence and investigative work and must be readily available in a form suitable to comply with requests for information from the authorities and for evidential use in prosecutions. During terrorist investigations, this can literally be a matter of life or death. The records kept can also establish compliance with the law and their regulatory requirements by the financial institution. Failure to keep records will constitute either a civil/regulatory or criminal offence in many jurisdictions (eg, in the UK the requirement is contained in the ML Regulations). Record-keeping requirements cover both transactional data and CDD information. Records must be kept that can identify the details of individual transactions (whether or not they have been reported as suspicious or under other requirements outlined above), including the amounts involved. CDD records must either include copies of any documents produced by the customer, or sufficient detail for them to be reconstructed from official records (such as the type, number and date of issue of the document). Financial institutions must also keep copies of account files and business correspondence. FATF Recommendation 10 states: Financial institutions should be required to maintain, for at least five years, all necessary records on transactions, both domestic and international, to enable them to comply swiftly with information requests from the competent authorities. Such records must be sufficient to permit reconstruction of individual transactions (including the amounts and types of currency involved, if any) so as to provide, if necessary, evidence for prosecution of criminal activity. Financial institutions should be required to keep all records obtained through CDD measures (eg, copies or records of official identification documents like passports, identity cards, driving licences or similar documents), account files and business correspondence, including the results of any analysis undertaken (eg, inquiries to establish the background and purpose of complex, unusual large transactions), for at least five years after the business relationship is ended, or after the date of the occasional transaction. Financial institutions should be required by law to maintain records on transactions and information obtained through the CDD measures. The CDD information and the transaction records should be available to domestic competent authorities upon appropriate authority. In addition to transaction and CDD records, financial institutions should also keep records of the training provided to its own staff, internal and external suspicion reports made to and by the MLRO, and reports made by the MLRO to senior management.

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The Role of the Private Sector

In relation to the retention of documents, in addition to these specific AML/CFT requirements and any internal practices of companies to satisfy their own business needs, there are three legal aspects to be borne in mind: Data protection legislation contains requirements that impact on document retention in that, conversely, personal data should not be retained for longer than is necessary, for a particular purpose and in any case must be stored securely. The second aspect relates primarily to financial records, such as value added tax (VAT) and accounting records, that may be required by HMRC, where six years’ retention is the norm in the UK. Other requirements, such as health and safety accident records or retention of NI records, may be less (three years) but others still, such as the inspection of records of resolutions and meetings referred to in Section 355 of the 2006 Companies Act (eg, records of resolutions etc.), must be retained and available for inspection for ten years. Finally, for records relating to matters under POCA, the retention requirement is five years for ongoing clients and customers, and up to six years after they have stopped being either. The current norm for the regulated sector is five years.

8

Find it yourself A table setting out the complexities of requirements and variations in retention periods for data in the UK can be found at Watson Hall Ltd, UK Data Retention Requirements at: www.watsonhall.com/resources/downloads/paper-uk-data-retention-requirements.pdf

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End of Chapter Questions Think of an answer for each question and refer to the appropriate section for confirmation. 1.

How does a long firm fraud work? Answer reference: Section 1.1.3

2.

What does data compromise mean? Answer reference: Section 1.1.5

3.

Why are casinos regarded as high-risk for money laundering? Answer reference: Section 1.2.1

4.

What are two ways charities can be sued for TF purposes? Answer reference: Section 1.2.2

5.

What would be the basic components of a corporate structure seeking to resist financial crime? Answer reference: Section 1.4.1

6.

What are the risks from outsourcing? Answer reference: Section 1.4.2

7.

What are the responsibilities of directors for AML/CFT? Answer reference: Section 1.5.1

8.

What should senior management do to promote anti-bribery? Answer reference: Section 1.5.3

9.

In what circumstances can banks disclose client information? Answer reference: Section 1.6.1

10.

What is an investigation order? Answer reference: Section 1.6.3

11.

Name three main risks associated with non-compliance. Answer reference: Section 1.7

12.

What does CIFAS do? Answer reference: Section 2.1

13.

What is the difference between internal audit and external audit? Answer reference: Sections 2.2.2 and 2.2.3

14.

What according to the National Measurement Office are the key steps to demonstrate compliance with due diligence? Answer reference: Section 2.3

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15.

What due diligence is appropriate in outsourcing? Answer reference: Section 2.3.3

16.

How does data analysis help in detecting fraud? Answer reference: Section 2.4

17.

How is risk defined by ISO 31000? Answer reference: Section 2.5

18.

Name three high ML/TF risk products or services. Answer reference: Section 2.5.1

19.

Name five measures to minimise financial crime opportunities within a business. Answer reference: Section 2.6

20.

What two risks do gifts and entertainment pose? Answer reference: Section 2.6.5

21.

Name the six areas on which a public interest disclosure may be made. Answer reference: Section 2.6.8

22.

What would a code of conduct address in relation to the prevention of financial crime? Answer reference: Section 2.7.3

23.

What is the role of an MLRO? Answer reference: Section 3.2.1

24.

What should an AML/CFT training strategy cover? Answer reference: Section 3.2.4

25.

According to the FATF, what should CDD entail? Answer reference: Section 3.4

26.

What information should SARs contain? Answer reference: Section 3.5

27.

What is structuring? Answer reference: Section 3.6

28.

What records does the FATF say should be kept and for how long? Answer reference: Section 3.7

8

The Role of the Private Sector

271

272

Glossary and Abbreviations

274

Glossary and Abbreviations

Action Fraud

Bribery

A service run by the National Fraud Authority – the government agency that helps to co-ordinate the fight against fraud in the UK – to provide a central point of contact for information about fraud.

The offer, promise, acceptance (or agreement to accept) of some benefit or advantage from a person to persuade the recipient to act or make a decision to their advantage.

Alternative Remittance Systems

Set up in the early 1990s after a series of commercial scandals to review corporate governance arrangements. The first of a number of committees, which culminated in today’s Combined Code.

Informal money transfers that do not use orthodox financial procedures. Asset Misappropriation The theft of an organisation’s assets. Assets Recovery Agency (ARA) The UK agency established to take appropriate criminal and civil action to recover assets under the Proceeds of Crime Act (POCA). Functions now delivered by the Serious Organised Crime Agency (SOCA). Associated Persons A legal term in the Bribery Act for people who may have a formal or informal position in relation to a commercial organisation. Association of Chief Police Officers (ACPO) The organisation that represents the views of chief constables. Audit The means by which internal or external auditors comment on the financial status of a company and its arrangements to manage its assets, income and expenditure. Basel Committee on Banking Supervision (BCBS) An informal group that sets international banking standards. Bona Fide In good faith; genuine.

Cadbury Committee

Chinese Walls The term used to describe procedures taken within organisations to ensure that different parts of the organisation do not have access to confidential or financially sensitive information. Civil Law Jurisdiction A country’s law is codified with written constitutions. The role of the courts is primarily to apply rather than interpret the law. Code of Conduct A published statement by an organisation or public agency on what is or is not acceptable conduct by employees. Collective Action An initiative supported by international organisations and non-governmental organisations (NGOs) to encourage anticorruption measures between governments and private sectors. Combined Code The UK’s current corporate framework for business.

governance

Common Law Jurisdiction A country’s legal system is made up of a range of legal instruments. Courts can actually establish the meaning of legislation through cases.

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Concealment

Cybercrime

A specific offence under the Proceeds of Crime Act (POCA) relating to hiding and moving proceeds of crime.

The use of the internet and other means to disrupt, disable or obtain information in relation to legitimate business and information.

Conflict of Interest

Denial of Service (DOS)

The presence of a personal or partisan interest that may relate to or influence a person’s official position, or appear to do either.

Hacking and other illicit activities designed to disrupt legitimate business undertaken electronically.

Consent Regime

Department for International Development (DFID)

A legal requirement of the Proceeds of Crime Act (POCA) by which organisations regulated by the Act not only have to report suspicious transactions, but must seek consent before such transactions may be completed. Corporate Malfeasance Unlawful activity committed by a company as a company, rather than individuals in that company. Corruption The use of public office for private gain. The main offence is usually associated with bribery. Council of Europe (COE) A regionally based organisation with over 50 members which establishes policies and review mechanisms in a range of areas, including MONEYVAL and GRECO. Credit Industry Fraud Avoidance Scheme (CIFAS)

The UK’s developmental agency. Dual Criminality Ensures that the transfer of offenders is based upon the presence of comparable offences in each country. Due Process Following legal procedures in a transparent and timely manner. Egmont Group International association of Financial Intelligence Units (FIUs). Enhanced (Customer) Due Diligence (EDD) A risk-based approach to verifying the identity of customers by financial services organisations, that requires additional processes for those customers already identified as a risk. European Arrest Warrant

The UK private sector’s mutual information sharing agency.

Judicial means to expedite alleged offenders between European Union (EU) states.

Crown Prosecution Service (CPS)

Eurojust

The main UK prosecuting agency.

EU agency to promote cross-border judicial work.

Customer Due Diligence (CDD)

Europol

A risk-based approach to verifying the identity of customers by financial services organisations.

EU agency to support countries’ law enforcement agencies (LEAs). Ex Parte On one side only; partial; prejudiced.

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Glossary and Abbreviations

Extractive Industries Transparency Initiative (EITI) An initiative supported by international organisations and NGOs to encourage transparency of income derived from a country’s mineral resources, such as oil. False Fronts Disguised means of raising terrorist finance. Financial Action Task Force (FATF) Set up by the G7 group of countries as an intergovernmental policy-making body to establish international standards for combating money laundering (ML) and terrorist financing (TF). Undertakes country reviews and publishes a list of non-co-operative countries and territories, identified as having strategic deficiencies regarding anti-money laundering and combating the financing of terrorism. Financial Crime A general term that relates to crime committed against, by or through organisations for financial gain. Financial Intelligence Unit (FIU) The agency responsible for the receipt, analysis and dissemination of suspicious activity reports (SARs). In the UK this is part of the Serious Organised Crime Agency (SOCA) (previously the National Criminal Intelligence Service (NCIS)). Financial Reporting The formal information provided by companies on their financial status. Financial Conduct Authority (FCA) One of two new regulators established by the Financial Services Act 2012, to regulate firms and financial advisers, so that markets and financial systems remain sound, stable and resilient.

Financial Services Act 2012 An Act to establish two regulators, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), to replace the Financial Services Authority (FSA) on 1 April 2013. Financial Services and Markets Act (FSMA) 2000 The UK legislation that created the single financial regulator, the Financial Services Authority (FSA), and established the framework within which it regulated financial markets and services. The Financial Services Act 2012 replaced the FSA with the FCA and the PRA from 1 April 2013. Financial Services Authority (FSA) The former UK regulator with statutory responsibility for the implementation of the Financial Services and Markets Act (FSMA) 2000. The FSA was replaced by the FCA and the PRA from 1 April 2013. Fraud Defined by UK legislation as involving attempted or actual financial benefit, by false representation, failing to disclose information and by abuse of office. Fraud Review A review of trends and issues relating to fraud as part of the establishment of the Fraud Act and associated agencies. Fraudulent Statement Falsifying financial information relating to a company. Freezing Legally based ability of governments and law enforcement agencies (LEAs) to prevent the movement of, alteration of, use of and access to funds considered to be involved in criminal or terrorist activities.

277

Global Witness

Integration

A non-governmental organisation (NGO) that publishes and reports corruption around the world.

Means to turn the proceeds of crime into legitimate assets.

Governance

A formal agreement between countries which are members of international associations.

Used to describe arrangements within companies and governments to ensure the proper and transparent stewardship of income and expenditure and decision-making processes. Hardening Targets Steps taken to prevent attacks by terrorists. Her Majesty’s Revenue & Customs (HMRC) A non-ministerial department of the UK government responsible for the collection of taxes. Home Office The lead government department for immigration and passports, drugs policy, crime, counter-terrorism and police. Human Rights Rights of individuals enshrined in international and domestic law. Human Rights Watch

International Convention

International Monetary Fund (IMF) International agency responsible for overseeing the international monetary system to ensure exchange rate stability and economic growth. Now also involved in issues relating to money laundering and terrorist finance. Intelligence The collection, collation and analysis of information that is evidenced and can be used for operational and other activities. Investment Fraud Encouraging investors to secure good rates of return may involve genuine schemes that over-exaggerate the rates or may simply be a fraudulent scheme from inception. Joint Money Laundering Steering Group (JMSLG)

An non-governmental organisation (NGO) that publishes reports on breaches of human rights and corruption around the world.

An association of main UK financial services trade associations, which promotes good practice in countering money laundering, through the publication of guidance.

Identity Theft

Know Your Customer (KYC)

The misappropriation of the identity of another person.

The means by which financial services organisations verify the identity of their customers and monitor their expected financial activity.

Identity Fraud Using another person’s identity information such as passwords, credit card numbers and documentation to illicitly obtain goods and services. Illicit Enrichment Unexplained wealth held by public official that does not appear to derive from lawful income.

278

Law Commission The official UK agency responsible for reviewing existing laws and making recommendations for revisions to those laws or for new legislation.

Glossary and Abbreviations

Law Society

Money Laundering Reporting Officer (MLRO)

Represents solicitors in England and Wales, from negotiating with and lobbying the profession’s regulators, government and others, to offering training and advice. The regulation of solicitors is undertaken by another body, the Solicitors Regulatory Authority (SRA).

A specific appointment by firms regulated by the Money Laundering Regulations, with responsibility for internal arrangements and external reporting of any suspicious activities associated with the proceeds of crime (referred to as the nominated officer in the Regulations).

Layering

MONEYVAL

Means to disguise the movement of the proceeds of crime.

The Council of Europe committee responsible for policies on money laundering and terrorist finance for its member countries.

Long Firm Fraud A particular type of fraud, usually involving organised crime, whereby a bogus firm increases orders on credit and then defaults on the last payment.

Mutatis Mutandis With necessary changes. Mutual Legal Assistance

Market Abuse

The judicial means by which countries co-operate on criminal matters.

An offence under the Financial Services and Markets Act (FSMA) 2000 relating primarily to insider trading and market manipulation.

National Audit Office

Merida Convention

National Criminal Intelligence Service (NCIS)

The United Nations (UN) Convention against Corruption (CAC).

UN global action plan to achieve the eight antipoverty goals by their 2015 target date.

Former UK agency which housed the UK’s Financial Intelligence Unit (FIU), responsible for the receipt and dissemination of intelligence including that from financial services regulated by the Money Laundering Regulations. Replaced by the Serious Organised Crime Agency (SOCA).

Money Laundering Directives

Nolan Committee

EU legislation providing guidance on the prevention and investigation of money laundering.

The Chairman of the first Committee on Standards in Public Life was Lord Nolan. The committee is a standing committee, established after the scandals of the Major government.

Millennium Development Goals (MDGs)

Money Laundering (ML) The movement and concealment of criminally derived funds done with the intention of hiding them and then converting them into legitimate assets.

The UK state audit.

Non-Co-operative Countries and Territories (NCCT) The list of countries previously published by the Financial Action Task Force (FATF) that it deemed not to have met its standards on combating money laundering and terrorist finance. Now replaced by the International Co-operation Review Group (ICRG) process.

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Non-Governmental Organisation (NGO)

Politically Exposed Person (PEP)

Civil society organisation.

Those persons deemed to be significant in relation to know your customer (KYC) and customer due diligence (CDD) policies because they are, or are related to or associated with, political figures who may or may not be involved in corruption and money laundering activities.

Not-for-Profit Organisation (NPO) Civic society organisation that may conduct commercial activities (such as charities). Office Européen de Lutte Anti-Fraude (OLAF) (the European Anti-Fraud Office) EU agency responsible for investigation of financial crimes against EU expenditure. Office of Foreign Assets Control (OFAC) The US Department of Treasury’s agency responsible for its terrorist sanctions regime. Organisation for Economic Co-operation and Development (OECD) Monitors events in member countries as well as outside the OECD area, and includes regular projections of short- and medium-term economic developments. Organisation for Economics Co-operation and Development (OECD) Development Assistance Committee (DAC) The policy and co-ordinating centre for OECD members in relation to assistance for developing countries. Organised Criminal Networks Groups of individuals who approach undertaking criminal activity on a planned and organised basis. Outsourcing The provision of goods and services by a company through a third party company.

Poverty Reduction Strategy Paper (PRSP) An attempt by the World Bank to provide a country-wide framework to ensure that donor funding supports the social, economic and political development of a country with poverty reduction at its core. Predicate Offence That offence under which a conviction has to be obtained in order to trigger confiscation proceedings. Proceeds of Crime Assets and other benefits obtained from criminal activity. Proceeds of Crime Act (POCA) The UK legislation which addresses money laundering and the reporting of the movement of illicit funds. Proliferation Finance Funding relating to activities associated with weapons of mass destruction. Prudential Regulation Authority (PRA) One of two regulators established by the Financial Services Act 2012, responsible for the prudential regulation and supervision of banks, building societies, credit unions, insurers and major investment firms.

Palermo Convention The United Nations (UN) convention relating to international organised crime. Placement The initial disposal of the proceeds of crime.

280

Ratification When a country ratifies a UN or other convention it, commits to translating the requirements of the convention into domestic law and also ensuring inter-state co-operation.

Glossary and Abbreviations

Record-Keeping

Serious Organised Crime Agency (SOCA)

The requirement within organisations regulated by the Money Laundering Regulations concerning the retention of documentation.

The UK law enforcement agency responsible for a range of complex and serious criminal activities and which now houses the UK’s Financial Intelligence Unit (FIU). It will be superseded by the National Crime Agency (NCA) in 2013.

Regional Asset Recovery Team (RART) These were created to maximise asset recovery. The teams are formed from officers and staff seconded from various police forces, HMRC, the Crown Prosecution Service (CPS) and other public bodies. Risk

Single Market Policy The European Union (EU) approach to standardising commercial practices for member states and removing barriers to trade between them.

Risk is the exposure to the possibility of something happening that may have a negative or unforeseen impact on an individual’s or organisation’s objectives.

Special Branch

Roskill Committee

Governments and officials who support and sponsor terrorism.

A government review on the law and investigation of fraud following a number of commercial scandals. Led to the setting up of the Serious Fraud Office (SRO). Royal Commission A UK official inquiry process. Rarely used today. Sanctions Legally based controls organisations and countries.

on

individuals,

That part of UK policing responsible for matters of national security, including terrorism. State Sponsors

Stolen Asset Recovery Initiative (StAR) A joint United Nations Office on Drugs and Crime (UNODC) and World Bank initiative to provide support and training to governments seeking to undertake asset recovery, with a particular focus on international co-operation. Suspicious Activity Report (SAR)

Lists drawn up by international agencies to counter proliferation finance.

The reporting by those organisations regulated by the Money Laundering Regulations of any financial activity that may involve the proceeds of crime. Sometimes termed Suspicious Transaction Report (STR).

Sarbanes-Oxley (SOX) Act

Suspicious Transaction Report (STR)

US legislation passed to address how companies manage their financial affairs, following a series of major scandals.

See Suspicious Activity Report (SAR).

Sanctions Lists

Serious Fraud Office (SFO) The UK government department legally responsible for the investigation and prosecution of serious and complex fraud. Now has responsibilities under the Bribery Act.

Tax Evasion The use of illegal means to disguise financial circumstances to avoid the payment of tax. Tax Avoidance The legitimate arrangement of financial affairs to minimise the amount of tax payable.

281

Terrorist Funding

Vetting

The collection of funds for use by terrorist groups.

The process used to ensure that information provided by, for example, an employee or a customer is verifiable and validated.

Terrorist Finance/Financing (TF) The means by which funds are raised for terrorist activities and the movement of money needed by terrorists. Tipping-Off

Vienna Convention The United Nations (UN) convention relating to drug trafficking.

A specific offence under the Proceeds of Crime Act (POCA) relating to a third party being informed about a Suspicious Activity Report (SAR).

Whistleblower

Transparency International (TI)

Wire Transfers

An non-governmental organisation (NGO) that focuses on corruption, based in Berlin with national chapters around the world.

Formal money transfers through legitimate organisations.

Transparency International (TI) Corruption Perception Index (CPI)

An association of major international banks which helps set industry standards on various money laundering and terrorist finance activities.

An annual ranking of countries according to levels of corruption, extrapolated from a range of quantitative surveys and opinion polls. Travaux Preparatoires The literal translation is preparatory works. The phrase is used to mean the official record of a negotiation. Sometimes published, the Travaux Preparatoires are often useful in clarifying the intentions of a treaty or other instrument. United Nations Global Compact (UNGC) A UN initiative to encourage corporate responsibility amongst private sector companies. United Nations Office on Drugs and Crime (UNODC) The UN office responsible for leading on international initiatives relating to drugs, organised crime, money laundering and corruption.

282

The term used to describe a person who complains internally or externally about potentially illegal activity by their employer.

Wolfsberg Group

World Bank Set up to promote economic development and support developing countries.

Glossary and Abbreviations

ABC

AUC

Anti-Bribery and Corruption

Autodefensas Unidas de Colombia (United SelfDefence Forces of Colombia)

AC Anti-Corruption ACA Anti-Corruption Agency ACAMS

BAE British Aerospace BBA British Bankers’ Association

Association of Certified Anti-Money Laundering Specialists

BBC

ACAS

BCBS

Advisory, Conciliation and Arbitration Service

Basel Committee on Banking Supervision

ACFE

BIS

Association of Certified Fraud Examiners

Bank for International Settlements, also (Department for) Business, Innovation and Skills

ACPO Association of Chief Police Officers ACTT Anti-Corruption Task ADB Asian Development Bank AFDB African Development Bank AML Anti-Money Laundering AMLP Anti-Money Laundering Professional (Forum) APGML Asia/Pacific Group on Money Laundering ARA Assets Recovery Agency

British Broadcasting Corporation

BP British Petroleum BRIC Brazil, Russia, India and China CAB Criminal Assets Bureau CARICOM Caribbean Community CCTV Closed Circuit Television CD Compact Disc CDD Customer Due Diligence CFATF Caribbean Financial Action Task Force

283

CFC

COE

Combating Financial Crime

Council of Europe

CFT

COP

Combating the Financing of Terrorism

Communication on Progress; Community of Practice

CHAPS Clearing House Automated Payment System CICA Crime (International Co-operation) Act 2003 CICFA

CPI Corruption Perception Index CPS Crown Prosecution Service

Concerted Inter-Agency Criminal Finances Action

CSO

CIFAS

CTC

Credit Industry Fraud Avoidance Scheme

Counter-Terrorism Committee; also CounterTerrorism (also known as SO15)

CIIA

Civil Society Organisation

Chartered Institute of Internal Auditing

CTCED

CIPD

Counter-Terrorism Committee Executive Directorate

Chartered Institute of Personnel and Development

CTF

CIPE Centre for International Private Enterprise CIS Commonwealth of Independent States CML Council of Mortgage Lenders CND Commission on Narcotic Drugs CO Country Office COBS Conduct of Business

Counter-Terrorism Financing CTITF Counter-Terrorism Implementation Task Force DAC Development Assistance Committee DAD Development Assistance Directive DAG Development Assistance Group DCM Developing Country Member DFID Department for International Development

284

Glossary and Abbreviations

DFSA

EIB

Dubai Financial Services Authority

European Investment Bank

DGG

EITI

Democratic Governance Group

Extractive Industries Transparency Initiative

DNFBP

EJN

Designated Non-Financial Businesses and Professions

European Judicial Network

DoS

Europol Liaison Officer

Denial of Service DPA

ELO

ESAAMLG

Data Protection Act 1998

Eastern and Southern Africa Anti-Money Laundering Group

DPRK

EU

Democratic People’s Republic of Korea

European Union

DTI

Europol

Department for Trade and Industry

European Police Office

EAG

FATCA

Eurasian Group (on Combating Money Laundering and Terrorist Financing)

Foreign Account Tax Compliance Act

EAW

Financial Action Task Force

European Arrest Warrant

FATF

FCA

EBRD

Financial Conduct Authority

European Bank for Reconstruction and Development

FCPA

EC European Commission ECOWAS

Foreign Corrupt Practices Act FinCEN Financial Crimes Enforcement Network

Economic Community of West African States

FIU

EDD

Financial Intelligence Unit; also Financial Information Unit

Enhanced (Customer) Due Diligence EEA

FPO Foreign Public Official

European Economic Area

285

FRC

GIABA

Financial Reporting Council

Inter-Governmental Action Group Against Money Laundering in West Africa

FSA Financial Services Authority, also Financial Services Act 2012 FSAP Financial Sector Assessment Programme FSMA Financial Services and Markets Act FSRB FATF-Style Regional Body FTO Foreign Terrorist Organization FX Foreign Exchange GAAR General Anti-Avoidance Rule GACAP Governance and Anti-Corruption Action Plan GAFISUD

GMC Groupe Multidisciplinaire sur La Corruption (Multidisciplinary Group on Corruption) GOVNET Network on Governance GPML Global Prevention of Money Laundering GRECO Group of States against Corruption HMRC Her Majesty’s Revenue & Customs HR Human Rights also Human Resources HSBC Hong Kong and Shanghai Banking Corporation HSWA 1974 Health and Safety at Work Act

Grupo de Acción Financiera de Sudamérica (Financial Action Task Force of South America Against Money Laundering)

IAIS

GAC

IBRD

Governance and Anti-Corruption

International Bank for Reconstruction and Development

GC

International Association of Insurance Supervisors

Global Compact

ICAEW

GDDS

Institute of Chartered Accountants in England and Wales

General Data Dissemination System GDP Gross Domestic Product

286

ICC International Chamber of Commerce

Glossary and Abbreviations

ICO

IRC

Information Commissioner’s Office

International Reference Centre (for Community Water Supply; now called IRC International Water and Sanction Centre)

ICRG International Co-operation Review Group IDA International Development Association IDB Inter-American Development Bank

ISO International Organisation for Standardisation IT Information Technology JMLSG

IDEA

Joint Money Laundering Steering Group

(International) Institute for Democracy and Electoral Assistance

KYC

IFA Independent Financial Adviser IFC International Finance Corporation IFES International Foundation for Electoral Systems IMF International Monetary Fund IMLPO

Know Your Customer LEA Law Enforcement Agency LSE London Stock Exchange MAD Market Abuse Directive MDB Multilateral Development Bank

Institute of Money Laundering Prevention Officers

MDG

IMoLIN

MDTF

International Money Laundering Information Network

Multi-Donor Trust Fund

iOCTA

Middle East and North Africa

internet-facilitated Organised Crime Threat Assessment

MFI

IOSCO International Organization of Securities Commissions

Millennium Development Goal

MENA

Multilateral Financial Institution ML Money Laundering

287

MLA

NPO

Mutual Legal Assistance

Not-for-Profit Organisation

MLRO

OECD

Money Laundering Reporting Officer

Organisation for Economic Co-operation and Development

MONEYVAL Committee of Experts on the Evaluation of AntiMoney Laundering Measures and the Financing of Terrorism

OFAC

MoU

Office of Fair Trading

Memorandum of Understanding MP

Office of Foreign Assets Control OFT

OLAF

Member of Parliament (UK)

Office Europeen de Lutte Antifraude, (European Anti-Fraud Office)

NAO

OFC

National Audit Office

Offshore Financial Centre

NCA

OSCE

National Crime Agency

Organisation of Security and Co-operation in Europe

NCCT Non-Co-operative Countries and Territories

PAACT

NCIS

Action Plan for Supporting Countries’ Efforts to Combat Corruption and Foster Transparency

National Criminal Intelligence Service NFA

PAC

National Fraud Authority

Public Accounts Committee; also Partnering Against Corruption

NGO

PACDE

Non-Governmental Organisation

Programme on Anti-Corruption for Development Effectiveness

NI National Insurance; Northern Ireland

PACE Police and Criminal Evidence Act

NIS National Integrity System

PACI Partnering Against Corruption Initiative

NMO National Measurement Office

PCAOB Public Company Accounting Oversight Board

288

Glossary and Abbreviations

PCM

RMC

Project Complaint Mechanism

Regional Member Country

PEP

SADC

Politically Exposed Persons

Southern African Development Community

PIDA

SAFO

Public Interest Disclosure Act

Specified Anti-Fraud Organisation

PIU

SAP

Performance and Innovation Unit

Structural Adjustment Programme

POCA

SAR

Proceeds of Crime Act

Suspicious Activity Report

PRA

SDGT

Prudential Regulation Authority

Specially Designated Global Terrorist

PRI

SFO

Political Risk Insurance

Serious Fraud Office

PRSP

SME

Poverty Reduction Strategy Paper

Small and Medium-sized Enterprises

RART

SOCA

Regional Asset Recovery Team

Serious Organised Crime Agency

RBA

SOX

Risk-Based Approach

Sarbanes-Oxley

RBSG

SR

Royal Bank of Scotland Group

Special Recommendation

REDD

SRA

Reducing Emissions from Deforestation and Degradation

Solicitors Regulation Authority

RESIST

Stolen Assets Recovery

Resisting Extortions and Solicitations in International Sales and Transactions

STR

RIPA Regulation of Investigatory Powers Act 2000

StAR

Suspicious Transaction Report SUA Specified Unlawful Activity

289

TF

USAID

Terrorist Financing

United States Agency for International Development

TI Transparency International TPB Terrorism Prevention Branch TRACK

USB Universal Series Bus VAT Value Added Tax

Tools and Resources for Anti-Corruption Knowledge

WBG

UN

WBI

United Nations

World Bank Institute

UNCAC United Nations Convention Against Corruption UNDAP United Nations Development Assistance Programme UNDP United Nations Development Programme UNGASS UN General Assembly UNGC United Nations Global Compact UNSC United Nations Security Council UNSCR United Nations Security Council Resolution UNODC United Nations Office on Drugs and Crime UNSCR UN Security Council Resolution

290

World Bank Group

Multiple Choice Questions

292

Multiple Choice Questions

The following additional questions have been compiled to reflect as closely as possible the examination standard that you will experience in your examination. Please note, however, they are not the CISI examination questions themselves. 1.

Which of the following is not an aim of money laundering? A. To disguise the illicit origin of proceeds of crime B. To distance criminals from their crimes C. To flaunt criminal wealth D. To avoid confiscation

2.

Which of the following is NOT true of terrorist financing? A. The person collecting funds must have intention or knowledge that they will be used for terrorist acts B. The person collecting funds has to use them himself to commit terrorist acts C. Terrorist funds may include letters of credit D. Terrorist funds do not have to be linked to specific terrorist attacks

3.

Proliferation finance does not include the financing of: A. Nuclear weapons B. Chemical weapons C. Computer viruses D. Biological weapons

4.

Globalisation of financial crime has led to cross-border LEA responses such as: A. SOCA B. Egmont Group C. FSA D. OFAC

5.

A characteristic of hawala is: A. It makes extensive use of connections such as family relationships B. It only operates inside India C. It is part of the formal banking system D. It is illegal throughout the world

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6.

Eurojust is a: A. Judges’ trade union B. Criminal justice regulator C. Cross-EU co-ordinating agency D. Judicial rights NGO

7.

FATCA requires foreign financial institutions to: A. Report US taxpayer information to US authorities B. Close accounts held overseas by US citizens C. Freeze accounts of companies owned by US taxpayers D. Report tax avoidance to their FIU

8.

A predicate offence is an offence that often has to take place in order to trigger off: A. Conspiracy charges B. Money laundering offences C. Criminal investigation D. A European arrest warrant

9.

One mandatory component for a charge to be brought under the Fraud Act is: A. Actual gain or loss B. Intent to make gain or cause loss C. Significant financial benefit D. Laundering the proceeds

10. Which of these is not be an example of asset misappropriation? A. Data theft B. Improper valuation of assets C. False expenses claims D. Payroll fraud

11. Which of the following is an investment fraud? A. Fictitious revenue fraud B. Insider dealing C. Boiler room scam D. Intellectual property theft

294

Multiple Choice Questions

12. To which businesses does the Sarbanes-Oxley Act apply? A. US companies and any other companies or subsidiaries incorporated in the US B. Any company incorporated in an OFC C. All international financial services companies D. US government contractors

13. Which of the following is not a stage in the money laundering model? A. Placement B. Layering C. Diffusement D. Integration

14. What is the effect of a failing to disclose an offence? A. Protecting an MLRO from a breach of confidentiality B. Forcing an FIU to share information with another FIU abroad C. Imposing a positive duty to disclose D. Preventing a subject of a report being told about it

15. Which of the following is not a role of the IMF and World Bank in AML/CFT? A. Publishing the international AML/CFT Standards B. Carrying out assessments C. Policy development D. Providing technical assistance

16. Where was the UN Convention on Transnational Organised Crime signed in 2000? A. Vienna B. Brussels C. Palermo D. Paris

17. FATF was set up by? A. G7 B. OECD C. World Bank D. IMF

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18. Which of the following are not identified by the FATF through public statements? A. Jurisdictions with strategic AML/CFT deficiencies that have not made sufficient progress B. Jurisdictions with strategic AML/CFT deficiencies that have not committed to an action plan C. Jurisdictions with strategic AML/CFT deficiencies that are suspended by the EU D. Jurisdictions that have strategic AML/CFT deficiencies and to which countermeasures apply

19. When should CDD normally be carried out? A. When law enforcement ask for it B. Before establishing a business relationship C. Before meeting a prospective client D. When a client closes their account

20. Which of the following is not a DNFBP according to the FATF? A. Casinos B. Luxury Yacht Dealers C. Trust and Company Service Providers D. Real Estate Agents

21. What does an FIU NOT do in connection with SARs, according to the Egmont Group? A. Receive B. Approve C. Analyse D. Disseminate

22. Which international body addresses securities regulators? A. IAIS B. BCBS C. IOSCO D. FSRB

23. Which of the following is a fundamental difference between ML and TF? A. TF can only occur overseas B. ML only applies to the proceeds of crime C. TF always involves charities D. ML always involves front companies

296

Multiple Choice Questions

24. The International Convention for the Suppression of the Financing of Terrorism dates from: A. 2012 B. 2001 C. 1999 D. 1973

25. Why did the FATF remove the Special Recommendations on TF in 2012? A. Because the terrorist threat has diminished B. Because terrorism was removed from the FATF mandate C. Because CTF was not working D. Because many of the requirements are similar to AML

26. Which one of the following was not highlighted by the Wolfsberg Group Statement on terrorist financing? A. The importance of CDD in CFT B. A requirement for customers to declare they are not terrorists C. The continued application of monitoring of customer activities D. The need to identify high risk sectors and activities

27. Which ONE of the following is true about jurisdictions’ listing processes? A. They must be approved by the UN B. They should implement UN listings domestically C. Only individuals on UN lists can be included D. Only individuals from the country concerned can be listed

28. The UN established an Office of Ombudsperson in relation to terrorist sanctions in order to: A. Speed up the process of listing B. Introduce greater transparency C. Impose fines on banks D. Co-ordinate with the European Union

29. Which of the following is NOT true in relation to breaches of sanctions? A. The financial institution concerned risks large regulatory fines B. The financial institution concerned suffers reputational damage C. Consequences only relate to the financial institution concerned, not individuals D. Criminal penalties may be imposed on the financial institution concerned

297

30. Which of these agencies undertakes mutual evaluation country corruption reviews? A. FATF B. GRECO C. OECD D. EU

31. What does the TI CPI measure the level of? A. Cash economies B. Concealment of proceeds of crime C. Conflict of interest D. Corruption

32. Which organisation published the first anti-corruption convention? A. EU B. OECD C. UNODC D. CoE

33. Which of the following is NOT one of the six dimensions of governance devised by the World Bank Institute? A. Rule of law B. Corruption perceptions C. Control of corruption D. Regulatory quality

34. What is the subject of the fourth GRECO evaluation round? A. Agency independence B. Money laundering C. Parliament, judges and prosecutors D. Party funding

35. In which city did the OECD DAC issue its 2010 Declaration on Aid Effectiveness? A. Paris B. Rome C. Vienna D. Strasbourg

298

Multiple Choice Questions

36. The UNDP Anti-Corruption Guidance Note relating to UNCAC is termed: A. Maximising the use of UNCAC B. An Alternative Approach C. Going Beyond the Minimum D. Making Sense of UNCAC

37. Collective Action is an initiative to encourage private sector-public sector agreements to prevent corruption, established by: A. The Business Anti-Corruption Portal B. World Bank Institute C. Organisation for Economic Co-operation and Development D. International Chamber of Commerce

38. Which ONE of the following is not covered by a statutory defence under the UK Bribery Act? A. Someone working for an intelligence service B. A member of the armed forces on active service C. A serving police officer D. A civilian subject to service discipline and working in support of the armed forces

39. Which ONE of the following must be true about an offence of bribing another person under the UK Bribery Act? A. The bribe has to be made before the other person acts B. The bribe must consists of money C. The bribe must relate to the improper performance of a function or activity D. The person bribed must be the person who carries out an improper act

40. Which ONE of the following does the definition of a foreign public official in the Bribery Act apply to? A. Federal bodies B. International bodies C. All levels of national and international bodies D. National level bodies

299

41. Which of the following is NOT true with regard to Principle 1 of the UK Bribery Act? A. Anti-bribery procedures should be proportionate to the risks B. Anti-bribery procedures should be proportionate to the nature and scale of the business C. Anti-bribery procedures should be practical and accessible D. Anti-bribery procedures must be approved by the Serious Fraud Office

42. Which of the following is true in relation to the self-reporting of possible bribery offences to the Serious Fraud Office (SFO)? A. It will guarantee that no prosecution will follow B. It may be taken into consideration as a factor tending against prosecution C. Any other violations of the law not reported will be ignored D. The SFO may not pass the information to other bodies without the consent of the reporting firm

43. Which of the following is allowable under the FCPA but not the UK Bribery Act? A. Use of middlemen B. Payments in kind C. Facilitation payments D. Payments to foreign public officials

44. According to the FATF, what should government authorities do in respect of money laundering/ terrorist financing risks? A. Design risk frameworks for financial institutions B. Identify and assess the risks at the national level C. Ask the World Bank to assess the risks D. Rely on law enforcement to mitigate the risks

45. Which of the following is not part of FATF Recommendation 30 regarding law enforcement agencies? A. Designated agencies should have money laundering responsibilities B. They should investigate all Suspicious Activity Reports C. Financial investigation should be done in parallel with investigations into predicate offences D. Specialised multi-disciplinary groups should be used when necessary

300

Multiple Choice Questions

46. Which of the following was not a reason for introducing proceeds of crime legislation? A. The need to regulate banks more closely B. Reinvestment of proceeds funds further crime C. Imprisonment was not seen as a sufficient deterrent for criminals D. Lack of fairness to law-abiding citizens

47. What is ONE difference between civil and criminal confiscation? A. The types of assets that can be seized B. Where the suspect is located C. How the money has been laundered D. Whether or not there has been a criminal conviction

48. The StAR initiative is an asset recovery initiative between the UNODC and: A. UNCAC B. UNDP C. World Bank D. IMF

49. What is the purpose of a freezing order? A. To provide security in respect of a judgement B. To prevent a suspect from travelling C. To stop someone moving or making use of assets D. To make a bank reveal information

50. Long firm fraud is normally associated with: A. Corporate malfeasance B. Organised crime C. Asset misappropriation D. Mis-statement of financial circumstances

51. Which of the following components is not part of the design of a corporate structure to prevent financial crime? A. Transparency B. Executive pay C. Accountability D. Reporting

301

52. Which UK act covers the protection of personal data? A. Freedom of Information Act B. Data Protection Act C. Information Commissioner Act D. Public Interest disclosure Act

53. Which organisation facilitates the sharing of information among public and private sector organisations relating to fraud? A. SOCA B. Action Fraud C. CIFAS D. JMLSG

54. Which of the following is not a key financial crime risk factor? A. Products and services B. Countries C. Advertising D. Customers

55. What is a policy on gifts and entertainment designed to prevent? A. Excessive costs B. Allegations of bribery C. Staff inequality D. Money laundering

56. Which of the following is not a suitable issue for whistleblowing procedures? A. Staff complaints about pay B. Criminal offences C. Damage to the environment D. Failure to comply with legal obligations

57. Which of the following is not an element of compliance risk, according to the Basel Committee? A. Legal or regulatory sanctions B. Failure to comply with regulations C. Staff morale D. Loss to reputation

302

Multiple Choice Questions

58. Which of the following is not an element of a training strategy? A. Keeping records B. Assessing the nature of training required C. Setting the MLRO’s salary D. The frequency of training

59. Which of the following does not require Enhanced Due Diligence? A. Correspondent banking relationships B. Politically exposed persons C. Public sector departments D. Non-face-to-face customers

60. Which of the following is true about suspicion? A. It must be proved beyond doubt B. It can be established simply by a feeling C. The MLRO must accept the judgement of members of staff D. It must go beyond merely unusual behaviour

303

Answers to Multiple Choice Questions 1.

C

Chapter 1, Section 1.2

Criminals launder their proceeds in order to disguise their criminal origin, which in turn makes it harder to link those in possession of the proceeds to the original criminality, and easier to avoid confiscation. If criminals flaunt their wealth, it is likely to attract the attention of the authorities. 2.

B

Chapter 1, Section 1.3

The offence of terrorist financing as defined in the Convention includes the requirement of intention or knowledge that the funds will be used for terrorist acts, and funds are defined as including letters of credit. However, it is not necessary for the person collecting the funds to intend to carry out the acts themselves. As the offence is complete before the terrorist acts are committed, it is not necessary to prove a link to any particular act. 3.

C

Chapter 1, Section 1.4

The FATF definition of proliferation finance includes nuclear, chemical or biological weapons, not computer viruses. 4.

B

Chapter 1, Section 2.1

The Egmont Group is a cross-border network consisting of FIUs from around the world. The other bodies listed are national bodies (SOCA and the FCA from the UK, OFAC from the US). 5.

A

Chapter 1, Section 2.3

Hawala is often based on family relationships. It operates across borders, is not part of the formal banking network and is legal in many jurisdictions (although some hawala operators may be found to be unlicensed). 6.

C

Chapter 1, Section 2.5.1

Eurojust is an EU body that aims to improve co-operation in investigations and prosecutions between member states of the EU by facilitating requests for international mutual legal assistance and the implementation of extradition requests. 7.

A

Chapter 1, Section 2.6.4

FATCA requires foreign financial institutions to report information about accounts held by US taxpayers directly to the IRS (not their local FIU – any requirements to report to the FIU will be covered by local legislation). FATCA requires special due diligence and record-keeping, but not the closing or freezing accounts. 8.

A

Chapter 2, Section 1.2

A predicate offence is the underlying criminal activity that gives rise to proceeds that may become the subject of a money laundering offence. Without the existence of a predicate offence there can be no money laundering.

304

Multiple Choice Questions

9.

B

Chapter 2, Section 2.1

The fraud offences require an intent to make a gain or loss, not an actual gain or loss. There is no threshold on the amount of benefit or any requirement that the proceeds have been laundered. 10.

B

Chapter 2, Section 2.4

Asset misappropriation involves people abusing their position to steal from an organisation. Typically the assets stolen are cash or equivalents, so false expense claims and payroll fraud would be included, but it can also include data. Improper valuation of assets is another type of fraud. 11.

C

Chapter 2, Section 2.5

Investment fraud involves the misrepresentation of a particular investment to those who hold them or who might wish to invest in them, so a boiler room scam is one example. The other frauds mentioned do not involve misrepresentation of an investment, although insider dealing is concerned with stocks and shares. 12.

A

Chapter 2, Section 2.7

The Sarbanes-Oxley Act is mandatory for all US companies, and overseas companies or their subsidiaries incorporated in the US, not those incorporated elsewhere or doing business with the US Government. 13.

C

Chapter 3, Section 1.1

The classic model of money laundering involves placement, layering and integration. 14 .

C

Chapter 3, Section 1.3.4

Because it is an offence not to disclose, this has the effect of imposing a positive duty to disclose, even though the statute is not worded in that way. The other answers refer to other elements required by the FATF Recommendations. 15.

A

Chapter 3, Section 2.1.2

The IMF and the World Bank both carry out assessments, policy development and provide technical assistance. Although they have an input, it is the FATF that actually publishes the international AML/CFT Standards. 16.

C

Chapter 3, Section 2.2

The UN Convention on Transnational Organised Crime was signed in Palermo. The Vienna Convention related to illicit traffic in narcotic drugs and psychotropic substances. Brussels is where the Egmont Group was established; the FATF was established in Paris. 17.

B

Chapter 3, Section 3

The FATF was established by the G7 in 1989. It works closely with the IMF and the World Bank; the FATF Secretariat is housed in the OECD headquarters in Paris.

305

18.

C

Chapter 3, Section 3.2

Jurisdictions suspended by the EU are not identified by the FATF. Their public statements refer to those jurisdictions with strategic AML/CFT deficiencies to which countermeasures apply, or to those that have not made sufficient progress, or to those which have developed an action plan with the FATF. 19.

B

Chapter 3, Section 3.7.1

Customer due diligence should normally be carried out before establishing a business relationship, which would not include meeting a prospective client. If it has not been carried out, it would be good practice to carry out CDD on closing an account, but this should be the norm. It is an obligation usually enacted in regulation, not on request of law enforcement. 20.

B

Chapter 3, Section 3.7.5

Luxury yacht dealers are not specifically identified as a DNFBP by the FATF, unlike the other three answers. However, they may be covered by AML laws if they accept large cash payments. 21.

B

Chapter 3, Section 4.1.6

According to Egmont, FIUs receive, analyse and disseminate SARs. 22.

C

Chapter 3, Section 4.1.2

IOSCO is the International Organization of Securities Commissions (ie, regulators). IAIS is concerned with insurance regulation, Basel with banking supervision, and FSRB is a FATF-Style Regional Body, concerned with FATF standards in its region. 23.

B

Chapter 4, Section 1

Unlike money laundering, which always applies to the proceeds of crime (predicate offences), terrorist financing may involve legitimately obtained funds, intended for use in connection with terrorist acts. Like ML, TF can happen anywhere. TF can involve any type of fundraising, not just charities (although they are a recognised TF vulnerability). ML may involve front companies, but so may TF. 24.

C

Chapter 4, Section 2.1

The International Convention for the Suppression of the Financing of Terrorism was signed in 1999. 25.

D

Chapter 4, Section 3.1

The FATF incorporated the special recommendations on TF into the main recommendations because many of the responses are the same as for ML, even though the two have differences. 26.

B

Chapter 4, Section 3.2

The Wolfsberg Group highlighted the importance of CDD, monitoring and the need to identify high-risk sectors and activities in CFT. It did not call for customer declarations.

306

Multiple Choice Questions

27.

B

Chapter 4, Section 4.4

Jurisdictions should, at a minimum, have a mechanism for implementing UN listings, but they may include their own designations and do not need to be approved by the UN. Listings frequently include individuals from outside the jurisdiction concerned. 28.

B

Chapter 4, Section 4.6.3

The Office of Ombudsperson was introduced by the UN in response to concerns about the listing process and in order to introduce greater transparency. 29.

C

Chapter 4, Section 4.7

Financial institutions are at risk of larger regulatory fines, reputational damage and criminal penalties if they are found to be in breach of sanctions. These consequences can also apply to individuals. 30.

B

Chapter 5, Section 2.3

GRECO is the Council of Europe’s Group of States against Corruption and it undertakes mutual evaluation of countries’ progress in addressing corruption in terms of laws, institutions and procedures. The FATF carries out mutual evaluations relating to AML/CFT; the FCA regulates the conduct of financial services firms; and OFAC is responsible for US sanctions. 31.

D

Chapter 5, Sections 1.2 and 1.4

The TI CPI is the Transparency International Corruption Perception Index. 32.

B

Chapter 5, Section 2.1.1

The OECD Convention against Bribery of Foreign Public Officials was the first significant international anti-corruption convention. 33.

B

Chapter 5, Section 2.4.1

The six dimensions of governance are: voice and accountability; political stability and absence of violence; government effectiveness; regulatory quality; rule of law; and control of corruption. 34.

C

Chapter 5, Section 2.3

The fourth GRECO evaluation round, launched in January 2012, is to focus on prevention of corruption in respect of members of Parliament, judges and prosecutors. Agency independence and party funding have been the subjects of previous rounds. GRECO does not evaluate AML. 35.

A

Chapter 5, Section 3.3

The 2010 Declaration on Aid Effectiveness is known as the Paris Declaration. 36.

C

Chapter 5, Section 3.4

The Guidance note is termed Going Beyond the Minimum.

307

37.

B

Chapter 5, Section 3.7

Collective Action was initiated and co-ordinated by the World Bank Institute. 38.

C

Chapter 6, Section 2.3.7

There is a statutory defence under the Bribery Act for those working in the intelligence services or armed forces on active service (including a civilian subject to service discipline and working in support of the armed services). The defence does not cover police officers. 39.

C

Chapter 6, Sections 2.3.2 and 2.3.3

A bribe must relate to the improper performance of a function or activity. A bribe may be paid after the fact, may relate to advantages other than financial, and does not need to be given to the same person who performs the function or activity. 40.

C

Chapter 6, Section 2.4

A foreign public official is a person who is an official of a public international organisation, or who holds a position or exercises a public function for any public agency or public enterprise of a country or territory, so the definition applies to any national or international body. 41.

D

Chapter 6, Section 2.6

Principle 1 states that a commercial organisation’s procedures to prevent bribery by persons associated with it should be proportionate to the bribery risks it faces and to the nature, scale and complexity of the commercial organisation’s activities. They are also clear, practical, accessible, effectively implemented and enforced. There is no provision for the SFO to approve procedures. 42.

B

Chapter 6, Section 2.7

Self-reporting may be taken into consideration as a public interest factor tending against prosecution. The SFO gives no guarantee against prosecution or that it will overlook any non-reported violation by a self-reporting firm. The SFO does not need permission to pass information relating to crimes to other bodies. 43.

C

Chapter 6, Section 3.2

Facilitation payments are allowed under the FCPA, but not under the Bribery Act. The other three answers are unlawful in connection with bribery under both Acts. 44.

B

Chapter 7, Section 1.1

FATF Recommendation 1 requires countries to identify and assess ML/TF risks at the national level. Financial institutions must assess their own risk: the World Bank does not assess risks on behalf of countries and the risks are mitigated in many ways, such as the preventative measures taken by financial institutions and DFNPBs or legal measures, not just by law enforcement action.

308

Multiple Choice Questions

45.

B

Chapter 7, Section 1.6

Recommendation 30 does not require that all SARs should be investigated, although those that identify ML activity should be. 46.

A

Chapter 7, Section 1.8

The Proceeds of Crime Act relates to removing the opportunities such as reinvestment in further crime and the lack of fairness that the possession of criminal proceeds presents. Removing the proceeds of crime from criminals also acts as a deterrent, whereas imprisonment can be seen as part of the job. It has nothing to do with the regulation of banks, which in the UK is now covered by the Financial Services Act 2012. 47.

D

Chapter 7, Section 2.4

Both types of confiscation can be applied to any assets, wherever the suspect may be and whatever laundering process has taken place. Civil confiscation does not require a criminal conviction to have been secured. 48.

B

Chapter 7, Section 2.3

The Stolen Asset Recovery Initiative is a partnership between the UNODC and the World Bank. 49.

C

Chapter 7, Section 2.4

Freezing orders are put in place to stop someone moving or making use of assets and may pre-date a final judgement. Travel bans can be implemented through other orders or sanctions, and banks can be made to reveal information through a variety of orders. 50.

B

Chapter 8, Section 1.1.3

Long firm fraud is carried out by criminals setting up businesses and can be associated with organised crime. The other answers are different kinds of corporate crimes. 51.

B

Chapter 8, Section 1.4.1

The basic building blocks of anti-financial crime design are standards, transparency, scrutiny, accountability and reporting. Executive pay can be important, for example in bribery and corruption, but is not one of the core components. 52.

B

Chapter 8, Section 1.6.1

The Data Protection Act covers the protection of personal data. The Freedom of Information Act allows access to non-personal data; the Information Commissioner is a body established to oversee and uphold information rights in the public interest; and the Public Interest Disclosure Act is a whistleblowing Act. 53.

C

Chapter 8, Section 2.1

CIFAS is the UK’s fraud prevention service and facilitates information sharing. SOCA is a law enforcement body, Action Fraud is the national fraud reporting centre; and the JMLSG provides approved AML/CFT guidance in the UK.

309

54.

C

Chapter 8, Sections 2.5.1 and 2.5.2

Financial crime risk is generally considered as a combination of customers, products and services and country risk factors. Advertising should not mislead, but is not a risk factor in itself. 55.

B

Chapter 8, Section 2.6.5

Policies on gifts and entertainment are designed to ensure that they do not create a conflict of interest and are proportionate, so cannot be considered or perceived as bribes. 56.

A

Chapter 8, Section 2.6.8

Whistleblowing procedures are designed for matters such as criminal offences, failure to comply with legal obligations (such as regulations), miscarriages of justice, health and safety dangers and damage to the environment. Other procedures should deal with internal grievances such as staff pay. 57.

C

Chapter 8, Section 3.1

The Basel Committee on Banking Supervision defined compliance risk as the risk of legal or regulatory sanctions, material financial loss or loss to reputation that a bank may suffer as a result of its failure to comply with laws, regulations, rules, related self-regulatory organisation standards, and codes of conduct applicable to its banking activities. Staff morale is likely to suffer as a result of compliance risks materialising, but it is not part of the Basel definition. 58.

C

Chapter 8, Section 3.2.4

Assessing what training is required and its frequency (ie, how often different types of training should be delivered) are the first steps in a training strategy. Records must be kept of who has been trained and when, in order to demonstrate compliance. The MLRO’s salary is not part of training. 59.

C

Chapter 8, Section 3.4

PEPs, correspondent banking and non-face-to-face relationships are identified in the FCA’s Financial Crime Guide as situations requiring Enhanced Due Diligence. Public sector departments are generally considered as posing a lower financial crime risk. 60.

D

Chapter 8, Section 3.5

Suspicion must have a factual basis (not simply a feeling) and go beyond unusual behaviour. However, it is not subject to a strong evidential standard such as ‘beyond all reasonable doubt’. The MLRO should have fuller access to information and better knowledge and experience, so he or she does not have to rely on the judgement of members of staff who may have formed a suspicion, but should consider all the circumstances for himself.

310

Syllabus Learning Map

312

Syllabus Learning Map

Syllabus Unit/ Element Element 1 1.1

Chapter/ Section The Background and Nature of Financial Crime

Chapter 1

Definitions On completion, the candidate should:

1.1.1

Know the definition of financial crime in the Financial Services Act 2012

1.1

1.1.2

Know the definition of money laundering in the Proceeds of Crime Act (POCA) 2000

1.2

1.1.3

Know the United Nations (UN) International Convention for the Suppression of the Financing of Terrorism (1999) definition of terrorist financing

1.3

1.1.4

Understand the Financial Action Task Force (FATF) provisional definition of proliferation finance

1.4

1.1.5

Understand why definitions of corruption have evolved

1.5

1.1.6

Know what FATF refers to as ‘the purpose, benefits and challenges of a risk-based approach to combating money laundering and terrorist financing’

1.6

1.2

International Context On completion, the candidate should:

1.2.1

Understand how globalisation impacts on the scale, likelihood and mechanics of financial crime

2.1

1.2.2

Know how types of financial crime are financed

2.2

1.2.3

Know how funds derived from financial crime are transferred, stored and hidden

2.3

1.2.4

Understand the difference between international conventions, international law and domestic law

2.4

1.2.5

Understand the work of the European Union (EU) in combating financial crime • Eurojust • European Arrest Warrant (EAW) • Money laundering directives

2.5

1.2.6

Understand the work of US authorities in fighting financial crime

2.6

1.2.7

Understand the difference between civil and common law jurisdictions

2.7

1.2.8

Know examples of civil and common law jurisdictions

2.7

1.2.9

Understand the role of civil and criminal processes in recovering the proceeds of crime

2.8

Element 2 2.1

Predicate Offences

Chapter 2

Predicate and Associated Offences On completion, the candidate should:

2.1.1

Understand the term predicate offences

1.1

2.1.2

Understand types of predicate offence

1.2

313

Syllabus Unit/ Element

Chapter/ Section

2.1.3

Know the UK Fraud Act (2006) definition of fraud

2.1

2.1.4

Know the relationship between fraud and money laundering and how they differ

2.2

2.1.5

Know the practical application of fraud classification systems

2.3

2.1.6

Know the difference between asset misappropriation and fraudulent statements

2.4

2.1.7

Understand examples of investment fraud

2.5

2.1.8

Know why market abuse may be considered to constitute or be related to financial crime

2.6

2.1.9

Know the main provisions of the Sarbanes-Oxley Act (2002)

2.7

2.1.10

Know the difference between tax evasion and tax avoidance

2.8

Element 3 3.1

Money Laundering

Chapter 3

Background On completion, the candidate should:

3.1.1

Know the stages of the money laundering process • Placement • Layering • Integration

1.1

3.1.2

Understand how the stages of the money laundering process are detected

1.2

3.1.3

Know these associated activities as defined by the Proceeds of Crime Act (POCA) 2002 • Concealment • Arrangements • Acquisition, use and possession • Failure to disclose • Tipping-off

1.3

3.2

314

International Anti-Money Laundering Standards On completion, the candidate should:

3.2.1

Know the role of international agencies in combating money laundering • United Nations Office on Drugs and Crime (UNODC) • International Monetary Fund (IMF) • World Bank

2.1

3.2.2

Understand the role, purpose and scope of international instruments and conventions • Vienna • Palermo • Merida • Directive 2005/60/EC of the European Parliament • Variance of application

2.2

Syllabus Learning Map

Syllabus Unit/ Element 3.3

Chapter/ Section Financial Action Task Force (FATF) On completion, the candidate should:

3.3.1

Understand the role and objectives of FATF, its limitations and the legal context of its Recommendations

3

3.3.2

Know which FATF Recommendations are mandatory and which are not

3.1

3.3.3

Know the categorisation of jurisdictions which FATF considers to have strategic deficiencies

3.2

3.3.4

Know examples of jurisdictions with strategic deficiencies

3.3

3.3.5

Know FATF Recommendations 1 and 2 relating to ‘AML/CFT policies and coordination’

3.4

3.3.6

Know FATF Recommendations 3 and 4 relating to ‘money laundering and confiscation’

3.5

3.3.7

Know FATF Recommendations relating to ‘terrorist financing and financing of proliferation’ (Recommendations 5 to 8)

3.6

3.3.8

Know what FATF terms ‘preventative measures’ (Recommendations 9 to 23)

3.7

3.3.9

Know FATF Recommendations 24 and 25 relating to ‘transparency and beneficial ownership of legal persons and arrangements’

3.8

3.3.10

Know FATF Recommendations relating to the ‘powers and responsibilities of competent authorities and other institutional measures’ (Recommendations 26 to 35)

3.9

3.3.11

Know FATF Recommendations relating to international co-operation (Recommendations 36 to 40)

3.10

3.4

The Role of Other Bodies On completion, the candidate should:

3.4.1

Understand the role, activities and coverage of FATF-Style Regional Bodies (FSRBs)

4

3.4.2

Know the role other bodies play in combating money laundering and establishing best practice • Basel Committee on Banking Supervision (BCBS) • International Organization of Securities Commissions (IOSCO) • European Union (EU) and the Council of Europe • International Association of Insurance Supervisors (IAIS) • Egmont Group of Financial Intelligence Units • Wolfsberg Group • Joint Money Laundering Steering Group (JMLSG) • Professional bodies

4.1

3.4.3

Know which organisations are officially backed by governments and which are voluntary

4.2

3.4.4

Understand what is meant by a consent regime

4.3

3.4.5

Know the circumstances in which the consent of a Financial Intelligence Unit (FIU) must be obtained

4.3.2

315

Syllabus Unit/ Element 3.4.6 Element 4 4.1

Understand the scope of the Financial Intelligence Unit (FIU) consent regime Terrorist Financing

4.3.3 Chapter 4

Background On completion, the candidate should:

4.1.1

Understand the similarities and differences between money laundering and financing terrorism

1

4.1.2

Know the similarities and differences between proliferation finance and terrorist financing

1.1

4.1.3

Know the objectives of combating the financing of terrorism: • Monitoring of potential terrorists • Prevention of terrorist attacks • Harm reduction • Prevention of further acts

1.2

4.1.4

Understand the challenges of combating the financing of terrorism • Potential erosion of due process and human rights • Risks of incorrect or inadequate controls • Challenge of detection given low visibility • Reliance on intelligence

1.3

4.1.5

Know the purpose and application of sanctions screening

1.4

4.2

Measures to Combat Terrorist Financing On completion, the candidate should:

4.2.1

Understand the main provisions of the United Nations (UN) International Convention for the Suppression of the Financing of Terrorism

2.1

4.2.2

Understand the work of the United Nations Security Council (UNSC) in relation to the financing of terrorism • Resolution 1267 (1999) • Resolution 1373 (2001) • Resolution 1390 (2002)

2.2

4.3

Standards for Countering the Financing of Terrorism On completion, the candidate should:

4.3.1

Know the Financial Action Task Force (FATF) Recommendations relative to terrorist financing

3.1

4.3.2

Understand the Wolfberg’s Group of Banks statement on the Suppression of the Financing of Terrorism

3.2

4.4 4.4.1

316

Chapter/ Section

Terrorist Listing On completion, the candidate should: Understand the impact of the listing process of the United Nations (UN)

4.1

Syllabus Learning Map

Syllabus Unit/ Element

Chapter/ Section

4.4.2

Understand the impact of the listing process of the European Union (EU)

4.2

4.4.3

Understand the circumstances in which the UN list can be applied within the European Union

4.3

4.4.4

Know the listing process of various jurisdictions and their extraterritorial application

4.4

4.4.5

Understand the range of legal consequences related to designation • Bans • Asset freeze

4.5

4.4.6

Understand the potentially undesirable consequences of the listing process • Human rights violations • Privacy violation • Lack of due process • Private lists

4.6

4.4.7

Understand the potential consequences of dealing with listed persons and entities

4.7

Element 5 5.1

Corruption

Chapter 5

Background On completion, the candidate should:

5.1.1

Understand the nature, significance and impact of corruption: • National level • Regional and international level • Private sector implications

1.1

5.1.2

Understand how conflicts of interest can manifest into corrupt practices

1.2

5.1.3

Know why the concept of dual criminality may be applied differently in cases of corruption

1.3

5.1.4

Understand the practical application and limitations of quantitative indicators in combating corruption

1.4

5.1.5

Understand the main components and differences between types of corrupt practice • Active and passive bribery • Embezzlement • Trading in influence • Abuse of office • Illicit enrichment • Obstruction of justice • Concealment

1.5

317

Syllabus Unit/ Element 5.2

Chapter/ Section Combating Corruption On completion, the candidate should:

5.2.1

Know the background to the United Nations Convention against Corruption (UNCAC) and related Organisation for Economic Co-operation and Development (OECD) conventions and their role in combating corruption

2.1

5.2.2

Understand which United Nations Convention against Corruption (UNCAC) provisions are mandatory and those that represent best practice

2.2

5.2.3

Understand the role of the Council of Europe’s Group of States against Corruption (GRECO)

2.3

5.2.4

Understand the role of development bodies in combating corruption • World Bank • Multi-lateral financial institutions (MFIs) • Multi-lateral development banks (MDBs)

2.4

5.2.5

Understand the good governance guidelines incorporated in the World Bank's Poverty Reduction Strategy Papers and comprehensive development framework

2.5

5.3 5.3.1

Understand the purpose of the United Nations Global Compact (UNGC)

3.1

5.3.2

Know the objectives of the UN Global Compact’s 10th principle

3.2

5.3.3

Understand the work the OECD’s Development Assistance Committee (Organisation for Economic Co-operation and Development’s (OECD) DAC) performs in relation to fighting corruption

3.3

5.3.4

Understand the work of the United Nations Development Programme (UNDP) in combating corruption

3.4

5.3.5

Understand the Principles for Countering Bribery developed by the World Economic Forum Partnering against Corruption Initiative (PACI)

3.5

5.3.6

Understand the application and limitation of anti-corruption toolkits

3.6

5.3.7

Understand the work of multilateral agencies in promoting the Extractive Industry Transparency Initiative (EITI) and collective action

3.7

Element 6 6.1 6.1.1 6.2 6.2.1

318

Role of Multi-Lateral and Bi-Lateral Institutions On completion, the candidate should:

Bribery

Chapter 6

Bribery and Corruption On completion, the candidate should: Know the difference between bribery and corruption

1

UK Bribery Act (2010) On completion, the candidate should: Know the factors that led to the UK Bribery Act (2010)

2.1

Syllabus Learning Map

Syllabus Unit/ Element

Chapter/ Section

6.2.2

Know the extra-territorial reach of the Act

2.2

6.2.3

Know the offences introduced by the UK Bribery Act (2010) • Bribing another person • Receiving bribes • Bribery of a foreign public official (FPO) • Failure of commercial organisations to prevent bribery

2.3

6.2.4

Know the definition of a foreign public official (FPO)

2.4

6.2.5

Understand strict liability and the meaning of ‘adequate procedures’

2.5

6.2.6

Understand the 6 principles for bribery prevention and their legal context

2.6

6.2.7

Know what is meant by self-reporting and related guidance from the Serious Fraud Office (SRO)

2.7

6.2.8

Understand the liabilities corporate entities face from associated persons

2.8

6.2.9

Know the maximum penalties applicable to individuals found guilty under the Act

2.9

6.2.10

Understand the circumstances under which directors and senior officers of a corporation may be found liable under the Act • Consent or connivance • Passive acquiescence • Failure to implement adequate procedures and potential civil liability

2.10

6.2.11

Understand the potential consequences relating to public procurement that could be incurred by failing to comply with the Act

2.11

6.3

Foreign Corrupt Practices Act (1977) On completion, the candidate should:

6.3.1

Understand the objectives and scope of the Foreign Corrupt Practices Act (FCPA)

3.1

6.3.2

Know the key differences between the UK Bribery Act (2010) and the Foreign Corrupt Practices Act (FCPA) 1977

3.2

Element 7 7.1

Combating Financial Crime Governmental and Quasi-Governmental Combating Financial Crime On completion, the candidate should:

Chapter 7 Approaches

to

7.1.1

Understand the role of government in the partnership between private and public sectors

1.1

7.1.2

Know how regulators implement international standards and facilitate cross-border co-operation

1.2

7.1.3

Know the jurisdictional authority of organisations involved in combating financial crime

1.3

319

Syllabus Unit/ Element 7.1.4

Understand the role of law and rule-making in combating financial crime

1.4

7.1.5

Understand the role of government in providing feedback and updates to regulated and reporting institutions

1.5

7.1.6

Understand the role and scope of control agencies • Intelligence gathering and analysis • Investigating financial crime • Asset recovery and repatriation

1.6

7.1.7

Understand the role, evolution and practical application of best practice in combating financial crime and establishing international standards

1.7

7.1.8

Understand the factors that necessitated the advent of Proceeds of Crime Act (POCA) 2002

1.8

7.1.9

Know various domestic legal alternatives to Proceeds of Crime Act (POCA) 2002

1.8.1

7.2

Asset recovery On completion, the candidate should:

7.2.1

Understand the importance of recovery for prevention, deterrence and justice

2.1

7.2.2

Understand the impact of non-recovery on victim states and private parties

2.2

7.2.3

Understand how the United Nations Office of Drugs and Crime (UNODC) World Bank Stolen Asset Recovery initiative (StAR) aims to assist developing countries

2.3

7.2.4

Know civil and criminal remedies to recovering assets

2.4

7.2.5

Understand the implications of a freezing order

2.5

Element 8 8.1

320

Chapter/ Section

The Role of the Private Sector

Chapter 8

Considerations for the Private Sector On completion, the candidate should:

8.1.1

Understand how financial crime can directly impact on firms: • Embezzlement • Fraudulent customer activity • Defrauding by organised criminals • Limiting access to data • Data compromise

1.1

8.1.2

Understand how firms can be exploited as vehicles for financial crime: • Criminals using the firm’s services to launder the proceeds of crime • Customer payments to terrorists • Theft of customer data to facilitate identity fraud

1.2

Syllabus Learning Map

Syllabus Unit/ Element

Chapter/ Section

8.1.3

Understand how a firm or its representatives may collude in the propagation of financial crime: • Misstatement of financial circumstances • Corporate malfeasance

1.3

8.1.4

Understand the relevant implications of business strategies • Corporate structure • Outsourcing and oversight • Use of middlemen

1.4

8.1.5

Understand the responsibilities of directors and senior management in relation to anti-money laundering (AML), combating financial crime (CFC) and anti-corruption (AC) initiatives

1.5

8.1.6

Understand the responsibilities of the private sector in dealing with relevant authorities • Protection of customer confidentiality • Responses to information requests • Responses to investigation orders • Civil recovery, forfeiture and confiscation • Global investigation, prosecution and confiscation • Presentation of evidence in court

1.6

8.1.7

Understand the risks associated with non-compliance for the private sector • Financial • Reputational, including risks arising from adverse publicity in corruption cases reported by news media and civil society advocacy organisations • Legal • Operational • Systemic

1.7

8.2

Practical Business Safeguards On completion, the candidate should:

8.2.1

Know the role industry groups and guidance bodies play in facilitating practical solutions for business

2.1

8.2.2

Understand how auditing contributes to corporate governance, accounting and reporting requirements • Audit committees • Internal audit • External auditors

2.2

8.2.3

Know the purpose and key elements of due diligence

2.3

8.2.4

Understand how data analysis techniques may be utilised by a firm to detect fraud

2.4

321

Syllabus Unit/ Element

8.2.5

Understand how to assess and manage the impact of risks on a firm’s business activities: • Products and services • Customers • Industry • Countries

2.5

8.2.6

Understand what measures can be adopted to minimise financial crime opportunities within a firm • Conflicts of interest policies • Information barriers/Chinese Walls • Limiting access to data • Effective sign-off protocols • Gifts and entertainment policies • Objective audit processes • Information Technology (IT) security • Whistleblowing • Employee vetting

2.6

8.2.7

Understand how internal policies and procedures on AML, CFC and AC are formulated and implemented • Introduction Handbooks • Regulations • Codes of conduct • Best practice and steering group guidance

2.7

8.3

322

Chapter/ Section

Specific Responsibilities of Regulated Financial Institutions On completion, the candidate should:

8.3.1

Know the Basel Committee on Banking Supervision’s (BCBS) definition of ‘compliance risk’

3.1

8.3.2

Understand how a compliance culture may be created and maintained • Appointment of Compliance/Money Laundering Reporting Officers (MLROs) • Information gathering and analysis • Application in routine operations • Raising awareness • Training • Updates

3.2

8.3.3

Know the benefits of utilising technology to support a compliance culture and the limitations of over-reliance on systems

3.3

8.3.4

Know how regulated financial institutions implement know your customer (KYC) and customer due diligence (CDD) procedures

3.4

8.3.5

Know how and why regulated financial institutions report suspicious transactions and trading activity

3.5

Syllabus Learning Map

Syllabus Unit/ Element

Chapter/ Section

8.3.6

Know the circumstances in which financial services firms are obliged to report currency transactions and those circumstances that are exempt

3.6

8.3.7

Understand the reasons why financial institutions may have record-keeping requirements and the circumstances in which they are required to comply

3.7

Examination Specification Each examination paper is constructed from a specification that determines the weightings that will be given to each element. The specification is given below. It is important to note that the numbers quoted may vary slightly from examination to examination as there is some flexibility to ensure that each examination has a consistent level of difficulty. However, the number of questions tested in each element should not change by more than plus or minus 2.

Element number

Element

Questions

1

The Background and Nature of Financial Crime

12

2

Predicate Offences

8

3

Money Laundering

16

4

Terrorist Financing

12

5

Corruption

14

6

Bribery

11

7

Combating Financial Crime

11

8

The Role of the Private Sector

16

Total

100

Assessment Structure A two-hour examination of 100 multiple choice questions. Candidates sitting the exam by Computer Based Testing will have, in addition, up to 10% of additional questions as trial questions that will not be separately identified and do not contribute to the result. Candidates will be given proportionately more time to complete the test.

323

324

Revision Express Interactive

You’ve bought the workbook... now test your knowledge before your exam. Revision Express Interactive is an engaging online study tool to be used in conjunction with CISI workbooks. It contains exercises and revision questions. Key Features of Revision Express Interactive: • Examination-focused – the content of Revision Express Interactive covers the key points of the syllabus • Questions throughout to reaffirm understanding of the subject • Special end-of-module practice exam to reflect as closely as possible the standard you will experience in your exam (please note, however, they are not the CISI exam questions themselves) • Interactive exercises throughout • Extensive glossary of terms • Useful associated website links • Allows you to study whenever you like IMPORTANT: The questions contained in Revision Express Interactive elearning products are designed as aids to revision, and should not be seen in any way as mock exams. Price per elearning module: £35 Price when purchased with the CISI workbook: £100 (normal price: £110) To purchase Revision Express Interactive: call our Customer Support Centre on:

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or visit CISI Online Bookshop at:

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For more information on our elearning products, contact our Customer Support Centre on +44 20 7645 0777, or visit our website at cisi.org/study

Professional Refresher

Self-testing elearning modules to refresh your knowledge, meet regulatory and firm requirements, and earn CPD hours. Professional Refresher is a training solution to help you remain up-to-date with industry developments, maintain regulatory compliance and demonstrate continuing learning. This popular online learning tool allows self-administered refresher testing on a variety of topics, including the latest regulatory changes. There are currently over 50 modules available which address UK and international issues. Modules are reviewed by practitioners frequently and new topics are added to the suite on a regular basis. Benefits to firms: • Learning and tests can form part of business T&C programme • Learning and tests kept up to date and accurate by the CISI • Relevant and useful – devised by industry practitioners • Access to individual results available as part of management overview facility, ‘Super User’ • Records of staff training can be produced for internal use and external audits • Cost-effective – no additional charge for CISI members • Available to non-members Benefits to individuals: • Comprehensive selection of topics across industry sectors • Modules are frequently reviewed and updated by industry experts • New topics introduced regularly • Free for members • Successfully passed modules are recorded in your CPD log as Active Learning • Counts as structured learning for RDR purposes • On completion of a module, a certificate can be printed out for your own records The full suite of Professional Refresher modules is free to CISI members or £150 for non-members. Modules are also available individually. To view a full list of Professional Refresher modules visit:

cisi.org/refresher

If you or your firm would like to find out more contact our Client Relationship Management team:

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For more information on our elearning products, contact our Customer Support Centre on +44 20 7645 0777, or visit our website at cisi.org/study

s to b e r ee m Fr me SI

CI

Professional Refresher Top 5 Integrity & Ethics • • • •

High Level View Ethical Behaviour An Ethical Approach Compliance vs Ethics

Behavioural Finance

Client Assets and Client Money

• • • •

• Protecting Client Assets and Client Money • Ring-Fencing Client Assets and Client Money • Due Diligence of Custodians • Reconciliations • Records and Accounts • CASS Oversight

• • • • •

Introduction to Money Laundering UK Legislation and Regulation Money Laundering Regulations 2007 Proceeds of Crime Act 2002 Terrorist Financing Suspicious Activity Reporting Money Laundering Reporting Officer Sanctions

Financial Crime • What is Financial Crime? • Insider Dealing and Market Abuse Introduction, Legislation, Offences and Rules • Money Laundering Legislation, Regulations, Financial Sanctions and Reporting Requirements • Money Laundering and the Role of the MLRO

Information Security and Data Protection • • • • •

Information Security: The Key Issues Latest Cybercrime Developments The Lessons From High-Profile Cases Key Identity Issues: Know Your Customer Implementing the Data Protection Act 1998 • The Next Decade: Predictions For The Future

UK Bribery Act • • • • • •

Wealth

Background to Behavioural Finance Biases and Heuristics The Regulator’s Perspective Implications of Behavioural Finance

Conduct Risk

Anti-Money Laundering • • • • • • • •

Compliance



Background to the Act The Offences What the Offences Cover When Has an Offence Been Committed The Defences Against Charges of Bribery The Penalties

What is Conduct Risk? Regulatory Powers Managing Conduct Risk Treating Customers Fairly Practical Application of Conduct Risk

Conflicts of Interest • • • • • • •

Introduction Examples of Conflicts of Interest Examples of Enforcement Action Policies and Procedures Tools to Manage Conflicts of Interest Conflict Management Process Good Practice

Riak (an overview) • • • • • • •

Definition of Risk Key Risk Categories Risk Management Process Risk Appetite Business Continuity Fraud and Theft Information Security

T&C Supervision Essentials • • • • •

Who Expects What From Supervisors? Techniques for Effective Routine Supervision Practical Skills of Guiding and Coaching Developing and Assessing New Advisers Techniques for Resolving Poor Performance

Investment Principles and Risk • • • • • • • • •

Diversification Factfind and Risk Profiling Investment Management Modern Portfolio Theory and Investing Styles Direct and Indirect Investments Socially Responsible Investment Collective Investments Investment Trusts Dealing in Debt Securities and Equities

Principles of RDR • • • • •

Professionalism – Qualifications Professionalism – SPS Description of Advice – Part 1 Description of Advice – Part 2 Adviser Charging

Suitability of Client Investments • • • • • •

Assessing Suitability Risk Profiling and Establishing Risk Obtaining Customer Information Suitable Questions and Answers Making Suitable Investment Selections Guidance, Reports and Record Keeping

Operations

International

Best Execution

Dodd-Frank Act

• • • • • •

What Is Best Execution? Achieving Best Execution Order Execution Policies Information to Clients & Client Consent Monitoring, the Rules, and Instructions Client Order Handling

Central Clearing • • • •

Background to Central Clearing The Risks CCPs Mitigate The Events of 2007/08 Target 2 Securities

Corporate Actions • • • •

Corporate Structure and Finance Life Cycle of an Event Mandatory Events Voluntary Events

• • • • • •

Background and Purpose Creation of New Regulatory Bodies Too Big to Fail and the Volcker Rule Regulation of Derivatives Securitisation Credit Rating Agencies

Foreign Account Tax Compliance Act (FATCA) • Reporting by US Taxpayers • Reporting by Foreign Financial Institutions • Implementation Timeline

Sovereign Wealth Funds • • • • •

Definition and History The Major SWFs Transparency Issues The Future Sources

cisi. or g /refres her

Feedback to the CISI Have you found this workbook to be a valuable aid to your studies? We would like your views, so please email us at [email protected] with any thoughts, ideas or comments.

Accredited Training Providers Support for examination students studying for the Chartered Institute for Securities & Investment (CISI) Qualifications is provided by several Accredited Training Providers (ATPs), including Fitch Learning and BPP. The CISI’s ATPs offer a range of face-to-face training courses, distance learning programmes, their own learning resources and study packs which have been accredited by the CISI. The CISI works in close collaboration with its accredited training providers to ensure they are kept informed of changes to CISI examinations so they can build them into their own courses and study packs.

CISI Workbook Specialists Wanted Workbook Authors Experienced freelance authors with finance experience, and who have published work in their area of specialism, are sought. Responsibilities include: • Updating workbooks in line with new syllabuses and any industry developments • Ensuring that the syllabus is fully covered Workbook Reviewers Individuals with a high-level knowledge of the subject area are sought. Responsibilities include: • Highlighting any inconsistencies against the syllabus • Assessing the author’s interpretation of the workbook Workbook Technical Reviewers Technical reviewers provide a detailed review of the workbook and bring the review comments to the panel. Responsibilities include: • Cross-checking the workbook against the syllabus • Ensuring sufficient coverage of each learning objective Workbook Proofreaders Proofreaders are needed to proof workbooks both grammatically and also in terms of the format and layout. Responsibilities include: • Checking for spelling and grammar mistakes • Checking for formatting inconsistencies

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