Money Laundering: Hume Papers on Public Policy 1.2 9781474470605

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MONEY LAUNDERING

THE DAVID HUME INSTITUTE

Hume Papers on Public Policy Volume 1 No 2 Summer 1993

MONEY LAUNDERING

EDINBURGH UNIVERSITY PRESS

© David Hume Institute 1993 Edinburgh University Press 22 George Square, Edinburgh Transferred to digital print 2008

Typeset in Times by ROM-Data Corporation Ltd, Falmouth, Cornwall Printed and bound in Great Britain by CPI Antony Rowe, Eastbourne, East Sussex

A CIP record for this book is available from the British Library ISBN 0 7486 0485 5

Contents Foreword Hector L MacQueen, Executive Director, The David Hume Institute Introduction Robert B Jack, McGrigor Donald, Solicitors l. Money Laundering: The International Aspect William C Gilmore, Head of Department of Public International Law, University of Edinburgh; formerly Assistant Director, Legal Division, Commonwealth Secretariat 2. International Efforts to Combat Money Laundering: the Role of the Financial Action Task Force Tom Sherman, President, Financial Action Task Force; Chairperson, National Crime Authority, Australia 3. Money Laundering: The European Community Directive Peter J Cullen, Jean Monnet Lecturer, The Europa Institute, University of Edinburgh 4. Money Laundering in Scotland: The Law Alastair N Brown, Crown Office, Edinburgh 5. Countering Money Laundering: The Response of the Financial Sector John Drage, Banking Division, Bank of England Bibliography

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12 34 50 60 73

Foreword The second issue of The Hume Papers on Public Policy publishes an up-dated version of the proceedings of a conference on Money Laundering mounted by The David Hume Institute on 27 November 1992. In addition it contains the text of a lecture on the same subject given in Edinburgh on 14 May 1993 by Tom Sherman, President of the Financial Action Task Force. Mr Sherman's lecture was delivered at the invitation of the Department of Public International Law in the University of Edinburgh, and The David Hume Institute was delighted to be able to provide some modest financial support on that occasion. Both conference and lecture were well received by large and appreciative audiences, and it is a particular pleasure to be able now to bring both events forward in a more permanent form. Money laundering is a phenomenon which raises many difficult questions of policy. On the one hand, there is the undoubted public interest in ensuring that wrongdoers are not allowed to enjoy the proceeds of their criminal activities and in so doing to subvert the integrity of the world's financial markets. On the other, there is the burden which current legislative activity places increasingly upon the shoulders of those whose business it is to handle money in all its forms, which carries with it the risk that they themselves may be liable to criminal sanctions. The recent passage into law of the Criminal Justice Act 1993, following a European Community Directive in 1991, extended the scope of money laundering offences still further. In this collection, a distinguished team of experts outline the background to this legislation and go into its likely effects. We may read the views of one prosecutor on the meaning and implementation of the new law, while a representative of the banking sector explains the response of the financial sector in practical terms. All the authors look ahead to the future, recognising that the fight against money laundering is unlikely to be completed quickly. Taken as a whole, therefore, this collection is not merely a guide to the new state of the law but is also a perspective on the extent and limits of regulation in this field in the future. Not all the contributions to the conference appear in this volume. We heard from Detective Sergeant Richard Wiszniewski of Lothian and Borders Police on the police perspective, and from Mr Graham Pepper of the Halifax Building Society, on the response of the financial sector. Both these gentlemen made invaluable contributions to the success of the day. I would also like to express thanks to In Conference Limited, who handled the conference arrangements with admirable efficiency, and to Dr Bill Gilmore, whose idea the event was

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and whose help in setting up the conference and Mr Sherman's lecture was indispensable. It remains only to say, as usual, that the views expressed in this collection are those of the authors alone, and that publication does not commit The David Hume Institute to any of the various positions which they espouse. Hector L MacQueen Executive Director of The David Hume Institute Editor, The Hume Papers on Public Policy

Postscript Since Alastair Brown's paper on Scots law (below, 50-59) was finalised, the Money Laundering Regulations 1993 (SI 1993 No 1993) have been made, and will come into effect on 1 Aprill994. They are as anticipated in the text (53-4).

Introduction RBJack Money laundering is a subject which continues to engage the attention of those concerned to ensure the integrity of our financial systems and the avoidance of their misuse for criminal purposes. Its growth in recent years has presented the world's banking systems with a very real threat to that integrity. In an authoritative article in the Bank of England's Quarterly Bulletin of November 1992, John Drage describes the problem thus: Money laundering is the process by which criminals attempt to conceal the true origin and ownership of the proceeds of their criminal activitjes. If done successfully, it also allows them to maintain control over these proceeds and ultimately to provide a legitimate cover for their source of income. The full scale of money laundering is not known, but it is now believed to be large. One estimate (made by the Financial Action Task Force on Money Laundering) suggests that as much as US$85 billion per year could be available for laundering from the proceeds of the sales of drugs alone in the United States and Europe.

Now additional topicality has been given to this subject by the revelations of what went on within the Bank of Credit and Commerce International [BCCI] as disclosed in the Bingham Report (1993). In describing the system of banking supervision in the United Kingdom in the period from 1972 to 1992, Lord Justice Bingham explained the development of banking supervisors' perceptions of their role in detecting money laundering (Bingham Report 1993: 25, para 1.72). It was, he said, during the 1980s and against a background of growing concern about drug trafficking that it became accepted that bank supervisors should contribute to the prevention of money laundering, although the supervisors' primary concern remained the maintenance of the financial stability and soundness of banks. The Criminal Justice Bill, currently before Parliament, contains provisions directed to strengthening the law in regard to the laundering of the proceeds of drug trafficking by extending the range of activities to which money laundering offences attach. We shall hear later in the conference about the state of play in regard to this latest legislative attempt to counter money laundering. I first became aware of the impact of money laundering on the banking system when I was Chairman of the Banking Law Services Review Committee. When we came in our report (Jack Report 1989) to look at the

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banker/customer relationship, we identified a banker's duty of confidentiality as being central to that relationship. The lawyers among you will know that in Tournier v National Provincial and Union Bank of England [1924] I KB 461 (CA) the qualifications of the contractual duty of secrecy implied in the relationship between a banker and his customer were classified under four headings. In relation to money laundering we are concerned with only the first two of these qualifications, namely (i) where the disclosure is under compulsion of law; and (ii) where there is a duty to the public to disclose. Statutory provisions relating to the prevention of money laundering, particularly those directed at the proceeds of drug trafficking and terrorism, were prominent among what we on the Committee described as "the torrent of legislation which had become a spate in the past few years", requiring or permitting bankers in a wide range of specified situations to disclose confidential information in the public interest. The requirement or permission to disclose is typically stated in the statutory provisions as overriding "any restriction on the disclosure of information imposed by contract or by any enactment, regulation, rule of conduct, or other provision". We saw these provisions as amounting cumulatively "to a formidable burden on bankers, not made easier to bear when there is some uncertainty as to the precise nature of the obligation imposed by the law". This uncertainty, we were told, applied particularly in relation to the Drug Trafficking Offences Act 1986 and the Prevention of Terrorism Act 1989. We saw too that these provisions constituted a serious inroad into the whole principle of customer confidentiality as conceived at the time of Tournier. In that situation we recommended that there should be a critical assessment of the need for any further erosion of the banker's duty of confidentiality. The generalised qualification of the duty of confidentiality by reference to the public interest, with its uncertainty of application, we considered was no longer needed in the light of the considerable number of specific qualifications imposed by the law. We therefore concluded that banks should no longer be able to breach the confidentiality obligation on the generalised ground of public interest (see Jack Report 1989: chapter 5). The Government were not persuaded by our arguments. Their response was in the following terms (Department of Trade and Industry 1990: para 2.13): The Government does not accept the Review Committee's view that there has been a "massive erosion" of the banker's duty of confidentiality over recent years through the various statutory exemptions from the general duty of confidentiality such as those in the Drug Trafficking Offences Act 1986 and the Prevention of Terrorism Act 1989. These require bankers to disclose on suspicion the location of funds which might be used for, or derived from, possible offences under the Acts. These and other similar statutory exemptions from the general duty are only enacted after the most careful consideration of all the implications. These are measures which would not apply to the vast majority of customers. In framing all such legislation, the effect on the normal confidential relationship between banker and customer is taken fully into account. These are, however, areas in which public policy overrides the need to preserve that confidentiality.

INTRODUCTION

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The Government also rejected the conclusion that banks should no longer be released from their confidentiality obligations on the generalised ground of public interest. In this case their response was as follows (Department of Trade and Industry 1990: para 2.14): The Government also believes that there is still a need for the second of the Tournier exceptions where there is a duty to the public to disclose. This exception gives a banker a safeguard if he believes that he must disclose information in the public interest. The statutory route requires information from the banker. This exception permits him to disclose. The increasing sophistication of financial crime means that there may well be cases in which a banker wishes to disclose information in the public interest but he may be uncertain whether there is specific statutory gateway for him to do so.

The Government response went on (Department of Trade and Industry 1990: para 2.14): The public interest gateway also allows a banker to disclose information to a supervisory authority, for example, the Bank of England or the Building Societies Commission, where he considers that this would enable or assist that authority to discharge its supervisory functions even though the authority had not required the information to be provided under its powers.

It is interesting to observe in parentheses that in the wake of the BCCI affair, it is proposed to alter the Banking Act 1987 so as to require(as opposed merely to permit) auditors to report irregularities to the regulator when these irregularities come to their attention. You will remember that the auditors of BCCI went to court to establish whether the public interest exception to the duty of confidentiality owed by accountants enabled them to disclose confidential information to the Bingham inquiry. The court found that they could, on the grounds that any duty of confidentiality, whether contractual or equitable, was subject to a limiting principle, namely the right, to disclose information where there is a higher public interest in disclosure than in maintaining confidentiality (Price Waterhouse v BCCI Holdings (Luxembourg) SA [1992] BCLC 583). Although the Price Waterhouse case concerned the duty of confidentiality of an accountant to his client and not the duty of a bank to its customer, the case may nevertheless have breathed fresh life into the Tournier exception under which a bank may disclose information where there is a duty to the public to do so. I think that it cannot but be accepted that bank secrecy, maintained in the absolute terms which in the public mind is associated with Swiss banks, constitutes a major bar to the effective detection and prosecution of offences such as money laundering. There are, however, dangers in going too far in pursuit of the totally laudable objective of countering criminal abuse of the financial system. The consequence of imposing too onerous duties on banks in relation to money laundering could easily give the impression to their customers that banks were merely agents of the prosecuting authorities owing duties to others which overrode the duties owed under the customer/banker relationship. This impression will be heightened if the bank is prevented from telling its customer that, to use the common expression, the bank is "helping

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the police with their enquiries" about him. There are dangers too for the banks if the requirement to act upon suspicion is taken too far. Banks for their own

protection may make disclosures where suspicions have little or no foundation. It is not always possible for a bank "to know its customer" in such a way as to guarantee that he is not involved with or connected in any way with criminal activity. The system could, of course, be easily overwhelmed if banks carried their reporting obligations to an extreme length. These considerations, I think, should always be taken into account when we are considering any measures which are proposed to combat money laundering. I hope that, in the attempt more effectively to combat drug trafficking and in consequence money laundering, these are considerations which will not be overlooked.

Money Laundering: The International Aspect William C. Gilmore Introduction The term "money laundering" is one of fairly recent origin. It appears to have first been coined by American law enforcement officials and to have entered popular usage during the Watergate inquiry in the United States in the mid-1970s. (Vallance 1992: 1) The expression seems to have been used in a judicial or legal context for the first time, again in the United States, only in 1982 in the case of US v $4,255,625.39 (1982) 551 F Supp 314. Since then it has become widely accepted as a term of art at both the international and domestic level, being extensively utilised, for example, in the 1990 European Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime and finally commending itself to the Parliamentary Draftsman in the UK in the Criminal Justice Act 1993. Although the terminology may be relatively recent, the concept is one of very long standing in relation to financially motivated criminal conduct. As McClean (1992: 184) has recently stated: From the point of view of the criminal, it is no use making a large profit out of criminal activity if that profit cannot be put to use ... Putting the proceeds to use is not as simple as it rna y sound. Although a proportion of the proceeds of crime will be kept as capital for further criminal ventures, the sophisticated offender will wish to use the rest for other purposes ... If this is to be done without running an unacceptable risk of detection, the money which represents the proceeds of the original crime must be "laundered"; put into a state in which it appears to have an entirely respectable provenance.

The age-old desire of the criminal fraternity to create the perception of legitimacy of the source and ownership of wealth and property has, in tum, become a central concern as governments have come to focus increasingly on law enforcement strategies in which the confiscation of the proceeds of crime is utilised both as a deterrent and as a form of punishment.

The Background Sustained international interest m money laundering arose m the 1980s

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essentially within a drug trafficking context. Not only was there growing concern at the escalating nature of the drug abuse problem, there was also an increasing awareness of the vast profits generated by this form of criminal activity - financial gains which, in the words of a European Parliament Report (l992a: 4), enable "the criminal organizations involved to contaminate and corrupt the structures of the State at all levels". (See further Ehrenfeld 1992.) A further impetus for action has come from the increasing recognition of the negative impact which vast flows of "dirty money" can have on the financial sector. As the Basle Committee on Banking Regulations and Supervisory Practices stated in December 1988 (reproduced in Gilmore 1992: 273 at 274): Public confidence in banks, and hence their stability, can be undermined by adverse publicity as a result of inadvertent association by banks with criminals. In addition, banks may lay themselves open to direct losses from fraud, either through negligence in screening undesirable customers or where the integrity of their own officers has been undermined through association with criminals.

Out of the above a twin track solution to the problem has gradually emerged. On the one hand it calls for the strengthening of the criminal law since it is widely acknowledged that the principal burden must be carried by invoking penal means. On the other hand, it is now generally accepted that the financial system can and must play an effective preventative role. In relation to each, however, it is clear that national initiatives on their own would be insufficient. As was pointed out in a note prepared for the UN SecretaryGeneral in March 1992 (United Nations 1992: 7): The strategy of criminal organizations is to manipulate their illicit proceeds, usually, but not always, through the legitimate financial sector, in such a manner as to make those proceeds appear to have come from a legitimate source. Thus money laundering is a vital component of all financially motivated crime. More importantly for the international community, since obfuscating any evidentiary paper or money trail is a precondition to successful money laundering, such activity will invariably involve transborder operations, often including many border crossings in the course of a laundering "transaction".

For example, a recent official analysis of Canadian money laundering police files revealed that over 80 per cent had an international dimension (Beare et al 1990: 304). The essentially transnational nature of modern money laundering was well illustrated on 28 September 1992 with the public announcement of the culmination of "Operation Green Ice". This was an undercover "sting" operation which sought to disrupt a major cocaine distribution and money laundering system involving organised crime groups in both Colombia and Sicily. The result was the arrest of more than 200 people in six countries and the seizure of nearly US $42 million in alleged illegal drug profits world wide. In the course of this enforcement effort the UK authorities arrested two foreign nationals in London, and seized 43 kilograms of cocaine and nearly £2.5 million (International Etiforcement Law Reporter, October 1992, 399-402).

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The Strategy in Overview 1 (a)

Strengthening crimina/law and international criminal cooperation

Given the fact that the transnational movement of funds is a prominent characteristic of money laundering operations, it is critical that efforts to combat it effectively provide for a considerable degree of international cooperation. As the 1992 UN Report stated: "Successful control of money laundering requires exchange of data, investigations carried out by administrative authorities and law enforcement agencies, and prosecutions and sanctions. Without appropriate international cooperation, all these efforts could yield few results while incurring large costs" (United Nations 1992: 4). The first major breakthrough in the effort to address these and related concerns came with the conclusion in Vienna in December 1988 of the UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (Gilmore 1991; Sproule and St. Denis 1989). This important instrument has, in tum, had a major influence on subsequent initiatives undertaken in other fora. First and foremost it obliges State parties to criminalise drug related money laundering (Art 3( 1)(b); see also Art 3(1 )(c)(i)). In requiring that this basic step is taken, the drafters have ensured that cooperation in respect of confiscation, mutual legal assistance and extradition will not be frustrated by considerations of double criminality. A second major feature of the approach adopted in Vienna relates to the subject of the confiscation of the proceeds derived from, and the instrumentalities used in, drug trafficking. This is treated in detail in Article 5 which addresses both the measures to be taken at the national level and the necessary mechanisms to give effect to international cooperation in this vital area. It is of importance because confiscation measures aim "to incapacitate, by depriving a person of the physical or financial ability, power, or opportunity to continue to engage in proscribed conduct, to prevent offenders from unjustly enriching themselves, by eliminating the advantages and benefits which the offender has gained through his or her illegality, to deter the offender and others from crime by undermining the ultimate profitability of the venture and to protect the community by curbing the circulation of prohibited items" (Freiberg 1992: 45-6). It should be noted that paragraph 3 of this Article requires that each State party empowers its courts or other relevant authorities to order that bank, financial or commercial records are made available. Most importantly it is specifically provided that: "A Party shall not decline to act under the provisions of this paragraph on the ground of bank secrecy". Finally, it should be mentioned that the Convention requires parties to afford one another "the widest measure of mutual legal assistance in investigations, prosecutions and judicial proceedings" in relation to serious drug trafficking offences (Art 7). In this area also bank secrecy considerations no longer afford a basis for refusal to cooperate. There can be no doubt that, from an enforcement perspective, the conclusion of the 1988 UN Convention was a major achievement. As Stewart (1990:

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388) has noted: "The Convention is one ofthe most detailed and far-reaching instruments ever adopted in the field of international criminal law and, if widely adopted and effectively implemented, will be a major force in harmonizing national laws and enforcement actions around the world". Reflecting this fact, the very first of the forty recommendations contained in the February 1990 Report of the Financial Action Task Force on Money Laundering was that "each country should, without further delay, take steps to fully implement the Vienna Convention, and proceed to ratify it". It is heartening to note that this treaty attracted swiftly the necessary 20 ratifications and it entered into force towards the end of 1990. In excess of 70 countries are now parties and the United Kingdom took this step on 28 June 1991 with effect from 25 September of that year (Home Office 1992: para 20). Significant though the achievements of the 1988 UN Convention were, it was not the intention or the expectation that efforts to combat the financial aspects of drug trafficking, let alone those related to other forms of criminality, would rest exclusively on that instrument. One development of particular significance took place in September 1990 when the Committee of Ministers of the Council of Europe adopted a new Convention on laundering, search, seizure and confiscation of the proceeds from crime. It is of importance to note that in undertaking the study which was to pave the way for this Convention the Committee of Experts paid attention not only to the various existing Council of Europe Conventions dealing with penal matters but also to the 1988 UN Convention. As its members have pointed out (reproduced in Gilmore 1992: 197; see also Nilsson 1991): The relevant provisions of the United Nations Convention were constantly taken into consideration: on the one hand, the experts tried as far as possible to use the terminology and the systematic approach of that convention unless changes were felt necessary for improving different solutions; on the other hand, the experts also explored the possibilities of introducing in the Council of Europe instrument stricter obligations than those of the United Nations Convention on the understanding that the new Convention- in spite of the fact that it is open to other States than the member States of the Council of Europe - will operate in the context of a smaller community oflike-minded states.

Perhaps the clearest indication of the willingness of the Council of Europe to go beyond that which was agreed in the UN context is to be found in its much broader scope. As has been pointed out elsewhere (Gilmore 1992: 193): One of the purposes of the Convention is to facilitate international co-operation as regards investigative assistance, search, seizure and confiscation of the proceeds from all types of criminality, especially serious crimes, and in particular drug offences, arms dealing, terrorist offences, trafficking in children and young women ... and other offences which generate large profits.

One clear illustration of the willingness of the Council of Europe to go beyond the 1988 UN precedent is provided by the treatment, in Article 6, of money laundering. The basic approach adopted has been summarised by the

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House of Lords Select Committee on the European Communities as follows (House of Lords, 1990: 7): Article 6 of the Convention requires State Parties to establish an offence of intentional money laundering. The property involved in any conversion or transfer could be proceeds not only of drug trafficking or terrorism but of any criminal offence (described as the "predicate offence") and the State Party prosecuting need not have criminal jurisdiction over the predicate offence. Although this constitutes a very wide definition of money laundering, it is open to States on signature or ratification to limit the definition for themselves to more limited categories of predicate offences. The decision to expand the definition of money laundering beyond its traditional association with drug trafficking was not entirely unexpected. For example, it finds support in the existing legislative practice of certain states including Switzerland. It is, in addition, a development in money laundering strategy which has the positive backing of the influential Financial Action Task Force (FATF) (see further Sherman 1993, below). In its 1990 Report the FATF recommended that countries should consider extending the scope of the offence of money laundering to reach any other crimes for which there is a link to narcotics, or to all serious offences. (The Report of the FATF, issued on 25 June 1992, contains an interpretive note on this matter.) It is also of relevance to recall that the provisions of the 1986 Scheme Relating to Mutual Assistance in Criminal Matters Within the Commonwealth, as amended by Law Ministers in 1990, do not restrict cooperation in the tracing, seizing and confiscation of the proceeds or instrumentalities of crime to drug offences (Commonwealth Schemes 1991). This trend away from drug-related definitions of money laundering, which is reflected in the terms of both the Criminal Justice Act 1993 and the recent German legislation, 2 mirrors the awareness of a growing number of commentators and practitioners of the practical and policy disadvantages of the narrow approach. As the UN Secretariat has recently stated (United Nations 1992: 22-3; see also Levi 1991): The international community, through the adoption of the 1988 Convention, has expressed its universal abhorrence of drug-related money laundering. However .... there would seem to be little policy justification for the proscription of money laundering arising from some profit-generating criminal activities and not others. Double standards, particularly in criminal law, are not conducive to the maintenance of the rule of law or to international cooperation, and there may be difficulties in proving that particular proceeds are attributable to particular predicate offences. In any event, drug trafficking may not remain - or for that matter still be- the most profitable form of transborder criminal activity.

(b) Prevention It is generally accepted that in the efforts to combat the financial aspects of

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drug trafficking and other forms of serious criminal activity particular reliance will have to be placed on the use of penal measures. It is, nonetheless, recognised that preventative strategies can play a significant and positive role. Indeed, it was this conception which lay at the heart of the Recommendation by the Committee of Ministers of the Council of Europe of 27 June 1980 on measures against the transfer and the safekeeping of funds of criminal origin. This initiative, prompted in the main by concern over the growing number of acts of criminal violence such as kidnapping, failed at the time to find a receptive audience and the "recommendations were not generally implemented" (House of Lords 1990: 7). More influential at the practical level has been the Statement of Principles for the guidance of bank supervisors issued on 12 December 1988 by the Basle Committee on Banking Regulations and Supervisory Practices. Its basic purpose is to encourage the banking sector to adopt a common position in order to ensure that banks are not used to hide or launder funds acquired through criminal activities and, in particular, through drug trafficking. As the preamble to the text makes clear, the document constitutes "a general statement of ethical principles which encourages banks' management to put in place effective procedures to ensure that all persons conducting business with their institutions are properly identified; that transactions that do not appear legitimate are discouraged; and that co-operation with law enforcement agencies is achieved". In an effort to maximise the impact of these principles the Committee took the step of commending the statement "to supervisory authorities in other countries" (Drage 1993, below). It has since been endorsed by, among others, the Offshore Group of Banking Supervisors which consists of 19 members including major financial centres such as Hong Kong and Singapore as well as the principal offshore banking and financial services "havens" (Bailhache 1991: 9). The philosophy of prevention is also central to the recently finalised plans of the European Communities in the area of money laundering. This takes the form of a Council Directive on Prevention of Use of the Financial System for the Purpose of Money Laundering of June 1991 which obliges Member States to bring it fully into force by I January 1993. It is the subject of a separate paper elsewhere in this collection (Cullen 1993, below). It would, however, be appropriate to note that in the elaboration of the EC Directive care was taken to ensure that it in no way undermined the achievements recorded in the Council of Europe or other fora. Furthermore, like the 1990 Convention, the EC initiative recognises the fact that "since money laundering occurs not only in relation to the proceeds of drug-related offences but also in relation to the proceeds of other criminal activities (such as organised crime and terrorism), the Member States should, within the meaning of their legislation, extend the effects of the Directive to include the proceeds of such activities, to the extent that they are likely to result in laundering operations justifying sanctions on that basis" (reproduced in Gilmore 1992: 252). Thus, whilst the definition oflaundering contained in Article I is derived from that used in the 1988 UN Convention, it relates to "criminal activity" rather than merely serious drug trafficking offences. The term "criminal

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activity" is in turn defined to mean "a crime specified in Article 3(1)(a) of the Vienna Convention and any other criminal activity designated as such for the purposes of this Directive by each Member State". (c)

The Financial Action Task Force

On a number of occasions mention has been made of the work of the Financial Action Task Force on Money Laundering (FATF). Unlike the other initiatives mentioned thus far, the work of this important grouping, created by the G-7 in 1989 and now consisting of 28 members, is on-going and its future impact on government action is likely to be profound. Although a detailed examination of the work of the FATF lies beyond the scope of this presentation (see further Sherman 1993, below), I should note that one of its major contributions has been in the formulation, in its 1990 Report, of some 40 recommendations or "action steps" relating to three central areas of concern, namely (i) improvements to national legal systems; (ii) the enhancement of the role of the financial system; and (iii) the strengthening of international cooperation. In the words of a recent UN Report (United Nations 1992: 14): "The recommendations outline a comprehensive strategy for dealing with money laundering and with proceeds ... and appear to have the capacity to be a blueprint for a programme of action for the international community as a whole ... ". In the present context it should be stressed that recommendations 9 to 29 which deal with the role of the financial system are regarded as being of central importance. As the Head of the Financial Affairs Division of the OECD has remarked (Pecchioli 1992: 3): The common thread underlying these recommendations is the view that financial institutions are the key element in the detection of illicit transactions given their unique function in a country's payments system and in the collection and transfer of financial assets. This is reflected in the heavy emphasis put on the identification of customers and beneficial owners, the availability of adequate record-keeping systems, the necessary diligence of financial institutions in respect of unusual transactions, and the development of in-house anti-money laundering programmes.

All EC Member States are active participants in the F ATF process and the June 1991 Directive has the effect of implementing no less than 15 of the 40 recommendations in question.

Recent Developments and Future Prospects It will be apparent that substantial progress has been achieved in a relatively short period of time to facilitate coordinated international action against those who seek to launder the profits derived from transnational criminal activity.

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Particularly in the area of international drug trafficking, agreement has been reached on the imposition of obligations and the creation of formal mechanisms which together permit enforcement and prosecution officials to target the financial power of organised criminality more effectively than ever before. It is no exaggeration to say that in the area of drug-related money laundering the landscape of international cooperation has been radically and positively transformed. Furthermore, new initiatives designed to increase the efficiency of international action against money laundering continue to be mounted. Of particular interest in this regard are the "Model Regulations Concerning Laundering Offenses Connected to Illicit Drug Trafficking and Related Offenses" which were approved by the General Assembly of the Organization of American States (OAS) meeting in Nassau, Bahamas in May 1992. These Model Regulations include provisions designed to secure improvements in national criminal law, to strengthen international cooperation and to enhance the role of the financial system in the effort to combat laundering. As has been pointed out elsewhere, they "seek to reconcile, whenever pertinent, the legal systems prevailing in the Inter-American region. Their framework is the Vienna Convention, incorporating, whenever possible, the recommendations tendered by the G-7 Financial Action Task Force" (Jimenez 1992: 168). Although a detailed exposition of the nature and scope of these Model Regulations lies beyond the reach of this general overview, it would be appropriate to make mention of two matters of particular interest. First, this instrument utilises a fairly wide ranging approach to the definition oflaundering which, among other things, embraces those who should have known or who remained intentionally ignorant of the fact that they were dealing with tainted property (Article 2). On the other hand, and unlike the approach adopted in the Council of Europe Convention and the EC Directive, it is limited in scope to drug related offences. As Jimenez (1992: 168) has stated: "Although the [expert] Group considered broadening the scope of the offense to cover other criminal proceeds, it felt constrained by the Program of Action of Ixtapa which restricted its mandate to the drafting of model money laundering legislation conforming to the Vienna Convention". Second, the Model Regulations reach out to cover a broad range of financial institutions and activities and do not concern themselves only with commercial banks (Article 9). These financial institutions are subject to a wide variety of detailed obligations in respect of, among other matters, the identification of clients and maintenance of records (Article 10), the recording and reporting of cash transactions (Article 12), the reporting of suspicious transactions (Article 13) and the establishment of internal compliance programmes (Article 15). It should also be noted that in May 1992 the General Assembly of the Organization of American States formally approved the text of the InterAmerican Convention on Mutual Assistance in Criminal Matters. In elaborating this complex instrument, consisting of some 40 Articles, attention was paid to a number of past precedents including the 1959 European Con-

MONEY LAUNDERING: THE INTERNATIONAL ASPECT 9

vention on Mutual Assistance in Criminal Matters and the 1988 UN Vienna Convention. The basic intent of this initiative was "to produce a harmonization between the civil law and common law systems for greater ease and expedition in cooperation between states in order to put an end to impunity and improve the investigation of crimes" (Organization of American States 1992: 24). Progress in the fight against money laundering cannot, however, be measured merely by reference to the proliferation of new initiatives. Indeed, unless great care continues to be taken to ensure a substantial measure of harmonisation of approach it is possible that the underlying purpose of promoting enhanced and effective cooperation could be inadvertently frustrated. 3 There is no doubt that sophisticated money laundering operations have the capacity both to identify and to exploit discrepancies in such measures. The real challenge for the international community is to continue to encourage countries to move as swiftly as circumstances permit to consolidate the gains which have been made by ratifying the appropriate international instruments, enacting often complex implementing legislation and adapting administrative and regulatory systems in order to reflect best international practice. In this respect it is suggested that the overall signs are encouraging. Thus, in spite of the demanding nature and range of obligations imposed on State parties by the 1988 Vienna Convention a significant number of countries from a wide variety of geographic areas, and representing the ideological diversity and varied socio-economic character of the membership of the world community, have already taken this step. Similarly, the most recent FATF Report, issued in the course of 1992, reported that good progress was being made by its membership on the implementation of its 40 recommendations. Nonetheless, even within this group of economically advanced and well motivated states and territories a number of gaps remain (FATF 1992:7, para 17). In addition, the Task Force has been actively seeking "to disseminate knowledge about its work in priority geographical areas (including the Caribbean, Central and Eastern Europe and the Pacific) outside its present membership" (FATF 1992: 3-4, para 6). It is not difficult to illustrate and justify the view that the global trend is a positive one. Let us take, for example, the impact of the EC Directive which will extend, directly and indirectly, well beyond the internal borders of the Twelve. This impact has been and is being achieved in a number of different ways. First, the Directive itself has been drafted in such a way as to "ensure that all financial and credit institutions which operate within the Community are subject to its provisions, and not solely those institutions which have their head office within its borders" (McClean 1992: 190). 4 Second, and more important, the Commission has taken steps to ensure that the majority of EFTA countries implement the terms of the Directive in their national law following ratification of the Agreement for a European Economic Space (Rosello Lopez 1992: 11-12).5 Finally, the Commission has insisted on progress in the area of money laundering in its various negotiations with the states of Central and Eastern Europe. As has been pointed out elsewhere, "The three countries which have signed Association Agreements with the

10 THE HUME PAPERS ON PUBLIC POLICY

Community- Hungary, Poland and the Czech and Slovak Federal Republichave agreed to include specific clauses under which the parties will engage to make every effort and cooperate in order to prevent money laundering and to establish suitable standards equivalent to those contained in the Money Laundering Directive and in the Task Force recommendations. Similar clauses are being considered in the Agreements being negotiated with Bulgaria and Romania" (Rosello Lopez 1992: 13). A similar approach will be taken on this subject in future discussions concerning cooperation with the States which were formerly constituent parts of the Soviet Union. This process, needless to say, holds out the prospect of a highly harmonised series of standards in the money laundering area eventually being applied from Iceland to the Urals and beyond. It should also be noted that progress in this vital area of concern continues to be recorded in many of the countries and regions of the developing world including those areas which are particularly associated with the development of "offshore" financial services. 6 This has been the case, for instance, in the Caribbean region which has for some time been a source of concern to law enforcement officials and other experts involved in anti-money laundering investigations and related initiatives. In this regard, it is of interest to note that a major anti-money laundering Workshop was hosted by the Government of Jamaica in May 1992. This was attended by more than 70 experts from 25 nations of the Caribbean, Caribbean Basin Rim countries and members of the F ATF. This gathering, which had at its disposal the results of an ambitious data collection exercise, was in an excellent position to examine the nature and extent of the problem, take stock of developments in the region in the period since the June 1990 Aruba Caribbean Drugs Money Laundering Conference, and to reflect on the best way forward. The data collection exercise revealed that real progress had been achieved in establishing the appropriate legislative underpinning which constitutes a necessary precondition for any successful money laundering strategy. For example, some 50 per cent of those responding stated that drug money laundering was already a criminal offence in their jurisdictions and yet others indicated a firm intention to take this step in the near future. Similarly, a clear majority of respondents had in place asset confiscation laws for laundering and were capable of responding positively to extradition requests in respect of alleged money laundering offences. Nonetheless, there was also a clear recognition that much remained to be done. In the words of the Workshop Press Release of 29 May 1992: "Most jurisdictions are still developing the policies and legislation needed to deal with the financial, regulatory and administrative aspects of the drugs money-laundering threat". In the course of the Workshop the Government of Jamaica endorsed the FATF recommendations "as a guide to future policy in this area" and urged "all governments in the region to sign and ratify the UN Convention of 1988 and to adopt the FATF Recommendations". To further this process Jamaica convened a regional ministerial meeting in November 1992 at which the participating countries formally undertook, among other things, to ratify the 1988 UN Convention and to implement the 40 FATF recommendations.

MONEY LAUNDERING: THE INTERNATIONAL ASPECT

II

In recent years the island States of the South Pacific region have come to focus increasingly on the potential threat posed to their sovereignty, security and economic integrity from the growth of transnational criminal activity. Following a period of consultation, discussion and study of the position within the region (South Pacific Forum 1991), South Pacific Forum leaders issued an important declaration on law enforcement cooperation in July of 1992. In this declaration they accepted that "there is a risk the South Pacific region may be targeted for such activities". Accordingly they recommended that members consider the recommendations of the FATF and move towards the implementation of those which were deemed to be applicable to their individual circumstances. Significantly, for present purposes, the Forum leaders also specifically "accepted the need to strengthen national and international legal provisions to enable the proceeds and instrumentalities of crime to be traced, frozen and seized, and acknowledged the need to regulate banking and other financial services to reduce the possible manipulation of these services to "launder" the proceeds of crime. The Forum recognised that bank secrecy laws can be used as a shield for the laundering of criminal profits and determined that it should not be permitted to obstruct the operation of mutual assistance arrangements". Elsewhere in this document progress is urged in the modernisation of extradition legislation, and in making appropriate statutory provision for mutual assistance in criminal matters. Furthermore, members have agreed to afford priority to the ratification and implementation of the 1988 UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances.

Conclusion As was pointed out at an earlier stage, money laundering is truly a global problem and all members of the international community have a role to play in seeking to combat it effectively. A broad consensus, reflected in various international conventions and in the work of the FATF, has started to emerge and progress achieved to date has been impressive. With appropriate encouragement and the provision, where necessary, of technical and other forms of assistance, it should be possible to maintain the current momentum. The ultimate prize, that of being in a position, for the first time, to take coordinated and effective world-wide action to undermine the financial power of drug trafficking networks and other criminal organisations, is now in sight if not, as yet, fully within our reach.

International Efforts to Combat Money Laundering: The Role of the Financial Action Task Force 1 Tom Sherman Introduction I welcome this opportunity to come to the University of Edinburgh to give this lecture on international money laundering and the role of the Financial Action Task Force. I would like to thank Dr Gilmore for the invitation to give this lecture. Dr Gilmore and I have worked on a number ofjoint ventures in recent years both in the context of the Financial Action Task Force and the Commonwealth Secretariat. Dr Gilmore is a world authority on international criminal law and is an effective academic in that he combines his academic skills with the ability to contribute to the development and implementation of policy particularly through international organisations. I am also pleased to acknowledge the important contribution of The David Hume Institute in making this lecture possible. The Institute was launched in 1985 to promote discourse and research on economic and legal aspects of public policy questions. As you may know, the Institute is supported in its work by industrial and financial companies, banks, trusts and individuals. It has been active in stimulating debate within Scotland on the issue of antimoney laundering policies and strategies. Dr Gilmore tells me that Edinburgh is the second largest financial centre in the United Kingdom. They say there are no prizes for coming second but perhaps the prize in this case is that, to my understanding, Scots have a substantial influence in the City of London anyway. I propose to cover the following matters:

*

the relationship between organised crime and money laundering

* the nature and scale of the money laundering problem

*

the threats posed by money laundering

*

the role of the Financial Action Task Force

THE FINANCIAL ACTION TASK FORCE

13

Organised Crime and Money Laundering Money laundering is the process of converting or "cleansing" property knowing that such property is derived from serious crime for the purpose of disguising its origin. The concept of money laundering generally covers those who assist that process and ought reasonably be aware that they are assisting such a process. The phenomenon of money laundering has been with us for centuries. "The Fence" was the traditional launderer of the proceeds of crime. A good deal of community crime is based upon violence and emotion. However, the primary purpose of organised crime is to make profits. Like any business, the purposes of profit are to enjoy it and re-invest it in future activity. For the organised criminal, however, profit close to the source of the crime represents a particular vulnerability and unless the criminal can effectively distance himself or herself from the crime which is the source of profit they remain susceptible to detection and prosecution. Organised crime covers a wide variety of activity. The more profitable the activity the more attractive it is to organised criminal figures. The traditional activities of organised crime have tended to be in fraud, extortion and corruption often associated with crimes of violence. The twentieth century has seen a significant increase in narcotics trafficking. The modern problem of money laundering originated in the huge profits generated from narcotics. It should be borne in mind that narcotics is only one aspect of organised criminal activity. Money laundering is also associated with major fraud, extortion and, in the case of developing countries, offences relating to capital flight. A more recent phenomenon of considerable concern is the extent to which criminal organisations are now penetrating and taking over legitimate business. It is said that the Mafia, for example, probably now derives more income from its legal investments than it does from its illegal investments. Some people would argue that the penetration by organised crime into legitimate business activity should not be a cause of major concern because it creates wealth and employment and confers benefits on a wide range of people. The proponents of this view forget that organised criminals are unlikely to change their habits when engaging in legitimate business activity. There are clear signs that when organised crime invests in legitimate business activity it will attempt to dominate that market and engage in predatory pricing, extortion and corruption. In other words, the organised criminal is not content simply with legitimate profit but to maximise profit, by fair means or foul. Another phenomenon which has greatly assisted the process of money laundering is our modern communications technology. Money can be sent around the world in seconds. Technology has greatly increased the efficiency and responsiveness of the world's financial systems, but it also facilitates the speed and complexity of money laundering transactions. Every corner of the globe is affected by money laundering- South America, Central and North Africa, Asia, the Pacific, the Middle East and Europe. A number of African countries are now emerging as staging areas for money movement associated with the Asian heroin trade. Notwithstanding the existence of other forms of organised criminal activity,

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narcotics trafficking remains the most significant source oflaundered money. Although they control cultivation, refining and initial distribution of their product, the Asian heroin traffickers tend not to control their product to the point of final sale. By contrast, the major cocaine cartels tend to be much more vertically integrated, controlling the process from cultivation and production to final sale. The cocaine cartels therefore tend to launder money in greater volume and with more sophistication. Asian and Middle East drug proceeds are laundered both through mainstream financial systems as well as through underground banking systems such as:the "hawala" or "hundi" systems in South Asia and the Middle East. the "chit" system or "chop shop" banking in East and Southeast Asia. Some of these underground systems are centuries old and their origins had more to do with avoiding repressive tax regimes than laundering the proceeds of crime. Much of the pre-occupation of anti-money laundering activity has been with the banking system. But experience shows that money launderers will utilise almost any form of corporate and trust activity to launder their profits. The mainstream and underground financial systems in all their varieties are susceptible. Accordingly, anti-money laundering measures have to be directed, in addition to the banking system, to currency exchange houses, insurance companies, building societies and other lending institutions as well as betting agencies.

Scale and Nature of the Problem The scale of the money laundering problem is huge. No-one of course knows how much money is laundered each year around the world because it is an inherently secret activity. Some estimates have been made. In 1987 the United Nations estimated the proceeds from narcotics trafficking world wide to be US $300 billion. In its first report in 1990 the Financial Action Task Force (FATF) referred to US street yields of cocaine, heroin and cannabis as being of the order of US $106 billion. These sums are larger than the GOP of many countries and are unlikely to have diminished over the past few years. Some individual cases reveal quite startling amounts being laundered:Rodriquez Gacha laundered an estimated US $130 million of Medellin Cartel proceeds, using 82 company and other accounts in 16 countries. In the "Polar Cap" case, it is believed that US $1.2 billion of cocaine proceeds was laundered for the Medellin Cartel through a complicated system of false gold and jewellery businesses in the United States. Funds were banked in the United States, then transferred to Panama and thence to accounts in Britain, Europe and South America. An investigation of an Australian narcotics ring by my National Crime

THE FINANCIAL ACTION TASK FORCE

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Authority revealed A$77 million was laundered through financial institutions in a number of countries. With such vast sums of money to launder, the criminals involved - whether they be drug traffickers or groups engaged in organised crime generally - have grown increasingly sophisticated. Money laundering now is not just a case of depositing suitcases of money in bank accounts but making use of the whole range of the modem international financial system and both its formal and informal sectors: international electronic fund transfers; the establishment of front companies or shell corporations; and the purchase of existing businesses and property with laundered money. Indeed, there is increasing evidence of the use of"professional money launderers" who specialise in ways to disguise the illicit origin of funds. There is also evidence that professionals such as lawyers are being used (both wittingly and unwittingly) by money launderers. For example, my own organisation in Australia, the National Crime Authority, found lawyers had been used to assist in the purchase of property in a way that disguised the source of the funds/or identity of the owner; to establish "nominee companies" and trusts for use by money launderers; to place cash proceeds in trust accounts, and to arrange false "loans" with other parties on behalf of criminals. What this means is that virtually no type of financial institution is immune from money laundering- the more so as anti-laundering measures are brought into effect in the banking sector. Insurance, commodities, securities and real estate dealers are all used for laundering proposes. Nor is money laundering just a problem for the world's major financial centres - or indeed the lightly regulated offshore havens. No country which is integrated into the international financial system is going to escape the attentions of launderers. With the dismantling of exchange controls and the growing interpenetration of financial markets, access to a financial institution in one country allows worldwide access and mobility of payments and capital. Money launderers are always on the look-out for new routes and methods of concealing their funds. As the more advanced financial centre countries tighten up their controls, those states with developing financial sectors are potentially attractive targets, particularly as their domestic currencies become convertible and old regulations and controls are lifted.

Threats Posed by Money Laundering Why should nations join the international effort against money laundering? Some jurisdictions who wish to establish a financial services industry as a supplementary source of income for national finances and create local employment or who want hard currency may be tempted to use lack of regulations in this sector as a competitive advantage. In addition, there are admittedly administrative costs in applying anti-money laundering measures and it may seem paradoxical to be imposing new requirements on financial institutions at a time when old controls are being dismantled.

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But these kinds of motivations to avoid taking measures against money laundering reflect a short-sighted view. Allowing your financial system to be used for laundering helps strengthen organised crime which in turn has a corrosive effect on society and political institutions and, if unchecked, risks challenging the state itself. It also undermines the financial system. A money laundering operation can put at risk the whole financial system through the loss of credibility and investor confidence. A financial centre can only prosper in the long-term if it operates in an honest way. Taking firm action against money laundering helps to preserve the integrity of the financial system and fight back against drugs trafficking and other organised crime. The fight against money laundering cannot be the sole responsibility of government and law enforcement agencies. Governments need to be conscious that any anti-money laundering measures which are introduced have a minimal impact upon financial systems themselves, and maximum impact on money launderers. The private sector is naturally concerned that anti-money laundering measures do not significantly add to the cost of doing business. It is important, however, to bear in mind that the fight against money laundering (as indeed against all forms of criminal activity) is a community concern. The private sector cannot pass the entire responsibility to government. The old adage "money has no smell" 2 simply doesn't wash today. If these activities are to be suppressed and hopefully, in the long term, substantially eliminated it will require the collective will and commitment of the public and private sector working together. Role of the Financial Action Task Force The Financial Action Task Force was set up in July 1989 by a decision of the G7 Heads of State and Government participating in the Paris Economic Summit. It reflected world leaders' concern at the dimension the drugs problem had attained and the speed with which drug trafficking and related money laundering were growing. However, I would emphasise that the Task Force, although primarily concerned with drugs money laundering, does address the laundering of the proceeds of all serious crime. In its first year of operation the Task Force expanded quickly from the G7 nations to a group of 15 countries. It has since expanded to 26 countries, 3 and its membership also includes the Commission of the European Communities and the Gulf Cooperation Council. The Task Force has a number of relatively unusual features. It is not part of any other international organisation such as the United Nations or the OECD. It is a free-standing specialist body which concentrates on the international fight against money laundering. It has a small secretariat of three persons based in Paris and a budget of approximately 4 million French Francs. Most of those officials actively involved in Task Force activities are doing it in addition to their ordinary work. For example, in my case, the job for which I am paid is Chairperson of the National Crime Authority in Australia. The Task Force brings together experts from the world's leading financial

THE FINANCIAL ACTION TASK FORCE

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countries in different areas of expertise- particularly financial, law enforcement and legal agencies. Our multi-disciplinary composition is a source of great strength. It ensures anti-money laundering measures are developed and implemented in the financial system, in investigative agencies and in the criminal justice system. It also facilitates effective co-operation between these three areas both domestically and internationally. The Task Force tends to meet about five times a year in Paris. Those meetings concentrate on the following activities:

* * *

*

sharing the law enforcement experience in emerging money laundering techniques; assessing the effectiveness of anti-money laundering measures; conducting assessments of members performance; planning our "Outreach" program.

In its first year (1989/90) the Task Force agreed on a comprehensive antimoney laundering programme contained in the 40 recommendations produced in its first report (see the Appendix to this paper). An important feature of the Task Force Recommendations is that they bring together anti-money laundering measures covering

*

* * *

law enforcement the criminal justice system the financial system international co-operation

I will not try to describe all the recommendations but I will mention some of them so that you will have a reasonable picture of the measures we are concerned to implement throughout the world. The first recommendation is that each country should, without further delay, take steps to implement fully the 1988 Vienna Convention and proceed to ratify it. Second, Task Force members have agreed that financial institution secrecy laws should be conceived so as not to inhibit implementation of Task Force Recommendations. Third, enforcement programs should include increased multilateral co-operation and mutual legal assistance in money laundering investigations, prosecution and extradition. Fourth, countries should implement effective measures to trace, seize and forfeit proceeds of crime. Fifth, each country should take steps to criminalise drug money laundering as defined in the 1988 Vienna Convention. Countries should also consider extending the application of this offence to (a) (b)

any other crimes linked to narcotics, or serious crimes generally.

Sixth, the recommendations relating to the financial system cover

(a)

banks and non-bank financial institutions;

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(b) (c) (d)

customer identification and record keeping rules; increasing the diligence of financial institutions, particularly in the reporting of large cash and suspicious transactions; the need for ongoing training and audit activity;

and (e)

monitoring cross border flows of cash.

Seventh, the recommendations relating to international co-operation emphasise the importance of (a) (b)

exchanging information, particularly information relating to suspicious transactions, and co-operation between legal authorities.

The recommendations of the Task Force are simply that- recommendations. They do not constitute an international convention in international law. This does not diminish their effectiveness. There are, however, a number of formal conventions and instruments which also are important in the international fight against money laundering. 4 The 1988 UN Vienna Convention Against Illicit Traffic in Narcotic Drugs is a significant international instrument. Seventy-eight countries have now ratified this convention. The work of the Commonwealth Secretariat in recent years, particularly in the area of mutual assistance in criminal matters, is an important complement to the work of the Financial Action Task Force. In addition, we have:

* * *

The Basle Statement of Principles (1988) on Prevention of Criminal Use of the Banking System for the Purpose of Money Laundering. The 1990 Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime; The 1991 Council Directive on Prevention of the Use of the Financial System for the Purpose of Money Laundering;

All of these measures provide an international legal and law enforcement framework for effective anti-money laundering action. The Task Force has not simply contented itself with drawing up recommendations to combat money laundering. It has remained in being to monitor the implementation by its members of these anti-money laundering measures and it keeps abreast of changes in laundering techniques. Other equally important objectives are to promote the widest possible dissemination of the anti-money laundering programme and to co-operate with non-member countries and international organisations in taking action in this field. Our monitoring process has a number of important features. In its second year of operation (1990/91) the Task Force commenced a process of self-assessment of its membership. It is important to realise that the Task Force membership, although now closed, consists essentially of the top 26 financial

THE FINANCIAL ACTION TASK FORCE

19

countries in the world. The membership therefore accounts for a very substantial proportion of the international financial activity. The self-assessment process essentially involved members completing annual returns to the secretariat of their progress in adopting the Task Force's recommendations. In its third year of operation (1991/92), the Task Force commenced a process of mutual evaluation of its members. This process involves teams of experts from other member countries visiting individual member jurisdictions and examining and reporting back to the Task Force not only on the extent to which members are complying with the recommendations, but also the effectiveness of the efforts of individual members in the fight against money laundering. This has proved to be a very effective mechanism indeed. During my presidency in the current year of Task Force activities (1992/93) I noticed a considerable number of member countries are making significant efforts to introduce anti-money laundering measures in anticipation of a visit from a team of evaluators. This, I think, shows the value of external pressure and peer scrutiny upon our membership. This process of mutual evaluation is continuing and all Task Force members are expected to be evaluated by the end of the calendar year 1994. In addition to the evaluation processes the Task Force continues to study the latest experience in money laundering techniques. It has the advantage of bringing together the experience of all its membership to monitor the latest money laundering trends and activities. The Task Force reviews its recommendations in light of this experience and from time to time issues interpretative notes which essentially update the 40 recommendations. An area of increasing importance for the TaskForce is our external program to encourage the implementation of the 40 recommendations amongst nonmember countries. The Task Force has identified a number of areas of the world for particular attention. The Task Force has carried out considerable work in the Caribbean and is now reaching the point where Caribbean jurisdictions (including a number which have had a reputation for facilitating money laundering activity) have agreed to pick up and implement the recommendations of the Task Force. We have assisted a Caribbean Financial Action Task Force to carry on this important work in that region. The countries of Central and Eastern Europe are also a priority for the Task Force. This is not because we have identified them as significant money laundering centres- they are not at present. However, several banking systems in the region have already been used to laundering drug proceeds and as their currencies move towards convertibility, they will inevitably become increasingly attractive to money launderers. But, at the same time, the reform and restructuring of the financial sector in these countries presents an ideal opportunity to take preventative measures which will help protect them against the threat of money laundering. The Task Force has held seminars in Warsaw and Budapest this year (1993) in which the phenomenon of money laundering and the F ATF recommendations have been discussed and elaborated with officials in Central and Eastern European countries. In April 1993 the Task Force and the Commonwealth Secretariat held a Symposium in Singapore which was attended by 120

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representatives from 23 Asian countries ranging from Pakistan in the west, the Philippines in the east, Australia and New Zealand in the south, and Korea in the north. My expectation is that there will emerge in that region a group to carry on the anti-money laundering fight. The Task Force is the only international body which specialises in and concentrates solely upon the fight against money laundering. It is not, however, alone in this task. An important part of our strategy is to work in co-operation with other international organisations with an interest in this field. Such organisations include the Council of Europe, the United Nations International Drugs Control Program (UNDCP) and the Commonwealth Secretariat. It is important in all of this endeavour that the international community avoids overlap and duplication and draws strength from collective action. The Task Force activity tends to be concentrated at the policy level. That is, we try to explain the seriousness of the global problem of money laundering to policy makers and legislators in individual countries and then try to develop with those countries appropriate strategies to combat money laundering both within their respective jurisdictions and internationally. It is important to bear in mind that, while FATF recommendations have universal application, the circumstances will be different between countries. Available resources vary greatly and it is important that countries assist one another to the maximum extent possible. Further, countries will have different preoccupations and priorities as to the cause of their money laundering problems. In western countries the main concern is still narcotics. In many developing countries the major concern is capital flight.

Conclusion In conclusion I would emphasise two points. First, that because money laundering is an international phenomenon, the response to it must embrace as many countries as possible. The more widespread the action against money laundering the more effective it will be. Second, the fight against money laundering is a necessary complement to rather than a contradiction of economic liberalisation. It is not concerned with restricting the free movement of capital or fettering the efficiency of financial systems. The facilitation of money laundering, particularly by secrecy and anonymity, does not help a country's financial sector nor the cause of free capital movement. Combating money laundering is not just a matter of fighting crime but of preserving the integrity of financial institutions and ultimately the financial system as a whole.

Appendix Recommendations A- General Framework of the Recommendations Many of the current difficulties in international co-operation in drug money laundering cases are directly or indirectly linked with a strict application of bank secrecy rules, with the fact that, in many countries, money laundering is not today an offence, and with insufficiencies in multilateral co-operation and mutual legal assistance.

2 3

Some of these difficulties will be alleviated when the Vienna Convention is in effect in all the signatory countries, principally because this would open more widely the possibility of mutual legal assistance in money laundering cases. Accordingly, the group unanimously agreed as its first recommendation that each country should, without further delay, take steps to fully implement the Vienna Convention, and proceed to ratify it. 5 Concerning bank secrecy, it was unanimously agreed that imancial institutions secrecy laws should be conceived so as not to inhibit implementation of the recommendations of this group. Finally, an effective money laundering enforcement program should include increased multilateral co-operation and mutual legal assistance in money laundering investigations and prosecutions and extradition in money laundering cases, where possible. Nevertheless, this should not be the end point of our efforts to fight this phenomenon. Additional measures are necessary, for at least two reasons:

the need for rapid and tough actions

As the purpose of the Vienna Convention is the fight against drug trafficking in general, including of course, but not exclusively, the fight against drug money laundering, some countries could have difficulties in ratifying and implementing it for reasons that are not related to the issue of money laundering. It remains crucial, whatever the difficulties may be on legal and technical grounds, to ratify and implement the Convention fully and without delay. Rapid progress on the issue of money laundering is necessary. Hence, the Task Force's recommendations include important steps that are implied by

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this Convention. Furthermore, even on the topics mentioned by the Vienna Convention, it seemed to the group that the growing dimension and increasing awareness of the problem of money laundering, would justify a reinforcement of its provisions applicable to money laundering issues. the need for practical measures

Any discrepancy between national measures to fight money laundering can be used potentially by traffickers, who would move their laundering channels to the countries and financial systems where no or weak regulations exist on this matter, making more difficult the detection of funds of criminal origin. To avoid such a risk, these national measures, particularly those concerning the diligence of financial institutions, have to be conceived in a way that builds upon and enhances the Basel Statement of Principles, and to be harmonized in their most practical aspects, which is not provided for in the Statement. On these bases, we recommend action steps that, in our view, could constitute a minimal standard in the fight against money laundering, for the countries participating in this Task Force, as well as for other countries. Some of these recommendations reflect the view of a majority of delegates, rather than unanimity, so that they are not limited to the weakest existing solution in the participating countries on each topic. Cases where a minority held a significantly different view are also mentioned. Accordingly, the minimal standard we recommend can be viewed as rather ambitious. Nevertheless, it should in no way prevent individual countries from adopting or maintaining more stringent measures against money laundering. Furthermore, as money laundering techniques evolve, anti-money laundering measures must evolve too: our recommendations will probably need periodic re-evaluation. These steps against money laundering focus on improvements of national legal systems (B), enhancement of the role of the financial system (C), and the strengthening of international co-operation (D).

B - Improvement of National Legal Systems To Combat Money Laundering 1- Definition of the criminal offence of money laundering

4

5

Each country should take such measures, as may be necessary, including legislative ones, to enable it to criminalise drug money laundering as set forth in the Vienna Convention. However, the laundering of drug money is frequently associated with the laundering of other criminal proceeds. Given the difficulty of bringing evidence of drug money laundering specifically, an extension of the scope of this offence, for instance to the most serious offences, such as arms trafficking, etc., might facilitate its prosecution. Accordingly, each country should consider extending the offence of drug money laundering to any other crimes for which there is

THE FINANCIAL ACTION TASK FORCE 23

6

7

a link to narcotics; an alternative approach is to criminalize money laundering based on all serious offences, and/or on all offences that generate a significant amount of proceeds, or on certain serious offences. The group agreed that, as provided in the Vienna Convention, the offence of money laundering should apply at least to knowing money laundering activity, including the concept that knowledge may be inferred from objective factual circumstances. Some delegates consider that the offence of money laundering should go beyond the Vienna Convention on this point to criminalize activity where a money launderer should have known the criminal origin of the laundered funds. As already mentioned, a few countries would impose criminal sanctions for negligent money laundering activity. In addition, the group recommends that, where possible, corporations themselves - not only their employees - should be subject to criminal liability.

2 - Provisional measures and confiscation

The Vienna Convention provides for provisional measures and confiscation in case of drug trafficking and laundering of drug money. These measures are a necessary condition to an effective fight against drug money laundering, notably because they facilitate the execution of sentences and help reduce the financial attractiveness of money laundering. 8

Accordingly, countries should adopt measures similar to those set forth in the Vienna Convention, as may be necessary, including legislative ones, to enable their competent authorities to confiscate property laundered, proceeds from, instrumentalities used in or intended for use in the commission of any money laundering offence, or property of corresponding value. Such measures should include the authority to : (1) identify, trace, and evaluate property which is subject to confiscation; (2) carry out provisional measures, such as freezing and seizing, to prevent any dealing, transfer, or disposal of such property and 3) take any appropriate investigative measures. In addition to confiscation and criminal sanctions, countries also should consider monetary and civil penalties, and/or proceedings including civil proceedings, to void contracts entered by parties, where parties knew or should have known that as a result of the contract, the state would be prejudiced in its ability to recover financial claims, e.g. through confiscation or collection of fines and penalties.

C- Enhancement of the Role of the Financial System

In addressing the subject of money laundering, the group has kept in mind the

24 THE HUME PAPERS ON PUBLIC POLICY

necessity to weigh the impact of its recommendations on financial institutions, and to preserve the efficient operation of national and international financial systems. I - Scope of the following recommendations

The entry of cash into the financial system is of crucial importance in the drug money laundering process. This may occur through the fmancial system (banks and other financial institutions), and also through certain other professions dealing with cash, which are unregulated or virtually unregulated in many countries. 9 10

11

Accordingly, the recommendations 12 to 29 of this paper should apply not only to banks, but also to non-bank financial institutions. For maximum effectiveness, these recommendations need to cover as many organisations as possible that receive large value cash payments in the course of their business. Therefore, the appropriate national authorities should take steps to ensure that these recommendations are implemented on as broad a front as is practically possible. Nevertheless, excessive variation among the national lists for these non-bank financial institutions and other professions dealing with cash, subject to the following recommendations, could potentially facilitate the activity of money launderers. To avoid that, some delegates prefer that a common, minimum list of these financial institutions and professions be accepted by all the countries. As examples of non-bank financial institutions, savings societies including postal savings societies, loan societies, building societies, security brokers and dealers, credit card companies, cheque cashers, transmitters of funds by wire, money changers/bureaux de change, sales finance companies, consumer loan companies, leasing companies, factoring companies, and gold dealers were mentioned. It was agreed that, a working group should further examine the possibility of establishing a common minimal list of non-bank imancial institutions and other professions dealing with cash subject to these recommendations.

2 - Consumer identification and record keeping rules

Crucial in the fight against money laundering through the financial system, are the ability of financial institutions to screen undesirable customers, and the ability for law enforcement authorities to conduct their enquiries on the basis of reliable documents about the transactions and the identity of clients. 12

Hence, imancial institutions should not keep anonymous accounts or accounts in obviously fictitious names: they should be required (by law, by regulations, by agreements between supervisory authorities and imancial institutions or by self-regulatory

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13

14

25

agreements among imancial institutions) to identify, on the basis of an official or other reliable identifying document, and record the identity of their clients, either occasional or usual, when establishing business relations or conducting transactions (in particular opening of accounts or passbooks, entering into fiduciary transactions, renting of safe deposit boxes, performing large cash transactions). Furthermore, layering of funds of illicit origin is often facilitated by nominee accounts in financial institutions and shareholdings in companies, where beneficial ownership is disguised. Hence, financial institutions should take reasonable measures to obtain information about the true identity of the persons on whose behalf an account is opened or a transaction is conducted if there are any doubts as to whether these clients or customers are not acting on their own behalf, in particular, in the case of domiciliary companies (i.e. institutions, corporations, foundations, trusts, etc., that do not conduct any commercial or manufacturing business or any other form of commercial operation in the country where their registered office is located). Financial institutions should maintain, for at least five years, all necessary records on transactions, both domestic or 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 behaviour. Financial institutions should keep records on customer identification (e.g. copies or records of official identification documents like passports, identity cards, driving licenses or similar documents), account files and business correspondence for at least five years after the account is closed. These documents should be available to domestic competent authorities, in the context of criminal prosecutions and investigations.

3 - Increased diligence offinancial institutions

Identification of customers is generally not sufficient to allow financial institutions and law enforcement authorities to detect suspicious transactions. 15

Hence, financial institutions should pay special attention to all complex, unusual, large transactions, and all unusual patterns of transactions, which have no apparent economic or visible lawful purpose. The background and purpose of such transactions should, as far as possible, be examined, the findings established in writing, and be available to help supervisors, auditors and law enforcement agencies.

26 THE HUME PAPERS ON PUBLIC POLICY

16

17

18

19

Where financial institutions suspect that funds stem from a criminal activity, bank secrecy rules or other privacy laws which are presently enforced in most countries prohibit them from reporting their suspicions to the competent authorities. Thus, to avoid any involvement in money laundering operations, they have no other choice, in that case, than denying assistance, severing relations and closing accounts in accordance with the Basle Statement of Principles. The consequence is that these funds can flow through other, undetected channels, which would frustrate the efforts of competent authorities in the fight against money laundering. To avoid this risk, the following principle should be established: if financial institutions suspect that funds stem from a criminal activity, they should be permitted or required to report promptly their suspicions to the competent authorities. Accordingly, there should be legal provisions to protect imancial institutions and their employees from criminal or 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 in good faith, in disclosing suspected criminal activity to the competent authorities, even if they have not known precisely what the underlying criminal activity was, and regardless of whether illegal activity actually occurred. There is a divergence of opinion within the Task Force on whether suspicious activity reporting should be mandatory or permissive. A few countries strongly believe that this reporting should be mandatory, possibly restricted to suspicions on serious criminal activities, and with administrative sanctions available for failure to report. If financial institutions, while making these reports, warned at the same time their customers, the effect might be similar to a refusal to handle the suspected funds: the suspected customers and their funds would flow through undetected channels. Hence, financial institutions, their directors and employees, should not, or, where appropriate, should not be allowed to, warn their customers when information relating to them is being reported to the competent authorities. In the case of a mandatory reporting system, or in the case of a voluntary reporting system where appropriate, financial institutions reporting their suspicions should comply with instructions from the competent authorities. In countries where no obligations of reporting these suspicions exist, when a financial institution develops suspicions about operations of a customer, and when the imancial institution chooses to make no report to the competent authorities, it should deny assistance to this customer, sever relations with him and close his accounts. The group also discussed what actions financial institutions should take when they learn from competent authorities, even in an informal

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20

27

way, that criminal proceedings, including international mutual assistance requests and/or appropriate freezing orders, are pending or imminent. Further examination of the intricate legal and practical aspects of this question would be useful, to avoid a premature withdrawal of funds which would unduly impair the criminal proceedings. Staff in financial institutions are still only beginning, in most countries, to become aware of money laundering. This is of great help to money launderers. In some countries, complicity of staff may also be a problem. Hence, financial institutions should develop programs against money laundering. These programs should include, as a minimum:

(a)

the development of internal policies, procedures and controls, including the designation of compliance officers at management level, and adequate screening procedures to ensure high standards when hiring employees; (b) an on-going employee training program; (c) an audit function to test the system.

4- Measures to cope with the problem of countries with no or insufficient anti-money laundering measures

The strengthening of the fight against money laundering in some countries could lead to a simple move of the money laundering channels, to countries with insufficient money laundering measures, in a process akin to regulator shopping. Frequently, a money laundering operation would involve the following stages: drugs cash proceeds would be exported from regulated countries to unregulated ones; this cash would be laundered through the domestic formal or informal financial system of these havens; the subsequent stage would be a return of these laundered funds to regulated countries with safe placement opportunities, particularly through wire transfers. While sovereignty principles make it difficult to prevent this type of displacement of money laundering channels, and other laundering operations using regulation havens, the following principles should be applied by financial institutions in regulated countries: 21

-financial institutions should give special attention to business relations and transactions with persons, including companies and lmancial institutions, from countries which do not or insuffi-

28 THE HUME PAPERS ON PUBLIC POLICY

22

ciently apply these recommendations. Whenever these transactions have no apparent economic or visible lawful purpose, their background and purpose should, as far as possible, be examined, the findings established in writing, and be available to help supervisors, auditors and law enforcement agencies. - financial institutions should ensure that the principles mentioned above are also applied to branches and majority owned subsidiaries located abroad, especially in countries which do not or insufficiently apply these recommendations, to the extent that local applicable laws and regulations permit. When local applicable laws and regulations prohibit this implementation, competent authorities in the country of the mother institution should be informed by the financial institutions that they cannot apply these recommendations. Within the context of relations between regulated and unregulated countries, the study of a system to monitor cash movements at the border is of special importance (see point 5 hereunder).

5 - Other measures to avoid currency laundering It was recognised that the stage of drugs cash movements between countries

is crucial in the detection of money laundering. A few delegates strongly support the proposal that a system of reporting of all large international transportations of currency or cash equivalent bearer instruments to a domestic central agency with a computerised data base available to domestic judicial or law enforcement authorities should be established for use in money laundering cases. But this opinion is not shared by the majority of the group. 23

Nevertheless, the group acknowledged that the feasibility of measures to detect or monitor cash at the border should be studied, subject to strict safeguards to ensure proper use of information and without impeding in any way the freedom of capital movements. The detection of suspicious cash operations could potentially be also facilitated if law enforcement authorities were in a position to be informed and to analyse all large cash transactions occurring within their country. For that purpose, one suggested solution is that these matters be routinely reported by financial institutions to competent authorities. However, the efficiency of such a system, which currently exists in two participating countries, is uncertain. The majority of the group was not convinced of the cost effectiveness of this system at this time, and expressed fears that it could lead financial institutions to feel less responsible for the fight against money laundering. On the other hand, it is the view of a few members that a comprehensive program to combat money laundering must include such a currency reporting system together with the reporting of international transportation of currency and currency equivalent instruments.

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24

25

29

Nevertheless, the group agreed that countries should consider the feasibility and utility of a system where banks and other financial institutions and intermediaries would report all domestic and international currency transactions above a fixed amount, to a national central agency with a computerized data base, available to competent authorities for use in money laundering cases, subject to strict safeguards to ensure proper use of the information. Furthermore, given the crucial importance of cash in drug trafficking and drug money laundering, and despite the fact that no clear correlation could be established between the cash intensiveness of a country's economy, and the role of this economy in international money laundering countries should further encourage in general the development of modern and secure techniques of money management, including increased use of cheques, payment cards, direct deposit of salary cheques, and book entry recording of securities, as a means to encourage the replacement of cash transfers.

6 - Implementation, and role of regulatory and other administrative authorities

Effective implementation of the above recommendations must be ensured. But the authorities supervising banks and other financial institutions have currently, in many countries, no competence to participate in the fight against criminal activities, because their mission is primarily a prudential one, and because of professional secrecy or other rules. 26

27

28

Accordingly, in each member country, the competent authorities, supervising banks or other imancial institutions or intermediaries, or other competent authorities, should ensure that the supervised institutions have adequate programs to guard against money laundering. These authorities should co-operate and lead expertise spontaneously or on request with other domestic judicial or law enforcement authorities in money laundering investigations and prosecutions. The effective implementation of the above mentioned recommendations in other professions dealing with cash is hampered by the fact that, in many countries, these professions are virtually unregulated. Hence, competent authorities should be designated to ensure an effective implementation of all these recommendations, through administrative supervision and regulation, in other professions dealing with cash as defined by each country. The establishment of programs to combat money laundering in financial institutions and other professions dealing with cash, would require the support of these competent authorities, particularly to make these institutions and professions aware of facts that should normally lead to suspicions. Accordingly, the competent authorities should establish guidelines which will assist financial institutions in

30 THE HUME PAPERS ON PUBLIC POLICY

29

detecting suspicious patterns of behaviour by their customers. It is understood that such guidelines must develop over time, and will never be exhaustive. It is further understood that such guidelines will primarily serve as an educational tool for f"mancial institutions' personnel. Furthermore, the competent authorities regulating or supervising financial institutions should take the necessary legal or regulatory measures to guard against control of or acquisition of a significant participation in financial institutions by criminals or their confederates. The group acknowledged the risk that, outside the financial sector, industrial or commercial companies also could be acquired by criminals with the aim to use them for money laundering purposes.

D -Strengthening of International Co-operation The study of practical cases of money laundering clearly demonstrated that money launderers conduct their activities at an international level, thus exploiting differences between national jurisdictions and the existence of international boundaries. Therefore, enhanced international co-operation between enforcement agencies, financial institutions, and financial institution regulators and supervisors to facilitate the investigations, and prosecution of money launderers, is critical. 1 - Administrative co-operation (a)

Exchange ofgeneral information

A first step is to improve the knowledge of international flows of drug money, noticeably cash flows, and the knowledge of money laundering methods, to enable a better focus of international and national efforts to combat this phenomenon. 30 Accordingly, national administrations should consider recording, at least in the aggregate, international flows of cash in whatever currency, so that estimates can be made of cash flows and reflows from various sources abroad, when this is combined with central bank information. Such information should be made available to the IMF and BIS to facilitate international studies. 31

International competent authorities, perhaps Interpol and the Customs Co-operation Council, should be given responsibility for gathering and disseminating information to competent authorities about the latest development in money laundering and money laundering techniques. Central banks and bank regulators could do the same on their network. National authorities in various spheres, in consultation with trade associations, could then disseminate this to financial institutions in individual countries.

THE FINANCIAL ACTION TASK FORCE

(b)

31

Exchange of information relating to suspicious transactions

Present arrangements for international administrative co-operation and international exchange of information relating to identified transactions, are acknowledged to be insufficient. At the same time, this exchange of information must be consistent with national and international provisions on privacy and data protection. Furthermore, several countries consider that exchange of information relating to individual money laundering cases should take place only in the context of mutual legal assistance. 32 It was agreed that each country should make efforts to improve a spontaneous or "upon request" international information exchange relating to suspicious transactions, persons and corporations involved in those transactions between competent authorities. Strict safeguards should be established to ensure that this exchange of information is consistent with national and international provisions on privacy and data protection. 2- Co-operation between legal authorities (a)

Basic means for co-operation in confiscation, mutual assistance, and extradition

A necessary condition to improve mutual legal assistance on money laundering cases, is that countries acknowledge the offence of money laundering in other countries as an acceptable basis for mutual legal assistance. The group agreed that countries should consider extending the scope of the offence of money laundering to reach any other crimes for which there is a link to narcotics, or to all serious offences, and let the definition for this wider money laundering offence open between different options. Furthermore, it agreed that: countries should adopt a definition covering the offence of drug money laundering compatible with the definition of the Vienna Convention. 33

- countries should try to ensure, on a bilateral or multilateral basis, that different knowledge standards in national definitions -i.e. different standards concerning the intentional element of the infraction - do not affect the ability or willingness of countries to provide each other with mutual legal assistance.

34

Furthermore, international co-operation should be supported by a network of bilateral and multilateral agreements and arrangements based on generally shared legal concepts with the aim of providing practical measures to affect the widest possible range of mutual assistance. The current works in the framework of the Council of Europe, con-

35

32 THE HUME PAPERS ON PUBLIC POLICY

cerning international co-operation as regards search, seizure and confiscation of the proceeds from crime, could constitute the basis of an important multilateral agreement on this matter. Accordingly, countries should encourage international conventions such as the draft convention of the Council of Europe on confiscation of the proceeds from offences. (b)

Focus of improved mutual assistance on money laundering issues

Experience of international co-operation on money laundering issues shows that improvements are necessary on the following topics: 36 - Co-operative investigations - Co-operative investigations among appropriate competent authorities of countries, should be encouraged. 37

38

39

40

-Mutual assistance in criminal matters- There should be procedures for mutual assistance in criminal matters regarding the use of compulsory measures including the production of records by :fmancial institutions and other persons, the search of persons and premises, seizures and obtaining of evidence for use in money laundering investigations and prosecutions and in related actions in foreign jurisdictions. - Seizure and confiscation - There should be authority to take expeditious action in response to requests by foreign countries to identify, freeze, seize and confiscate proceeds or other property of corresponding value to such proceeds, based on money laundering or the crimes underlying the laundering activity. -Co-ordination of prosecution actions- To avoid conflicts of jurisdiction, consideration should be given to devising and applying mechanisms for determining the best venue for prosecution of defendants in the interests of justice in cases that are subject to prosecution in more than one country. Similarly, there should be arrangements for co-ordinating seizure and confiscation proceedings which may include the sharing of confiscated assets. - Extradition - Countries should have procedures in place to extradite, where possible, individuals charged with a money laundering offence or related offences. With respect to its national legal system, each country should recognise money laundering as an extraditable offence. Subject to their legal frameworks, countries may consider simplifying extradition by allowing direct transmission of extradition requests between appropriate ministries, extraditing persons based only on warrants of arrests or judgments, extraditing their nationals, and/or introducing a simplified extradition of consenting persons who waive formal extradition proceedings.

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33

Conclusion The delegates to the Financial Action Task Force agreed that the presidency of the Task Force would address this report to finance ministers of participating countries, which would submit it to their Heads of State or Government, and circulate it to other competent authorities. The group agreed that decisions from the Summit of the Heads of State or Government of seven major industrial nations, which convened the Financial Task Force, would be crucial for the implementation of the recommendations and further work and studies. Political impetus would also be particularly necessary to crystallize strong co-ordinated overall international action, and to define the best way to associate other countries, including drug producing countries, to the fight against money laundering. While discussing the most adequate ways by which the follow-up to its works could be organized, the group emphasized that the wider the number of countries applying these recommendations (including countries which have weak or no regulations against money laundering) the greater their efficiency would be. It considered that a regular assessment of progress realized in enforcing money laundering measures would stimulate countries to give to these issues a high priority, and would contribute to a better mutual understanding and hence to an improvement of the national systems to combat money laundering.

The European Community Directive Peter J Cullen Background and Objectives The completion of the European Community's internal market on 1 January 1993 has been overshadowed by economic recession in Europe. The spirit of Iiberalisation and openness behind the single market programme has been replaced by an inward-looking, protectionist and above all sceptical mood in most of the Community. This has manifested itself in the negative reaction of European populations to the Maastricht Treaty. Mter a short-lived demonstration of solidarity with European neighbours released from behind the Iron Curtain, western Europe has shown itself reluctant to make the sacrifices necessary to extend prosperity to the East and help in the consolidation of the new democracies there. There is certainly little talk of rapid extension of the internal market eastwards. Rather, the Community's eastern borders are being sealed against both goods and persons. A recent development means that would-be asylum-seekers will be turned away at the German frontier. France has declared it wants "zero immigration". Within the Community, the focus is now not so much on the advantages of the abolition of border controls, as on the dangers which freedom of movement represents to European security. German politicians, in particular, are now as wont to talk of a "security union" as an economic and monetary union. Some go so far as to say that there has been a "change of objectives" as far as the Community is concerned (European Parliament 1992b: 19). Crime appears to be rising throughout the Community. Recent events in Italy have concentrated minds on the particular threat to European democracies posed by "organized crime". While this concept defies precise definition, it clearly comprises the activities of the drug trafficking cartels operating across European frontiers. They have developed co-operative structures and a high degree of professionalism in their activities (Eisenberg 1993: 1034). This level of organisation and its international dimension makes them particularly threatening. They are, of course, sustained by the huge financial gains to be had from their trade. Illicit drug sales in the European Community in 1989 were put at $16.3 billion by the "Groupe d'action financiere internationale" when it reported to the G7 in April 1990, and for Germany alone such sales are estimated at between 2 and 4 billion Deutschmark per annum (European Parliament 1992a: 58, 64). Well over half of these amounts is thought to be laundered so as it can enter the legitimate business of world capital and

THE EUROPEAN COMMUNITY DIRECTIVE 35

financial markets (House of Lords 1990: Evidence, 2; European Parliament 1992a: 58). The European Community's Directive of 10 June 1991 on prevention of the use of the financial system for the purpose of money laundering can be seen as part of the Community's contribution to efforts to prevent the spread of drug trafficking and organized crime in general, though it is not overtly a security measure but one designed to protect the integrity of the Community's financial market. In the memorandum which accompanied its proposal for a Directive, the Commission stated that "the Community has the responsibility to impede launderers from taking advantage of the single financial market ... ". The completion of that market was heralded in a separate report by the Commission of November 1992, when it described the liberalising measures which had been adopted in the fields of banking, insurance, securities and capital movements. The market in financial services is already of considerable importance to the Community, now accounting for 7 per cent of the twelve's gross domestic product (European Commission 1992: 1). This share is likely to increase with the freeing of controls. The Directive recognises that the expansion of the business of credit and financial institutions also carries with it an increased risk of money laundering. Unfortunately, as the European Parliament has noted and as is clear from cases such as that involving the Bank of Credit and Commerce International, the integrity of the banking and financial systems in the Member States cannot be taken for granted (European Parliament 1992a: 59). The Commission's Directive was proposed at a time when a number of other European and international measures to combat laundering of the proceeds of serious crime were being considered or, as in the case of the Vienna Convention against Illicit Traffic in Narcotic and Psychotropic Substances of 1988, had already been taken. For some, notably the Bank of England, which gave evidence to this effect to the House of Lords Select Committee on the European Communities, the Commission's intervention was seen as overkill. Before introduction of the Directive, acting in response to the recommendations of the G7 Financial Action Task Force (themselves framed in the light of the Vienna Convention), the Bank had worked with other financial institutions and law enforcement agencies to produce a set of "Guidance Notes for Financial Institutions on Money Laundering". It was of the opinion that the Commission's proposed Directive had "probably been counter-productive" to the implementation of such practically-oriented measures (House of Lords 1990: Evidence, 21). Certainly, the existence of the Vienna Convention of 19 December 1988 and the Council of Europe Convention on laundering, tracing, seizure and confiscation of proceeds of crime, opened for signature on 8 November 1990 in Strasbourg, raised the question of whether a Community measure in this area was necessary. In fact, while these measures pursue the same overriding objective as the Directive, i.e. the prevention of money laundering, they mainly seek to address the problems which arise in the context of criminal investigations and enforcement procedures, including jurisdictional questions, extradition, transfer of proceedings and provisions for confiscation of the

36 THE HUME PAPERS ON PUBLIC POLICY

proceeds of crime. The Directive, on the other hand, is primarily addressed to credit and financial institutions and imposes obligations on them which are designed to ensure that laundering is detected before the stage of criminal investigations is reached. From a legal perspective, a Community Directive also possesses certain advantages over measures undertaken under international law. The Community legal order takes precedence over the municipal laws of the Member States (Louis 1990: 135 et seq). The Directive, once implemented, will therefore prevent the Member States from taking different measures to protect their financial systems against laundering. One of the Commission's concerns in making its proposal was the danger of distortions of competition in the banking and other financial sectors which might have resulted from disparate national measures. At the time when the Directive was proposed some Member States had quite advanced legislation in place while others had not even addressed the problem of money laundering. This point was also raised by the reporter to the European Parliament committee which met to discuss the matter as one of the reasons why a Community measure was desirable (House of Lords 1990: Evidence, 2). Directives impose a time limit for implementation; in the case of this Directive, the time for implementation expired on l January 1993. This was another factor in favour of a Community instrument. The House of Lords Committee made the point that none of the other international or European initiatives was "likely to result in effective legal measures throughout the Community within the necessary time-scale" (House of Lords 1990: 15). The Community legal order provides various means to ensure that Member States which fail to fulfil the obligations of a Directive can be brought to account. This can be done in the national courts using the principle of direct effects (Louis 1990: 107 et seq) or by the Commission, using the procedure under Article 169 ofthe EEC Treaty.

Main Features of the Directive (a)

Community jurisdiction

Every Community measure must have a legal basis. The Community may only exercise jurisdiction in fields where competences have been transferred to it by the Member States (Article 4(1), EEC Treaty). The EEC Treaty does not, however, refer directly to the "Community's competences" and distinguish them clearly from national competences, for example by means of a catalogue or list. Rather, the Member States have entrusted the Community, under the EEC Treaty, with certain "activities" (Article 3), "tasks" (Article 4) or "objectives" (Article 235). The Community enjoys the competence to act in order to perform those tasks. The EEC Treaty's language tends to be general rather than specific. Powers necessary for the Community to act to attain one of the Community's objectives may be inferred if not expressly provided for (Article 235). The legal bases of the Directive are Articles 57 and 1OOa of the EEC Treaty.

THE EUROPEAN COMMUNITY DIRECTIVE 37

Article 57 was chosen because it relates to the free provision of services in the Community. It was the sole legal basis referred to in the original proposal but the European Parliament successfully sought amendment of the Directive to include Article 1OOa as an additional legal basis, thus making the Directive "an internal market measure" (House of Lords 1990: 15). The establishment of the internal market, described in Article Sa of the EEC Treaty as "an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured", is one of the Community's primary objectives. Article 1OOa requires the Council of Ministers to take the measures necessary for the "establishment and functioning of the internal market". The inclusion of Article lOOa as a legal basis of the Directive indicates that measures necessary to protect that market against possible abuses may come within this definition. In the course of the legislative progress of the Directive a disagreement emerged in relation to the Commission's intention to require the Member States, by express provision in the Directive, to "ensure that money laundering of proceeds from any serious crime is treated as a criminal offence according to their national legislation" (Article 2 of the proposal). The United Kingdom Government took the view that this would amount to the Community's assertion of competence in the field of criminal law, in respect of which it enjoyed no jurisdiction. The legal services of the Council of Ministers and the Commission did not deny that Article 2 of the proposal encroached upon the area of criminal law but they were of the view that the Community could assert the competence to compel Member States to criminalise certain forms of conduct, provided that this was necessary to achieve the Community objective in question (House of Lords 1990: 11 ). The House of Lords Committee shared this view, citing case-law of the European Court of Justice in support of the proposition that "there is nothing in the EEC Treaty or in any other Community Treaties which excludes the national criminal law from the ambit of Community law" (House of Lords 1990: 15). The European Court of Justice has indeed indicated on more than one occasion that the Member States may be required to sanction particular conduct, in so far as it contravenes Community law, by criminal penalties (cf. the recent example of Case 68/88 European Commission v Hellenic Republic [1989] ECR 2965, 2984-2985). In the event, the Directive as adopted does not follow the Commission's draft in this respect. Owing to continued opposition within the Council of Ministers, not least from the United Kingdom, the final version of Article 2 merely requires the Member States "to ensure that money laundering as defined in this Directive is prohibited". Article 14 speaks only of the "penalties" which Member States must determine in respect of infringement of the measures adopted pursuant to the Directive. The position, therefore, is that the Directive does not expressly require the Member States to introduce criminal sanctions to punish conduct in breach of the obligations under the Directive. On the other hand, the penalties created under national implementing measures must, in terms of Article 14, be "appropriate to ensure full application of all the provisions of this Directive", and the Directive must be read subject to the jurisprudence of the Court of Justice to the effect that Member States "must ensure ... that infringements of Community law are

38 THE HUME PAPERS ON PUBLIC POLICY

penalized under conditions, both procedural and substantive, which are analogous to those applicable to infringements of national law of a similar nature and importance and which, in any event, make the penalty effective, proportionate and dissuasive" (Case 68/88, European Commission v Hellenic Republic [1989] ECR 2965, 2985). The British Government believes it prevented a precedent from being established by opposing the original version of Article 2. That our Government was not opposed to criminalisation of money laundering per se was apparent not only from our pre-existing national provisions but also from the Government's approval of a Statement by the Representatives of the Governments of the Member States meeting within the Council (i.e. acting outside the Community framework) to "take all necessary steps by 31 December 1992 at the latest to enact criminal legislation enabling them to comply with their obligations" under the UN and Council of Europe Conventions as well as the Directive. But the UK did not believe it could be compelled by Community law to criminalise conduct in contravention of the Directive. This is mistaken if one considers the principle of analogous treatment as enunciated in the case-law of the Court of Justice referred to. (b) Scope of the Directive (i)

Criminal conduct covered

The Commission originally proposed that the Directive's prohibition of money laundering should apply in respect of the proceeds of "serious crime", by which it meant a crime covered by Article 3(l)(a) and (c) of the Vienna Convention (offences related to drug trafficking), terrorism and any other serious criminal offence, especially organized crime, even if unconnected to drug trafficking. In the form as adopted, the Directive is less specific, referring only to the crimes specified in Article 3(l)(a) of the Vienna Convention "and any other criminal activity designated as such for the purposes of this Directive by each Member State". Significant differences of opinion arose within the Council of Ministers Working Group in relation to this aspect of scope (House of Lords 1990: Evidence, II). The difficulty was not so much with the Vienna Convention, though the reference to Article 3(l)(c) of the Convention in the Commission's proposal was deleted from the final version of the Directive, which refers only to Article 3( I)(a). Whereas the latter covers drug trafficking per se or activities, such as cultivation of narcotic drugs and psychotropic substances, which directly facilitate trafficking, the former provision calls upon the parties to the Convention to criminalise acts such as the acquisition or possession of property derived from drug trafficking activities or acts of incitement to commit trafficking offences. These acts have now been included in the definition of money laundering itself in Article I of the Directive. The real disagreement among the Member States centred on how far the Directive should seek to encompass criminal activity which was unconnected with drug trafficking. The Directive was certainly conceived as a measure

THE EUROPEAN COMMUNITY DIRECTIVE

39

aimed particularly at the prevention of the laundering of the proceeds of drug trafficking, as the preamble suggests: "Whereas money laundering has an evident influence on the rise of organized crime in general and drug trafficking in particular ... ". It soon became apparent that the Commission had been somewhat optimistic in believing that the Member States could or would agree on other forms of crime deemed serious enough to warrant inclusion in the definition. The Treasury's evidence to the House of Lords Select Committee indicated that there was a wide divergence among the EC countries on the interpretation of "serious crime". Some Member States, including the United Kingdom and Italy (House of Lords 1990: Evidence, 22, 24) already had legislation in place which extended the offence of laundering beyond drug trafficking. But the British Government apparently soon realised that pursuit of agreement on a wide application of the Directive, would be futile (House of Lords 1990: Evidence, 11 ). A consensus could not even be reached to include terrorism. The view that one should have a specific list of serious offences which were likely to give rise to laundering of proceeds was espoused by some within the European Parliament who were concerned to achieve uniformity within the Member States (House of Lords 1990: Evidence, 6) but this proved unrealistic. The British Bankers' Association evidence which was presented to the House of Lords Committee pointed out the disadvantages to bankers and their relationship with their customers if the range of offences in respect of which reporting obligations were imposed were to be extended beyond drug trafficking or terrorist crime. There was particular anxiety about the possible inclusion of fiscal offences (House of Lords 1990: Evidence, 26). Given that the empirical evidence supports the emphasis on the laundering of the proceeds of drug trafficking (European Parliament 1992a: 57 et seq), the failure to go beyond this in the Directive is unlikely to be damaging. The problems arising from distortions which may continue as a result of the pragmatic approach ofleaving the Member States with the discretion to extend the application of the Directive to the proceeds of other forms of criminal activity are thought to be small (House of Lords 1990: 16). It is doubtful whether there would be much to be gained, even if consensus could be reached, from the inclusion of a long list of other crimes which may well be unlikely to give rise to much laundering in the first place. (ii) Institutions covered The main addressees of the Directive are so-called "credit institutions" and "fmancial institutions", in respect of which the Directive imposes a number of obligations concerning the identification of customers, the recording and reporting of financial transactions and internal control procedures. These institutions are defined in terms of pre-existing Community legislation. "Credit institution" is defined as "an undertaking whose business is to receive deposits or other repayable funds from the public and to grant credits for its own account". The primary institutions covered here are, of course, banks situated in the Member States (whether public or private) but obviously the definition would also comprise building societies and other institutions having

40 THE HUME PAPERS ON PUBLIC POLICY

a deposit and credit business. "Financial institutions" are more broadly defined to include life insurance companies and any institutions performing one or more of a series of financial activities listed in the Annex of the Community's Second Banking Directive (89/646). The list of activities spans the gamut of financial service provision and thus brings within the field of application of the Directive any body whose principal activity is to provide a financial service to a client. The Commission has stated that its intention was to ensure "general coverage of the whole financial system" (House of Lords 1990: 21). In the course of the legislative procedure leading to adoption of the Directive, the Council of Ministers broadened the definition of credit or financial institutions to include Community branches of institutions having their head office outside the Community (European Parliament 1991: 8). Initially, the Commission intended to apply the Directive to all forms of insurance companies, though the evidence it said it had of insurance companies being involved in laundering activities applied only to life insurers (House of Lords 1990: Evidence, 30). After representations from some Member States, including the UK, the reference to non-life insurance companies was deleted from the Commission's proposal. The British Government had argued that the nature of the activities of non-life insurers made it unlikely that they would be at risk from launderers, an assertion supported by their "clean record" (House of Lords 1990: Evidence, 11 ). The House of Lords Committee endorsed the view that it would not be necessary to bring all insurance firms within the scope of the Directive (House of Lords 1990: 16). In defining its aim as ensuring general coverage of the financial system, the Commission indicated that it meant by this "the whole formal financial system", i.e. excluding professions such as lawyers or accountants (House of Lords 1990: Evidence, 30). The view taken with regard to the latter was that, although they may launder or be used for laundering the proceeds of crime, such laundering would probably also involve use of the financial system at some stage. The possibility that such professionals may, however, be made subject to the application of the Directive is envisaged in Article 12 which obliges Member States to extend the terms of the Directive "in whole or in part to professions and to categories of undertakings, other than ... credit and financial institutions ... which engage in activities which are particularly likely to be used for money-laundering purposes." It is the intention of HM Treasury to apply the terms of the Directive within the United Kingdom to all firms or individuals which are authorised to conduct investment business under the Financial Services Act 1986. To take the Scottish example, this will bring in some 900 of the country's approximately 1000 solicitor's firms (information supplied by Law Society of Scotland). The Treasury is of the view that the conduct of such business makes solicitors and others particularly susceptible to money laundering. In evidence given to the House of Lords Committee, a senior Commission official stated that the Commission would expect Member States to apply the Directive to other sectors in the event that there was a "shift of money-laundering business" towards a profession not yet covered by the Directive (House

THE EUROPEAN COMMUNITY DIRECTIVE 41

of Lords 1990: Evidence, 30). What is meant by "shift" in this context is, of course, open to interpretation. One could assume that a series of money laundering "incidents" in a particular professional or commercial sector not already covered by the Directive would activate the obligation under Article 12 to extend the Directive to it. Article 13 of the Directive envisages that a "Contact Committee" chaired by the Commission and comprising officials drawn from all Member States will meet "to examine whether a profession or a category of undertaking should be included in the scope of Article 12 where it has been established that such profession or category of undertaking has been used in a Member State for money laundering" (Article 13(l)(d)). This suggests that the drawing in of a profession to the application of the Directive does not follow automatically from the isolated occurrence of laundering in that profession. The implication is that Article 12 will only bite where comprehensive evidence convincingly demonstrates that the profession concerned is particularly prone to laundering. (c)

Obligations applying to credit and financial institutions

The preamble of the Community Directive explains that the penal approach to combating laundering should not be used in isolation from other strategies of prevention. The Directive proceeds from the assumption that the financial system can protect itself against money laundering to a significant degree. It requires the Member States to introduce legislation which will require credit and financial institutions to carry out various checks, maintain records and make reports in respect of certain transactions which are deemed to carry a risk of money laundering. In drafting these provisions of the Directive the Commission was aware that they would prove burdensome for the businesses concerned. But it did not consider that the burdens imposed were "unreasonable" (House of Lords 1990: Evidence, 30). In its explanatory memorandum the Commission listed the three main categories of obligations for credit and financial institutions to which the Directive would give rise: identification of customers and beneficial owners, due diligence in relation to suspicious transactions and obligations to co-operate with law enforcement agencies (House of Lords 1990: 22). The Commission's proposal would have required credit and financial institutions to identify their customers and to "take reasonable measures" to identify any persons on whose behalf a customer was acting "when entering into business relations or conducting transactions". The Commission had thus opted for an extremely broad obligation to identify and it cannot have been surprised when this provoked criticism from various quarters. The British Treasury took the view that a distinction should be made between transactions with established or account customers, in respect of whom an identification check should be required only on the opening of an account, and "non-customers" whose identity should be checked only in relation to suspicious transactions or transactions above a certain threshold (House of Lords 1990: Evidence, 11 ). The House of Lords Committee shared the view that it would be excessively onerous for banks and other bodies caught by the Directive to

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require identification in the case of every bank deposit (House of Lords 1990: 16). The Community legislator took account of these objections and the final version of the Directive adopts the approach advocated by HM Treasury. Article 3(1) of the Directive requires identification of all customers "when entering into business relations" (meaning, in particular, the opening of an account or savings accounts, or the offering of safe custody facilities), whereas Article 3(2) imposes the identification requirement for other transactions "involving a sum amounting to ECU 15,000 or more, whether the transaction is carried out in a single operation or in several operations which seem to be linked". The persons concerned should be identified "by means of supporting evidence" (Article 3(1 )). This formulation replaced the original wording "identity documents required" which had caused some concern to the Bank of England (House of Lords 1990: Evidence, 26). The new wording is more flexible. It was conceivable that the previous wording could have been construed to require production of an identity card, which, of course, does not exist in every Member State. The draft British regulations implementing this part of the Directive seek to retain the element of flexibility. They refer only to "evidence ... which is reasonably capable of establishing that the applicant is the person he claims to be". The Directive requires that the evidence of identification and of the transactions falling under Article 3 should be kept for at least five years (Article 4). Though this may entail new and rather burdensome practices for institutions in some Member States, others, like Germany, already have such legislative requirements; in the German case, documentary evidence relating to this sort of transaction must be kept for at least six years (Bundestag 1992: 16). The Directive allows certain exemptions from the identification requirements in respect of insurance-related business. On the other hand, it also makes clear that the obligation to carry out an identification will apply to transactions below the threshold "wherever there is suspicion of money laundering". The term "suspicion" is not defined in the Directive. The Commission took the view that to try and list "suspicious transactions" would have been inappropriate. It was better to leave the matter open and therefore opt for breadth than come up with a list which could quickly be shown to be incomplete, due to the ingenuity of the launderers! The duty of due diligence which is contained in Article 5 of the Directive means that credit and financial institutions will no longer be able to tum a blind eye when confronted by transactions which arouse their suspicions. They must, under this article, "examine with special attention any transaction which they regard as particularly likely, by its nature, to be related to money laundering". The Commission's original version of this clause would have imposed the obligation of scrutiny in relation to "any unusual transaction not having an apparent economic or visible lawful purpose". This wording would probably have placed unacceptable constraints on the affected institutions. Certainly, strong objections to it were registered by the British Bankers' Association (House of Lords 1990: Evidence, 26). The final version of the

THE EUROPEAN COMMUNITY DIRECTIVE 43

clause appears to leave the institutions with rather more discretion in making their assessment. The Commission has indicated that it would expect "the banking of proceeds which were abnormally large for the nature of the enterprise given as their source" to be regarded as suspicious (House of Lords 1990: Evidence, 30). Articles 5, 6 and 7 of the Directive are all closely linked. Whereas Article 5 will mean that credit and financial institutions will require to be alert to suspicious transactions, Article 7 seeks to guarantee that such transactions are not carried out, at least not before the institution's suspicions have been reported to the "authorities responsible for combating money laundering" in terms of Article 6. Article 7 allows, however, for "controlled money laundering" by providing that suspicious transactions may proceed where to refrain from carrying them out might jeopardise action by the law enforcement authorities to uncover further criminal activity (House of Lords 1990: 16-17). The reporting obligation under Article 6 raised some worries that credit and financial institutions might be put in a position where they would be acting in a quasi-policing role, rather than merely as supervisory authorities (House of Lords 1990: Evidence, 23). But this does not seem to be justified. As the Commission observed in its evidence to the Committee: "In the penal codes of most Member States there was already obligation (sic) of a general nature to report suspected criminal activities to the relevant law enforcement authorities". Article 6 requires Member States to ensure that company staff offer full co-operation to the law enforcement authorities in their investigations of money laundering. Not only must they let those authorities know of any fact which might suggest that laundering is about to occur or has taken place, directors and employees of credit and financial institutions must also provide those authorities, on request, "with all necessary information". The Directive does not say in whose view the information must be deemed "necessary" but the implication is that the law enforcement authorities can determine this. It will certainly not be open to banks to invoke the principle of bank secrecy to withhold information from the authorities. This is made clear by the preamble which states that "banking secrecy must be lifted". But might not other Community or national rules or principles concerning privileged information entitle persons to refuse to disclose information required in terms of the Directive? Article 9 of the Directive offers protection against exposure to "liability of any kind" for persons who, in pursuance of Articles 6 or 7, disclose information about money laundering to the competent authorities. Such disclosure will also not be regarded as a breach of any contractual, legislative or regulatory provision. Because it offers such immunity, Article 9 may be regarded as excluding the possibility of refusal to disclose information in any circumstances. But it is submitted that there must be exceptions to this. The legislation which will implement the Directive in the United Kingdom will contain provisions which reserve the right of professional legal advisers to refuse to disclose "information or other matter which is an item subject to legal privilege" (section 26B(2) of Drug Trafficking Offences Act 1986 and section

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43A(2) of Criminal Justice (Scotland) Act 1987). From a Community point of view, there cannot be any objection to such exemptions, given that the principle of the confidentiality of lawyer-client correspondence is recognised as a general principle of European Community law (Case 155179 Australian Mining & Smelting Europe Limited v European Commission [1982] ECR 157 5). The general principles of Community law may be invoked against Member States where they act pursuant to Community obligations (Steiner 1992: 54). The Directive will fall to be interpreted, in the light of this particular general principle, as protecting the confidentiality of lawyer-client communications, provided that they are "made for the purposes and in the interests of the client's rights of defence and ... they emanate from independent lawyers, that is to say, lawyers who are not bound to the client by a relationship of employment." (Case 155179 Australian Mining & Smelting Europe Limited v European Commission [1982] ECR 1575, 1611.) There is obviously scope for variation in the degree of protection extended by the Member States to lawyers' communications within these parameters. Even the laws of Scotland and England are not identical in this respect (MacPhaill987: para 18.23). It may be that a credit or financial institution finds itself in a situation where it would like to plead the privilege against self-incrimination in order not to disclose information, required under the terms of the Directive, for fear that it may thereby expose itself to a criminal or other penalty. Just as it is silent on the question of legal privilege, so the Directive does not mention the possibility of non-disclosure on the ground of self-incrimination. Article 9, which requires Member States to free the act of disclosure of information relevant to money laundering from liability of any kind, does not purport to prevent information supplied as part of such disclosure from being used for another purpose (e.g. a criminal prosecution in relation to tax evasion). The last paragraph of Article 6 confirms this by itself establishing the general rule that information supplied to the authorities responsible for money laundering investigations in pursuance of the Directive may not be used for another purpose. This paragraph adds, however, somewhat surprisingly, that Member States may decide to depart from this rule by separate provision. The European Court of Justice decided in 1989 that Community law does not recognise the privilege against self-incrimination as a general principle which would protect undertakings subject to investigation of anti-competitive practices against incriminatory disclosures (Case 374/87 Orkem v European Commission [1989] ECR 3283). Only in relation to natural persons charged with an offence in criminal proceedings could such a general principle be derived from the laws of the Member States. It is, therefore, extremely doubtful that directors or staff of credit or financial institutions may lawfully rely on a nationally guaranteed "right to silence" in order to escape the obligations of disclosure under the Directive. On the other hand, their legal advisers may wish to consider the impact of another decision of the European Court of Justice in the field of competition law which could have implications for the use of information obtained from credit and financial institutions pursuant to the Money Laundering Directive. In Case C-67/91 Direccion General de Defensa de Ia Competencia v

THE EUROPEAN COMMUNITY DIRECTIVE 45

Asociaci{m Espanola de Banca Privada and others [I992] ECR 1-4785 the Court

held that national authorities may not "poach" information obtained by the Commission in the course of competition proceedings carried out under Regulation I7 of I962 for use as evidence in their own investigations of anti-competitive practices (either under national or Community competition law). Of course, the Commission is not involved in investigations under the Money Laundering Directive but one could argue that the same principle should be applied to the national authorities in a Member State. If the concern reflected by the judgment of the Court ofJustice in the above case was to ensure that separate legal bases should be used to gather information for separate purposes, then surely one could argue with some force that it would breach this principle for, say, the Inland Revenue to have access to information provided pursuant to the obligations contained in the Directive to, say, the Serious Fraud Office. The final important provisions of the Directive which will lead to new duties for credit and fmancial institutions are contained in Article II. Under this provision, Member States must ensure that credit and financial institutions, first, set up "adequate procedures of internal control and communication" to help detect and prevent laundering and, second, "take appropriate measures so that their employees are aware of the provisions contained in this Directive". The day-to-day responsibility for making the Directive work will fall, in the first instance, upon the staff at the bank counter. Some writers have questioned the ability of such staff to apply the Directive (Eisenberg I993: 1036). Certainly, the assessments that these and other employees will have to make will not be altogether straightforward. Th~ Directive recognises that "special training programmes" will have to be arranged. There is some discretion here for the Member States and, indeed, there would have been little sense in prescribing uniform methods of control and training. But the Commission could certainly review the measures taken to see if they were "adequate" or "appropriate".

Implementation The I992 report by the European Parliament Committee of Enquiry into the spread of organized crime linked to drugs trafficking in the Member States of the European Community argued that the monitoring of the application of the Money Laundering Directive "must be considered a priority by the Community and its Member States when it comes into effect on 1st January I993", and added the recommendation that a "specialized service" be established for this purpose (European Parliament I992a: I2). Although the Commission rejected this suggestion, its officials are closely monitoring implementation of the Directive in the Member States. Under Article I7 of the Directive itself, the Commission is required to draw up reports on implementation. The first of such reports requires to be submitted to the European Parliament and the Council by January I994, i.e. one year after the expiry of the I January I993 deadline for implementation which is laid down in Article I6.

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Quite apart from the specific terms of the Directive, the Commission is obliged by Article 155 of the EEC Treaty to ensure the proper application of Community legislation and, in terms of Article 169 of that Treaty, may initiate "enforcement proceedings" against any Member States which fails (adequately) to implement a Directive. Such proceedings can lead to a declaration by the European Court of Justice that the Member State is in breach of its Treaty obligations. Member States must, in the event of such a condemnation, "take the necessary measures to comply with the judgment of the Court of Justice" (Article 171, EEC Treaty). By the beginning of June 1993 only four Member States had notified the Commission that domestic implementation had taken place. Among those not falling into this category are the United Kingdom and the Federal Republic of Germany. As it is obliged to do under Article 169 of the EEC Treaty, the Commission has opened the Article 169 procedure against the dilatory countries. Sources in the Commission regard this, however, as a purely formal step which they do not believe will lead to an action before the European Court of Justice. They are confident that national implementing rules will be in place in all Member States by the end of 1993. The eighteen-month deadline imposed by the Directive was a comparatively short one. The delays in some Member States can be attributed to the protracted nature of the consultation process. In the United Kingdom, where the financial services industry is so important and possesses a strong lobby, the Treasury has received many representations in relation to the proposed legislative enactments and, more especially, with regard to the Draft Money Laundering Regulations. It should be recalled that directives leave to the Member States the choice of form and methods when it comes to implementation. Whereas a single general legislative enactment may suffice in one state, in others legislation or regulations may be required in a variety of fields. In the United Kingdom, the passage of the primary legislation required was delayed as a result of the slow progress through Parliament of the European Communities (Amendment) Bill, the domestic legislation required before the Government could ratify the Maastricht Treaty. In Spain, part of the reason for legislative delay can be explained by the recent general elections there. The position in the Federal Republic of Germany is that an offence of money laundering has been inserted in the country's Criminal Code (para 261) but the complementary legislation which will implement the provisions of the Directive concerning the obligations of credit and financial institutions has been held up. The initial draft German legislation (para 2(4)) indicates that the government wishes to go beyond Article 3 of the Directive by requiring identification in relation to any cash deposit of 50,000 Deutschmarks or over, regardless of whether or not the payment is into the account of an existing customer (Bundestag 1992: 13). Paragraph 2( 1) of the German draft provides, in implementation of Article 3(2) of the Directive, for identification in relation to any financial transaction valued at 30,000 Deutschmark or more. Not surprisingly, the German banks and financial institutions have been pushing for a higher threshold in relation to cash deposits, while some politicians, pointing to the $10,000 American threshold, think the limit should be lowered

THE EUROPEAN COMMUNITY DIRECTIVE 47

to catch more transactions (cf. Eisenberg 1993: 1036; Bundestag 1992: 13). A compromise figure of 25,000 Deutschmarks emerged but this did not satisfy the Bundesrat, the Federal Council, which has also blocked the draft legislation because it objects to the planned exclusion of professional groups from the obligation of identification (Das Parlament, 16/23 July 1993, 11). Given the compelling evidence that German banks have been increasingly used over the last decade or so to launder very large amounts of "drugs money", comprehensive legislation would seem to be urgently required to prevent the Federal Republic from becoming something of a drugs launderer's paradise (Der Spiegel, 24 February 1992: 130 et seq). The implementing legislation or regulations thus far adopted and those in the process ofbeing adopted show that the Directive will not produce complete uniformity in relation to the legal treatment of money laundering at national level. The extent of application of the Directive will not be the same in each Member State. For one thing, the bodies providing financial services in the Member States differ considerably. Furthermore, it is quite conceivable that a profession in one Member State may be found to be particularly susceptible to laundering, and therefore be made subject to the application of the Directive as a result of Article 12, whereas the same profession in another Member State is unaffected and excluded from coverage. Nor, to take a further example, will compliance with the obligations contained in the Directive produce identical sanctions in respect of money laundering. The draft German legislation referred to on identification and similar requirements (para 18) foresees the imposition of regulatory fines ("Bussgelder") under the German system of administrative penalties ("Ordnungswidrigkeiten") in respect of the failure of banks and others concerned to identify their customers in accordance with the Directive (Bundestag 1992: 8). Such penalties have no exact equivalent under United Kingdom law. The level of criminal penalties to be imposed on the launderers themselves will also vary from one state to the next. Paragraph 261 of Germany's Criminal Code makes offenders liable to a prison sentence of up to five years (in aggravated cases, e.g. where the offender operates as part of a crime syndicate, ten years). Section 23A of the Drug Trafficking Offences Act will make launderers liable, on conviction on indictment, to imprisonment for a term of up to fourteen years. The Contact Committee, mentioned above (41), is accorded the role of facilitating "harmonized implementation" of the Directive (Article 13(1)(b)). But it can only work within the confines of the substantive terms of the Directive. For example, Article 15 of the Directive itself provides that "Member States may adopt or retain in force stricter provisions in the field covered by this Directive to prevent money laundering", so national disparities are accepted. In relation to the question of sanctions for laundering, obviously the Commission may pursue a Member State using the Article 169 procedure if that state failed to prohibit laundering at all. Also, should the penalties imposed fall foul of the "analogous treatment" principle (see above, 38), or if they were of a purely nominal character, the Commission would be fully justified in seeking a declaration from the Court of Justice that the Member State concerned was in breach of Community law. The Contact Committee

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may recommend to the Commission that the Directive be amended or extended in the light of experience. Such revision may be proposed, especially, in order to "harmonize the effects of Article 12" (Article 13(l)(c)). Three further points in relation to implementation require to be mentioned briefly. First, the principle of direct effects: the European Court of Justice has held that "a Member State which has not adopted the implementing measures required by a directive within the prescribed period may not plead, as against individuals, its own failure to perform the obligations which the directive entails" (Case 8/81 Becker v Finanzamt Miinster-lnnenstadt [1982] ECR 53, 71). An individual may rely directly on the terms of the Money Laundering Directive against a Member State or public authority of that state, if the state has failed to implement it timeously or correctly (Louis 1990: 125-126). Secondly, the case of Francovich v Italian Republic (C-6/90 and 9/90, [1991] ECR I-5357) establishes that Member States which fail to implement Directives (adequately) may be liable in damages to affected individuals. Thirdly, even after the Directive has been fully implemented in the Member States, it does not lose its legal relevance. Domestic legislation enacted in order to give effect in the United Kingdom to Community obligations falls to be interpreted purposively, in the light of the terms of the Directive concerned (Litster v Forth Dry Dock & Engineering Company Limited [1989] 2 CMLR 194).

Conclusions The adoption of the Money Laundering Directive is indicative of the importance the Community and the Member States attach to the prevention of money laundering. It reflects their general concerns about the spread of organized crime and, in particular, drug trafficking in the Community. The Directive is in keeping with the moves to enhance European co-operation in the combating of serious international crime signalled by the Maastricht Treaty on European Union. Article K.l (9) of that Treaty provides for increased police co-operation in relation to such crime, including unlawful drug trafficking. It envisages the establishment of a European Police Office (Europol) to facilitate information exchange on these matters. Steps have recently been taken to set up the forerunner ofEuropol, namely the European Drugs Intelligence Unit, part of whose remit will be to collate and disseminate information among the twelve on laundering of drugs money. At the same meeting in Copenhagen at which the Justice and Interior Ministers of the Member States took this decision, they also adopted recommendations on money laundering which complement the Directive (Agence Europe 1993: 5 June, 9-11). The Money Laundering Directive is also clearly intended to protect the EC's newly-formed financial market against abuses. In this sense it is an internal market measure. It requires all Member States to penalise money laundering, though not - because of British concerns about an arrogation of competence by the Community in the field of criminal law - necessarily by criminal sanction. Apart from this, the Directive is mainly concerned to ensure that

THE EUROPEAN COMMUNITY DIRECTIVE 49

credit and financial institutions throughout the Community take the preventative measures necessary to stop laundering from happening. The duties which will result from the Directive for such institutions will be onerous, though not as onerous as those which were contained in the Commission's original proposal. The Directive underwent several important changes in the course of its legislative progress, most of which appear to have taken the concerns of the financial community about excessive burdens on board. The good will and commitment of well-trained staff in credit and financial institutions will be essential in order for the Directive to work in practice. In the United Kingdom there is every sign that such co-operation will be forthcoming, not least because of the careful and thorough process of consultation with the financial services sector carried out by the Treasury. The UK and the other Member States which did not quite make the deadline of 1 January 1993 are all, nevertheless, likely to complete implementation by the end of 1993. Subsequent years may see the extension of the scope of the Directive to new professions or undertakings as the launderers shift their activities away from banks and other traditionally favoured institutions. The Directive will also, before long, apply to the EFfA countries as a result of their Agreement with the Community on a European Economic Area. The countries of Central and Eastern Europe are in the course of establishing laws of a similar character to the Directive. In conjunction with the other international instruments referred to, the Directive will therefore provide the basis for a comprehensive code of anti-laundering legislation throughout the continent of Europe.

Acknowledgement The author would like to thank Dr. W. C. Gilmore of the Department of Public International Law, University ofEdinburgh, for his helpful comments in relation to aspects of this article. Sole responsibility for its content remains with the author.

Money Laundering in Scotland: The Law Alastair N Brown The subject of this article is Scottish domestic law and practice in relation to money laundering. It may be wondered whether there is any such thing. Very substantial parts of the relevant legislation which already exists are common to the whole UK; the new Criminal Justice Act 1993, which substantially implements the EC Money Laundering Directive, was a Home Office-led UK Bill; and the associated Regulations, which complete that implementation, are the responsibility of HM Treasury, again on a UK basis. Nevertheless, there are distinctive Scottish provisions and there is a distinctive Scottish approach in practice. It is the Scottish approach which is to be summarised here. Although it will be necessary to make some reference to the English position, it is not intended to make a full comparison. The aim of the legislation is to seek to contain crime- especially, but not exclusively drug trafficking - by attacking its financial aspects. Whereas most crimes are committed without substantial premeditation, the drug trafficker is pursuing a deliberate decision to go into business. His motive is financial. The reasoning is that if he can be prevented from dealing with the proceeds of his crime and, better still, deprived of them, the incentive to commit the crime is removed and the drug trade is starved of investment. A business starved of investment is a business which cannot survive. The same reasoning applies to other forms of organised crime, and it was for this reason that the European Committee on Crime Problems considered that the scope of the application of the Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime should be as wide as possible, and should cover organised crime in general, violent crimes, extortion, kidnapping, environmental offences, economic fraud and insider dealing.

Laundering: the Existing Law Assuming that it has not been possible to catch the drug trafficker in the act of dealing in drugs, the first objective must be to prevent him from using the proceeds. Little can be done about the street-level dealer with small proceeds in used notes. However, the larger-scale dealer will wish to put his proceeds into the financial system. At the very least, he will prefer to have his money in the bank or in a safe deposit box instead of holding large amounts of cash

MONEY LAUNDERING IN SCOTLAND: THE LAW

51

around his house. At a slightly more sophisticated level he will wish to move the money through the financial system in such a way as to give it an appearance of legitimacy and it is this operation which constitutes money laundering. The money launderer will take advantage of financial systems created for other purposes, including in particular bank secrecy, easily negotiable instruments, grey markets and lax currency controls. He may change the form of the proceeds, for example by buying and reselling antiques, in order to avoid leaving an audit trail. In ways like these, large sums of money can be laundered, on a worldwide basis, very quickly indeed. Nor will the launderer necessarily be deterred by the prospect of making a small loss on some of these transactions. His primary objective is, not investment, but to enable himself to use the funds without arousing suspicion as to their provenance. A money laundering operation is at its most vulnerable at the "placement" stage, when the proceeds of the crime are first put into the financial system. It is at this stage that the explanation for the funds is likely to be thinnest and unsupported by any circumstantial evidence to lend it credibility. There are a number of legislative provisions which target this stage in particular. First, there is section 14(1) of the Criminal Justice (International Cooperation) Act 1990 ("the 1990 Act") which makes a person guilty of an offence if, in order to avoid prosecution for a drug trafficking offence or the making of a confiscation order (for which see below, 56-9), he conceals, disguises, converts or transfers property which in whole or in part represents his proceeds of drug trafficking; and subsection (2) makes it an offence to assist in that process. This is, logically, the first of the money ,laundering offences and it relates to what might be called "own funds" money laundering. Contravention of either subsection carries a potential penalty of 14 years imprisonment. Next we must notice section 43 of the Criminal Justice (Scotland) Act 1987 ("the 1987 Act"). The primary thrust of that subsection is to make it an offence to assist another person to retain his proceeds of drug trafficking. The offence is committed if, knowing or suspecting that a person has carried on or derived rewards from drug trafficking, the accused is involved in an arrangement whereby the retention or control by the trafficker of his proceeds is facilitated or the proceeds are used for his benefit. Once again, the potential penalty is 14 years imprisonment. Subsection (3) establishes a mechanism whereby disclosures may be made to the authorities under conditions which avoid the disclosure being treated as breach of any restriction on the disclosure of information. The making of such a disclosure before entering into the arrangement or as soon thereafter as is reasonably possible is a defence to a charge of assisting another to retain his proceeds of drug trafficking. In the first instance disclosures are best made to the National Criminal Intelligence Service (telephone 071-238-8272) whose task it is to collate and associate such pieces of information and to pass it to the police force best placed to deal with it. They will, of course, observe strict confidentiality. Section 43 of the 1987 Act can be contravened without actually dealing with the proceeds. It is enough to be concerned in the arrangement. Section 14(3)

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of the 1990 Act deals with the next stage, where a person who knows or has reasonable grounds to suspect that property represents the proceeds of drug trafficking acquires that property at undervalue. The subsection strikes most obviously at the associate of the trafficker, who knows or should know the provenance of the funds and who nevertheless accepts them (perhaps to hold them on behalf of the accused in order to help to conceal them). It is not, however, limited to such associates. In determining whether value has been given for the property, the provision of services or goods which are of assistance in drug trafficking is not to be counted.

Laundering- the EC Directive and the New Law Into this existing statutory framework comes the EC Directive of 10 June 1991 on prevention of the use of the financial system for the purposes of money laundering. This Directive is implemented by the Criminal Justice Act 1993 and by Regulations to be made under the European Communities Act. The Act operates in the main by making substantial insertions in the texts of the existing legislation. The existing legislation has already made the UK a world leader in attacking the fmancial aspects of drug trafficking and, on one view, relatively little required to be done in order to bring UK law into compliance in relation to the laundering of drugs money. However, there is a change of emphasis so that there will now be a positive obligation to report suspicion, more needed to be done in order to tackle the laundering of funds from other types of crime, and the prohibition on acquisition of property representing proceeds of crime had to be extended to possession or use of property known to be derived from crime. The 1993 Act inserts a new section 42A in the 1987 Act which effectively extends section 14(3) of the 1990 Act. It makes it an offence to acquire, possess or have the use of property known to be the proceeds of drug trafficking, subject to a defence of acquiring the property for adequate consideration. "Adequate consideration" means value not significantly less than the value of the property and, as in section 14(3) of the 1990 Act, the provision of services or goods which are of assistance in drug trafficking does not count. There is a subtle but important distinction between section 14(3) of the 1990 Act and the 1993 Act. Under section 14(3), reasonable grounds to suspect that the property represents the proceeds of drug trafficking is enough to constitute the offence. Under the 1993 Act, knowledge itself will have to be proved. This reflects the Directive. Similar provision is made for the proceeds of crimes other than drug trafficking. Article 6 of the Directive places a duty on EC Member States to ensure that credit and financial institutions and their directors and employees co-operate fully with the authorities by informing them, at their own initiative, of any fact which might be an indication of money laundering and providing, on request, all necessary information. Article 7 requires institutions to refrain from carrying out suspect transactions until they have made such disclosure. Section 43(3) of the 1987 Act falls short of the requirements of these Articles in that it

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protects a person who chooses to make a disclosure but does not require the making of a report; nor does it catch employees who are not personally involved in the relevant transaction but who become aware of laundering activity. The 1993 Act therefore makes it an offence if, knowing or suspecting that another person is engaged in drug money laundering as a result of information coming to attention in the course of one's trade, profession, business or employment, one does not disclose that information to a constable or customs officer as soon as reasonably practicable. This section has, understandably, concerned the Law Society of Scotland and that of England and Wales. Prima facie it would oblige a solicitor to "blow the whistle" on a client suspected of money laundering and this has implications for legal privilege. There is, therefore, a saving in the case of a professional legal adviser who does not disclose information subject to that privilege. This should not, however, be perceived as a complete exemption for solicitors. There are real limits on the scope of the doctrine of privilege, or confidentiality, especially where a criminal transaction is in issue. There is a defence of reasonable excuse for not disclosing and it is anticipated that where an institution has established a system of internal control and communication to deal with money laundering and an employee makes a report through the internal system that employee would be within this defence. The section also implements the requirement to give wide immunity following the proper disclosure of information. However, where such a system is in place and a disclosure has been made, any other employee who discloses information likely to prejudice the investigation commits an offence. The Directive requires a prohibition against disclosure to customer or third parties that information has been passed to the authorities. Scots law anticipated this with section 42 of the 1987 Act, but the equivalent English offence was more narrowly drawn and had to be extended to meet the requirement. The 1993 Act makes it an offence to assist another to retain the benefit of criminal conduct of any kind and follows the general pattern of section 43 of the 1987 Act; and it also provides in relation to the proceeds of any criminal conduct that it is an offence to conceal or disguise any property representing the proceeds of criminal conduct or to convert it, transfer it or remove it from the jurisdiction in order to avoid prosecution or the making of a confiscation order. All of this presupposes that a financial institution or other business can recognise a suspicious transaction when it sees one. In order to ensure, so far as possible, that this is the case, Regulations will impose a general duty on undertakings thought to be particularly at risk of use by money launderers to establish and maintain adequate systems of internal control in order to forestall and prevent operations related to money laundering and to make their employees aware of the legislative requirements and ensure that training is provided for relevant staff in recognition and handling of possible money laundering transactions. The responsibility for compliance will be that of the undertaking and, as usual, where an offence is committed with the connivance, or is attributable to the neglect, of an officer of the undertaking that person will also be guilty of the offence.

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The application of the Regulations is likely to be detailed and, once made, they should be consulted to ascertain whether they affect a particular business. In general, however, it may be said that those listed in the Annex to the Second Banking Coordination Directive (i.e. all of the usual types of financial institution), together with those who are authorised under the Financial Services Act, can expect to be covered. The Regulations are likely to require the establishment and maintenance of customer identification systems and controls, record keeping systems and controls and procedures for determining which transactions might be connected with money laundering and for reporting such transactions. Identification by supporting evidence (i.e. documents or other evidence admissible in a criminal court) will be needed for all long-term customers, all those who carry out transactions of ECU 15,000 or more and all those whose transactions are particularly suspicious (regardless of size). Steps will be required to discover the identity of the ultimate customer where there is reason to suppose that the immediate customer is acting as an agent. The customer identification evidence and evidence of transactions with customers will have to be kept, in a form admissible in a criminal court, for at least 5 years after the end of the relationship with the customer. And staff will have to be made aware of the requirements of the law, how the particular business has addressed them and how to identify and deal with potential money laundering transactions.

Tracing Funds All of the foregoing is directed to catching the proceeds of crime as they enter the financial system. It would be unrealistic, however, to think that it would be possible to stop all proceeds from getting into the system and when it happens it is necessary to overcome commercial or legal confidentiality in order to trace the funds. The disclosure provisions have already been noticed (above, 52-3), and should be operated whenever suspicion arises about a transaction, even if the funds have been moved on. Often, however, it will be the enforcement authorities who become suspicious about transactions for a particular customer and they will need to get information from those who have dealt with the funds. Accordingly the Criminal Justice (Scotland) Act 1987 provides in section 38 a mechanism by which a Procurator Fiscal can obtain from a Sheriff an order that material of a particular description be made available. The Procurator Fiscal must satisfy the Sheriff that there are reasonable grounds for suspecting that a specified person has carried on or derived rewards from drug trafficking and that the material to which the application relates is likely to be of substantial value to the investigation and does not consist of or include items subject to legal privilege. The Sheriff must also be satisfied that there are reasonable grounds to believe that it is in the public interest that the material should be produced, having regard to the benefit likely to accrue to the investigation if it is produced

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and to the circumstances under which the person in possession of the material holds that material. There are two things to say about this. The first is that the mechanism does not relate only to investigations which are directed to the obtaining of a confiscation order in relation to the proceeds of trafficking. The financial profile of an alleged drug trafficker may be of substantial value in proving a substantive charge of being concerned in the supply of drugs - as where an accused man had legitimate income over two years of only £10,000; during the same period he had unexplained income of over £100,000. Although such an income does not on its own prove drug trafficking, it is a circumstance which will assist a jury in drawing that conclusion where there is other substantive evidence of trafficking. Next, the material must not be subject to legal privilege. As observed above (53), there are distinct limits to this doctrine and it is certainly not the case that anything in the hands of a solicitor is thereby privileged. In particular, there is no protection for material about a transaction which is alleged to have been criminal, and a distinction is to be drawn between legal work on the one hand and the carrying out of general business on the other.

Restraint Orders In the early stages of the case the detailed investigation will be directed towards identifying the accused's realisable estate and in particular to identifying liquid assets which can be alienated easily. Obviously, the first step which a well-advised drug trafficker is likely to take upon realising that he is under investigation is to attempt to dispose of his assets in such a way that he retains control over them but that the Crown cannot get at them for the purpose of confiscation. It was to guard against this very obvious step that Parliament enacted in the 1987 Act a restraint mechanism. In terms of sections 8 and 9 the Court of Session on the application of the Lord Advocate may make a restraint order where warrant to arrest and commit a person for a drug trafficking offence has been granted and it is intended to proceed in the High Court, where a Procurator Fiscal proposes to petition for such a warrant within 28 days or where a Sheriff has remitted an accused person to the High Court for sentence in respect of such an offence. The procedure is by Outer House petition in the Court of Session and the order obtained interdicts the accused and any implicative donee from dealing with his or their realisable property and grants warrant for inhibition and arrestment. The objective is to tie up the whole property of the accused and of any implicative donee during the dependence of the criminal trial. (An implicative donee may be thought of as one who has received a gratuitous transfer or a transfer at undervalue.) If the estate which is tied up by restraint is complicated and requires active management to maintain its value, there is provision in sections 13 to 23 for the appointment of an administrator. These orders can be registered in England and Wales, and section 11 of the

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1987 Act enables equivalent English orders to be registered in Scotland. There are also reciprocal arrangements with the offshore islands- Jersey, Guernsey and the Isle of Man - and internationally there are such arrangements with an increasing number of countries. At present there is reciprocity with 73 countries and the UK has special bilateral agreements to facilitate co-operation with 25 of those countries. Where a restraint order is obtained and affects an asset held by a third party - for example a bank - that third party will be notified of the existence of the restraint order by the Crown Office and might receive service of an arrestment if the asset value is high. In general, where the value of an asset held by a responsible third party is small the Crown Office approach will be to notify the third party of the existence of the restraint order and recall the existence of section 43 of the 1987 Act which creates the offence of assisting another to retain the proceeds of drug trafficking. The English approach in this situation is that a third party with notice of a restraint order is in contempt of court if he allows the owner to deal with the asset but this may depend upon English rules about the effect of injunctions on those with notice of them. The claims made for Scottish interdicts are more modest. It would obviously be unsatisfactory that an order as substantial as a restraint order, granted on no more that an ex parte application, could tie up the estate of a person for a significant time without any remedy for that person, and accordingly there is provision in section 8(2) for a person having an interest in property to seek a variation or recall of the restraint order. In particular it is provided that on the application of a person named as having received an implicative gift, the court may recall the order if it is satisfied that the person received the gift not knowing, suspecting or having reasonable grounds to suspect that the giver was a drug trafficker, that he has never been an associate of the giver and that he would suffer hardship were the order not to be recalled. The difficulty which confronts such a person is that if there has been a gratuitous transfer to him it is difficult to see how he will suffer hardship by being prevented from dealing with the asset during the relatively short period between the making of the order and the trial.

Confiscation Once the realisable property has been identified and effectively restrained the thrust of the investigation will be towards the proceeds of crime with a view to seeking a confiscation order under section I of the 1987 Act. The effect of this section is that where a person is convicted in, or remitted for sentence to, the High Court of Justiciary in respect of a drug trafficking offence (the relevant offences are listed in section 1(2)) the High Court may, on the application of the prosecutor, make a confiscation order requiring the offender to pay a sum of money calculated by reference to the proceeds of drug trafficking or the value of the offender's realisable property, whichever is less. The word "confiscate" is therefore misleading because the order does not directly confiscate anything.

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It is necessary to quantify the proceeds of the offender's drug trafficking and the value of his realisable property. This is done in a statement which is prepared by the prosecutor for the purposes of section 4 of the Act. That section provides that where such a statement has been prepared and served the convicted person may then be required by the court to indicate the extent to which he accepts each allegation in the statement and, in so far as he does not accept any such allegation, to indicate the basis of his non-acceptance. If he fails to do so he is treated as accepting the allegations. The appearance of the statement is reminiscent of the pursuer's pleadings in a civil litigation and the convicted person will indicate his acceptance or otherwise of the allegations in a document which recalls the defender's pleadings. The Act strikes at the value of the proceeds of drug trafficking and the prosecutor's statement is substantially concerned with the demonstration of that figure. The obvious way to approach this is that adopted by the English Courts in Comiskey (1991) 93 Cr App R 227 (CA). In that case the defendant was caught importing a quantity of drugs in his car and it was known that he had made two similar trips. The street value of the drug was calculated and multiplied by the number of trips to determine the total value of his proceeds. This was held to be a proper way to calculate proceeds. It has, however, been criticised as "the most egregious speculation" (Sallon and Bedingfield 1993: 171). The Comiskey approach, if it is to have any relation to reality, depends upon knowing what drug was being dealt in, in what quantities and on how many occasions. Although it is not entirely unknown for drug traffickers to keep detailed records and for these to be recovered, it is unusual. The approach taken in Scotland tends, therefore, to be rather different and makes particular use of section 3(2) of the 1987 Act. Instead of trying to prove the history of the offender's drug trafficking and calculate proceeds from that, the starting point is expenditure and the proposition that it must be funded somehow. Put simply, if expenditure and net change in capital (items being counted at cost) are aggregated, the figure brought out must represent income. If the known legitimate income of the offender is deducted, the result will be a figure for unexplained income. Section 3(2) allows the court to assume that property held or transferred to the accused during the preceding six years came from drug trafficking and that any expenditure he made was made out of the proceeds of drug trafficking except to the extent that the assumption is shown to be incorrect. It is therefore for him to demonstrate that the unexplained income was in fact legitimate - or at least not the proceeds of drug trafficking. This is not unreasonable. The sums of money involved will be significant and should, if they are truly legitimate, be recorded somewhere and probably also remembered. A dilemma confronts the man who derived his unexplained income from some other sort of crime. He must decide whether to write the money off to be confiscated as drug trafficking proceeds or admit another offence. Having calculated the proceeds of drug trafficking, it is necessary to put a value on realisable property. This is rather more straightforward. What it

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comes to is that realisable property is the whole property of the accused plus the value of any implicative gift he has made. In general it has been found in Scotland that the value of realisable property has been less than the proceeds of drug trafficking so that the effect of the confiscation order and any fine has been to wipe out the offender's whole estate. The prosecutor's statement is a very substantial document and it is reasonable that the accused should have some chance to digest it. It is usual, therefore, on the production of such a statement on conviction for the court to invoke section 2 of the 1987 Act which allows the postponement of a decision on a confiscation order for a period not exceeding six months from the date of the conviction. Usually the defence will be allowed about six weeks to lodge answers and the case will call again in court at the conclusion of that time. Unless the Crown is in a position to agree everything in the defence Answers (which would be unusual), the case is then continued to a hearing on the evidence in relation to the financial aspects of the case. At the end of this, the judge makes his assessment and such order as he thinks appropriate. This procedure has no statutory sanction but it is difficult to see how the court could in any other way make an assessment of the value of the proceeds of drug trafficking or be satisfied as to the value of the realisable property of the accused. The approach thus described has been applied in all of the cases which have proceeded to a confiscation order in Scotland, and was in particular followed in the only Scottish case in which a written judgement has been issued. That case was HMA v McLean (4 May 1993, High Court of Justiciary, Edinburgh, unreported). The judge was Lord Sutherland and counsel for the accused did not quarrel in principle with the method of assessment (which, it happens, had been used in an earlier case which he had himself prosecuted when he was an Advocate Depute). In a detailed and careful judgement, Lord Sutherland began by describing the statutory scheme and observing that the Scottish approach to confiscation orders might be slightly different from the English in consequence of the difference in the legislation. He proceeded to reject a defence argument that he should not make the assumptions provided for in section 3(2), holding that it would be appropriate to apply the assumptions upon the suspicious nature of the accused's financial history as disclosed in the prosecutor's statement. He then said that the effect of the provisions of section 3(2) is to place the onus on the accused to establish that the assumptions should not be made in respect of any particular item, and that the standard of proof applying to the accused is that of the balance of probabilities. Having established that approach, Lord Sutherland proceeded to go through all the disputed items and make such adjustments to the calculations as he thought appropriate, having regard to the evidence which he had heard. He concluded that the proceeds of drug trafficking were, in McLean's case, £146,064, and that the value of realisable propertywas£98,966. It followed, in termsofthe 1987 Act, that the maximum confiscation order which could be made was £98,966. Lord Sutherland went on to consider whether it was appropriate to make the order in that figure or whether it should be in some lesser amount. He took

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into account the fact that the accused was dealing in substantial sums of cash which had not been satisfactorily explained, and that the proceeds of drug trafficking were substantially in excess of realisable property (which has typically been the case when the assessment has been done in this way). He said that he could see no ground for reducing the amount of the confiscation order below the value of realisable property, and he made the order for the full sum of £98,966. Comparison of the judgement in McLean with what can be gleaned from the judgement of the Court of Appeal about the method of calculation in Comiskey suggests that where the English court was prepared to proceed upon the basis that the amounts suggested by the Crown for each importation were "probably reasonable", the Scottish courts will be looking for precision wherever possible.

Crimes other than Drug Trafficking It is, of course, not only in drug trafficking cases that there are significant

proceeds to be made. Organised crime will take any opportunity to make a profit and there is evidence that successful drug traffickers move on into other types of crime including in particular credit and debit card fraud. These offences have the added attraction that the sentences imposed for "white collar crime" are perceived as being much less severe than those imposed for drug trafficking. Nevertheless, they can be extremely lucrative for the criminal and extremely expensive for the victims. Those victims will, in many cases, be institutions in the financial sector. White collar crime of this sort is a business and like all businesses it requires working capital. The proceeds of one offence go in part to fund the next criminal project. Whether the enterprise requires plant (such as the equipment to forge credit cards), stock (such as drugs, pornography or pirated software), or only the creation of an impression of financial soundness (as in long firm fraud or advance fee fraud), the starting point must be a sufficient supply of money. There is not yet a confiscation regime in Scotland for non-drug trafficking offences (other than for terrorist crime, to which the money laundering legislation also applies) and when the United Kingdom ratified the Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime it did so with the reservation that in relation to Scotland the Convention would only apply to drug trafficking offences. This is an unsatisfactory basis upon which to have entered upon international obligations but it is probably temporary. In June 1989 the Scottish Law Commission issued a discussion paper in which they signalled their clear intention to make recommendations for a scheme of restraint and confiscation in non-drug cases and it is to be expected that such a scheme will be introduced in the course of the next year or two.

Countering Money Laundering: The Response of the Financial Sector John Drage Money laundering has grown in recent years and is perceived to be a potential threat to the integrity of the world's banking system. This article explains what money laundering is; why it should be countered; and describes various steps that have been taken in the United Kingdom and internationally to tackle the problem.

What is Money Laundering and How Can It Be Countered? Money laundering is the process by which criminals attempt to conceal the true origin and ownership of the proceeds of their criminal activities. If done successfully, it also allows them to maintain control over those proceeds, and ultimately to provide a legitimate cover for their source of income. The full scale of money laundering is not known, but it is now believed to be large. One estimate (made by the Financial Action Task Force on Money Laundering- see 13 above, 65 below) suggests that as much as US$85 billion per year could be available for laundering from the proceeds of the sales of drugs alone in the United States and Europe. There is no one method oflaundering money. Methods can range from the purchase and resale of a luxury item (e.g. a car or jewellery) to passing money through a complex international web of legitimate businesses and 'shell' companies. Initially, however, in the case of drug trafficking and some other serious crimes, such as robbery, the proceeds usually take the form of cash: street level purchases of drugs are almost always made with cash. Because the possession of large volumes of cash could arouse suspicions that they have an illegal source, criminals often physically move the cash from where it was acquired and gather it in locations where it is easier to disguise or misrepresent its source. Disguising the cash is done by changing it into another form of asset. The money launderer can try to do this in the country where the proceeds were acquired by depositing the cash in an account at a deposit-taking financial institution, by purchasing some other form of financial asset or by purchasing goods. Alternatively, the launderer can try to transport the cash to another country and dispose of it there. If this 'placement' hurdle is overcome, the proceeds are no longer in the form of cash. The laundering process then continues through the 'layering' stage -

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the initial attempts at concealing the criminal source of the proceeds- towards the 'integration' stage where the funds are integrated into the legitimate financial system and assimilated with all other assets in the system. The purpose of 'layering' is to separate the illicit proceeds from their criminal source by creating complex layers of financial transactions so as to disguise the audit trail. Provided cash placement is achieved successfully, 'layering' can make it extremely difficult for the law enforcement authorities to trace illegal proceeds. Electronic funds transfer systems help the layering process by enabling assets to be switched rapidly between accounts in different names and jurisdictions. Experience shows that, unless an audit trail can be established, it is exceptionally difficult to distinguish between legitimate and illegitimate wealth once assets have changed form and/or location a number of times. When this stage is reached the money launderer has achieved his objective and 'integration' - the provision of apparent legitimacy to criminally-derived wealth - has been achieved. Efforts to combat money laundering largely focus on the points in the process where the launderer is most vulnerable to detection. Because of the money launderer's need to get rid of cash, deposit-taking institutions are particularly vulnerable to being used. Hence, many of the efforts to combat money laundering have concentrated on the procedures adopted by deposittakers. In particular, during the last few years many countries have placed increasing emphasis on the importance of deposit-taking institutions 'knowing their customers'. In the United Kingdom, laundering the proceeds of drug trafficking or facilitating the retention or control ofterrorist funds are criminal offences. The penalties attached to these offences have provided financial institutions with a powerful incentive to report suspicious transactions to the Financial Unit of the National Criminal Intelligence Service (formerly the National Drugs Intelligence Unit). Some other countries, including the United States and Australia, in addition to requiring reports to be made of suspicious transactions, also require all cash transactions in excess of a minimum threshold (normally $10,000 in the United States) to be reported. The United Kingdom's system of reporting suspicious transactions is not limited to cash. Because the reporting of suspicions can also provide useful information on the 'layering' stage of the money laundering process, the keeping of comprehensive transaction records by financial organisations is also an important weapon in efforts to counter money laundering. These are essential for establishing the audit trail. They can also provide useful information on the people and organisations involved in laundering schemes. Experience has shown that effective 'know your customer' and 'reporting suspicious transactions' policies require a considerable effort to be put into staff awareness and training programmes. In addition to the placement of cash and the tracing of transfers within and from the financial system, a third point of vulnerability is cross-border flows of cash. Again some countries have requirements that all large international movements of currency- in the case of the United States in excess of$10,000 -must be reported. In the United Kingdom, the Criminal Justice (International Cooperation) Act 1990 has been introduced to enable police and

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customs officers to seize cash being brought into or out of the United Kingdom, where they have reason to believe that the cash could be the proceeds of drug trafficking.

Efforts to Counter Money Laundering in the UK Financial Sector The fact that deposit-taking institutions are particularly vulnerable to use by money launderers means that the Bank of England, as the supervisor of institutions authorised under the Banking Act 1987, has maintained a keen interest in measures aimed at countering money laundering. Threats to the interests of depositors may arise from banks exposing themselves to direct losses from fraud - perhaps through failure to identify undesirable customers/counterparties - while even inadvertent association with criminals can result in adverse publicity that undermines public confidence in banks, and hence their stability. Thus, following agreement of the Basle Statement of Principles on Money Laundering the Bank announced in January 1989 that it expected banks to be able to demonstrate that they met the standards of best practice as set out in the Statement. In November 1989, the Bank reminded banks of these provisions and took the opportunity to make clear the statutory gateways for suspicion disclosure that then applied. That message also emphasised: (i) (ii)

that adherence to the Basle Statement of Principles would be tested as part of the regular reports on banks' systems undertaken under Section 39 of the Banking Act: and that failure to install or maintain adequate systems relating to money laundering would be taken into account in considering whether the Banking Act's minimum criteria for authorisation continued to be met.

Set against that background, it was consistent with the Bank's response to subsequent initiatives to counter money laundering that the issuing of the Joint Money Laundering Group's Guidance Notes (for which see further 64 below) was taken as the opportunity to advise UK banks of their supervisor's endorsement of that guidance and to point out that assessment of relevant systems and controls would be judged against meeting at least the standard set out in the Guidance Notes. The Building Societies Commission also acted to ensure that building societies adopted the principles contained in the Basle Statement. In July 1991 the Commission informed all building societies that it considered the adoption of these principles as being a necessary part of managing a building society with prudence and integrity and that it expected the systems necessary to achieve adherence to the Basle Statement to be covered in the annual reports made to the Commission under sections 71 and 82 of the Building Societies Act 1986. In addition to its responsibility for banking supervision, the Bank also has

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a more general interest in the maintenance of the integrity of the financial system in the United Kingdom. London, as one ofthe world's leading fmancial centres, offers a wide range of financial products many of which are traded on liquid markets. These attributes are likely to be appealing to the managers of criminal proceeds. Hence, the services available in London are likely to attract the attention of overseas as well as domestic criminal organisations. While deposit-taking institutions are most likely to be vulnerable at the 'placement' stage of the money laundering process, the providers of a much wider range of financial services are vulnerable to being used in the 'layering' and 'integration' stages. The Bank is anxious to ensure that London maintains its reputation as a 'clean' financial centre and that the providers of financial services in the United Kingdom adopt policies to avoid their being exploited by criminals. In pursuit of these interests the Bank has taken a number of initiatives. In addition to the role played by the banking supervisors in ensuring that authorised banks have policies and procedures in place to counter money laundering, the Bank's Wholesale Markets Supervision Division has taken similar steps to ensure that the wide range of institutions which it supervises -the market-makers and brokers in the wholesale sterling, foreign exchange and bullion markets - also adopt appropriate policies and procedures to counter money laundering. The Bank also plays an active role in a variety of international and domestic initiatives aimed at combating money laundering. The Bank was involved in the drawing up of the Basle Statement of Principles, and more recently has participated, as part of the UK delegation, in the international Financial Action Task Force. On the domestic front, in addition to carrying out its supervisory responsibilities, the Bank seeks to ensure that the potential impact on the day-to-day workings of fmancial organisations is fully taken into account when antimoney laundering legislation is being developed. As awareness of money laundering grew internationally, the Bank encouraged the establishment in the United Kingdom of the Joint Money Laundering Group - a forum with participants drawn from both the law enforcement and financial communities. The purpose of this Group was to develop Guidance Notes to raise the awareness in financial institutions of the obligations placed on them by the existing provisions in UK legislation on money laundering, and to offer more detailed guidance on how financial institutions could develop and implement anti-money laundering policies and procedures. The British Bankers' Association, the Building Societies Association, the then National Drugs Intelligence Unit (now the National Criminal Intelligence Service Financial Unit), the police and HM Customs & Excise all readily agreed to participate in the Group which is chaired by the Bank. The membership was subsequently extended to include representatives from the life insurance and investment services industries. The Group has produced three sets of Guidance Notes. Drawing heavily on the procedures already developed by some of the major banks and on the work of the Financial Action Task Force, these notes flesh out the Basle Statement of Principles and highlight the requirements imposed on financial institutions in the United Kingdom by

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existing legislation. The first set of Guidance Notes - for Banks and Building Societies - was issued in December 1990 and versions covering Insurance and Investment Business followed in July and September of 1991 respectively .1 As the title indicates, the objective of the Notes is to provide guidance to financial institutions in formulating policies and systems which are appropriate to their own particular circumstances. They are not in themselves intended to be a comprehensive package of measures. All three versions follow a common format and cover policies and procedures; verification of identity; record keeping; recognition and reporting of suspicious transactions to the investigatory authorities; and education and training. They also include descriptions of actual money laundering schemes that have been uncovered, examples of suspicious transactions and copies of the standard National Criminal Intelligence Service reporting format and feedback reports. The detailed content of each version, however, varies to fit the different working practices of the types of business covered by each set of Notes. The British Bankers' Association has produced a comprehensive training package (including a video tape) to supplement the Guidance Notes for banks and building societies.

International Initiatives to Counter Money Laundering The increasing integration of the world's financial system, as technology has improved and barriers to the free movement of capital have been reduced, has considerably complicated the task of national law enforcement investigators in tracing and confiscating criminally-derived proceeds. Once money launderers have been able to place their criminally-derived cash proceeds into the financial system, they can move their assets rapidly between national jurisdictions. Because of this, the need for close international co-operation in countering money laundering has been recognised by many governments, and a number of agreements have been reached in international fora. On the legal front a significant agreement is the December 1988 UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances2 (the Vienna Convention). It commits all countries that ratify it to introducing a comprehensive criminal law against laundering the proceeds of drug trafficking and to introducing measures to identify, trace, and freeze or seize the proceeds of drug trafficking. To date over fifty countries, including the United Kingdom, have ratified the Vienna Convention. Other international conventions with particular relevance to countering money laundering are the European Convention on Mutual Legal Assistance (ratified by the United Kingdom in 1991) and the recent Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime (ratified by the United Kingdom- the first country to do so- in September 1992). On the financial front, the Committee on Banking Regulations and Supervisory Practices3 issued the Basle Statement of Principles on the prevention of criminal use of the banking system for the purpose of money laundering in

THE RESPONSE OF THE FINANCIAL SECTOR 65

December 1988. This seeks to deny use of the banking system to those involved in money laundering by application of the following principles: Know your customer: banks should make reasonable efforts to determine the customer's true identity, and have effective procedures for verifying the bona fides of new customers (whether on the asset or liability side of the balance sheet). Compliance with laws: bank management should ensure that business is conducted in conformity with high ethical standards, that laws and regulations are adhered to and that a service is not provided where there is good reason to suppose that transactions are associated with laundering activities. Co-operation with law enforcement agencies: within any constraints imposed by rules relating to customer confidentiality, banks should co-operate fully with national law enforcement agencies including, where there are reasonable grounds for suspecting money laundering, taking appropriate measures which are consistent with the law. Policies, procedures and training: all banks should formally adopt policies consistent with the principles set out in the Statement and should ensure that all members of their staff concerned, wherever located, are informed of the bank's policy. Attention should be given to staff training in matters covered by the Statement. To promote adherence to these principles banks should implement specific procedures for customer identification and for retaining internal records of transactions. Arrangements for internal audit may need to be extended in order to establish an effective means of testing for general compliance with the Statement.

More recently, the framework established by the Vienna Convention and the Basle Statement of Principles has been developed by the Financial Action Task Force (FATF). The FATF is now the main international forum focusing on combating money laundering. The Task Force was convened by the Heads of State or Government of the seven major industrial nations and the President of the Commission of the European Communities in July 1989. The FATF was asked to "assess the results of the co-operation already undertaken to prevent the utilisation of the banking system and financial institutions for the purpose of money laundering, and to consider additional preventative efforts". In its first year of operation the membership was fifteen countries plus the European Commission. Its first report, published in Aprill990, provided estimates of the scale of proceeds derived from drug trafficking; examined a variety of money laundering techniques; reviewed existing international agreements and national measures against money laundering; and contained forty detailed recommendations for further action. These covered the improvement of national legal systems, the procedures followed by financial institutions and the strengthening of international co-operation. (See the Appendix to Sherman 1993, above, 21-33, for the Recommendations.) The F ATF brings together experts from the fields oflaw enforcement, legal and financial policy making and fmancial practice and supervision. The membership now includes all OECD countries plus Hong Kong, Singapore, the Gulf Co-operation Council and the European Commission. Its efforts are currently directed at three main tasks:

66 THE HUME PAPERS ON PUBLIC POLICY

the co-ordination and supervision of efforts to encourage non-FATF member countries to adopt and implement the F ATF recommendations; studying and exchanging information on the development of money laundering methods with a view to making recommendations as necessary to counter them; a system of self-reporting and mutual evaluation on the adoption and implementation ofFATF recommendations by all members.

All the FATF members have agreed to participate in an annual self-evaluation process to measure their progress in implementing the FATF's forty recommendations and also to implement a process of mutual evaluation. An agreement was reached that each member would normally be evaluated by its peers on the progress it had made in implementing the forty recommendations three years after endorsing them. The United Kingdom along with the other fourteen original members of the Task Force endorsed the recommendations in the Spring of 1990 and under the agreed rules would have been due for mutual evaluation in 1993. However, in the interests of getting the mutual evaluation process under way, the United Kingdom along with France, Sweden and Australia volunteered to be evaluated in the first half of 1992. For each evaluation examiners are selected with a blend of legal, financial and law enforcement expertise. The examination process involves the country concerned completing a comprehensive and standardised mutual evaluation questionnaire. This information is supplemented through interviews carried out by the examiners during an on-site visit. The F ATF Secretariat then writes a confidential evaluation report reflecting the examiners' assessments. The purpose of the exercise is to reach a clear and unbiased assessment of the extent to which the country being examined has implemented the FATF recommendations and of the areas in which further efforts may be warranted. The evaluation report itself remains confidential, but an executive summary is included in the FATF's published annual report. 4 In its evaluation of the United Kingdom the F ATF noted that an effective system to combat money laundering had been developed based on close co-operation between the authorities and financial institutions. The published summary of the evaluation report on the United Kingdom is reproduced as an Appendix to this paper.

Results in the United Kingdom The work of the Joint Money Laundering Group- reinforced by the activities of the supervisory authorities - has led to a significant rise in the number of suspicion-based reports made to the Financial Unit at the National Criminal Intelligence Service. In 1989, the number of disclosures made nearly tripled compared with 1988. This probably reflected the publicity given by the Bank and the Building Societies Commission to the Basle Statement of Principles, together with the simultaneous efforts of the National Drugs Intelligence Unit

THE RESPONSE OF THE FINANCIAL SECTOR 67

(the fore-runner of the National Criminal Intelligence Service Financial Unit) to raise awareness among the financial community of the obligations placed upon them by the Drug Trafficking Offences Act 1986 and the Prevention of Terrorism (Temporary Provisions) Act 1989. The next significant increase, to over 4,000 disclosures in 1991 compared with just under 2,000 in 1990, probably reflected the impact of the Guidance Notes. The further large increase this year in the number of disclosures being received by the National Criminal Intelligence Service is almost certainly because the British Bankers' Association training video is now being widely used in bank and building society branches throughout the country. The National Criminal Intelligence Service estimates that 5% of the disclosures received from financial institutions generate new cases and convictions that would not have occurred without the disclosure. Of these, approximately half do not involve the proceeds of drug trafficking or the funds of terrorist organisations but relate to the proceeds of other criminal activity (e.g. fraud, burglary or robbery). 5 A further 10% to 15% of disclosures add to pre-existing intelligence and 30% prove, after investigation, to be unconnected to crime. Although the enforcement authorities are unable to reach any conclusion as to whether or not the remaining 500/o of the disclosures they receive are related to crime, their experience is that reports that are not of immediate interest are sometimes subsequently found to have links to new reports and are helpful in adding to intelligence on particular cases. While disclosures made by financial institutions have played an important role in the development of cases against people responsible for the underlying criminal activity, only twenty-seven successful money laundering prosecutions have been brought under section 24 of the Drug Trafficking Offences Act. Of these only two involved personnel from financial institutions. The section 24 offence was formulated- using the subjective test of knowledge or suspicionso as to avoid putting at risk counter staff and others who might inadvertently handle the proceeds of drug trafficking in the course of their ordinary duties, while at the same time trying to ensure that the prosecution does not have to surmount an impossible barrier to secure the conviction of those who launder drugs money with a clear idea of what they are doing. Considerable progress has also been made in the field of mutual legal co-operation with overseas countries. Since the passing of the Drug Trafficking Offences Act in 1986, bilateral mutual legal assistance agreements or arrangements have been concluded with twenty-six countries, and so far 124 requests have been handled by the Central Authority in the Home Office (34 outgoing and 98 incoming). In the short period since the power to detain cash being brought into or out of the United Kingdom was introduced, over £500,000 has been detained in nineteen separate seizures.

The Way Forward Much has been achieved in the past few years, both domestically and internationally, in developing measures to counter criminal abuse of the financial

68 THE HUME PAPERS ON PUBLIC POLICY

system. But there are no grounds for complacency. In the United Kingdom the next step is the Criminal Justice Act 1993, bringing the EC Money Laundering Directive fully into effect. The Act, among other things, extends the scope of offences in connection with laundering the proceeds of drug trafficking to meet the requirements of the EC Directive. It also extends the range of crimes to which a money laundering offence attaches to all indictable crime and includes a number of measures to improve the working of the asset confiscation arrangements. The Government plans to implement the remaining provisions of the Directive through secondary legislation. Updating the Guidance Notes, not only to reflect the forthcoming legislative developments but also to take into account the practical experience financial organisations have acquired from working with them, is another item on the agenda. On the international stage, the F ATF has agreed a programme to step up its mutual evaluation process and has developed an action plan to encourage a greater number of countries to adopt effective measures to counter money laundering. It is also looking at ways of further streamlining mutual legal assistance procedures and will continue to study more sophisticated laundering techniques with a view to making recommendations about how to counter them. One subject being looked at by the FATF (which is of particular interest to the Bank of England) is the use made by criminals of electronic payment and message systems. A particular concern has been the number of electronic payment instructions that fail to include names and addresses of both senders and beneficiaries when these are not financial organisations. 6 SWIFT (the Society for Worldwide Interbank Financial Telecommunications) has responded to these concerns by broadcasting a message to all users of its system asking them to include these details in the messages they send. SWIFT is also co-operating with the FATF in studying what else might be done to improve the audit trail left by electronic payment and message instructions. The increasing efficiency and integration of the world's financial system creates an environment that organised criminals are only too ready to exploit. Hence the need for measures to counter use of the fmancial system by criminals to be closely co-ordinated on an international basis. Nevertheless, crime- and drug trafficking in particular- will inevitably continue to generate large amounts of financial proceeds and criminals will have a continuing need to find ways of disguising the source of their income. However, if the increased emphasis given in recent years to identifying the proceeds of crime and to deterring criminals from using the financial system proves to be effective, then money laundering will become a more risky activity. The Bank intends to continue playing an active role in widening the arrangements- both in the United Kingdom and internationally - to deter and detect money laundering. This paper was first published under the same title in the November 1992 issue ofthe Bank ofEngland Quarterly Bulletin. The David Hume Institute gratefully acknowledges the Bank's permission to reproduce the article in the present collection.

Appendix Executive summary of the mutual evaluation report on the United Kingdom's efforts to combat money laundering included in the FATF's 1991-92 annual report As one of the world's most important and sophisticated financial centres, the United Kingdom is an obvious target for money launderers. It has a vital interest in maintaining a 'clean' reputation and therefore established at a very early stage an effective legal and institutional system to combat money laundering. Drug money laundering was made a criminal offence under legislation enacted in 1986 which also provided for the confiscation of the proceeds of drug crimes. This has been built on by further legislation. The UN Convention was ratified on 28 June 1991. The basic approach adopted by the United Kingdom is to concentrate resources on identifying and pursuing cases involving suspicious activities rather than the routine reporting of financial transactions. A key element of the United .Kingdom system is the good co-operation both among the various enforcement authorities and between them and the financial institutions and supervisors, with a central clearing house dealing with disclosures of suspicious transactions from financial institutions. This provides an efficient and cost effective system within the available enforcement resources. The United Kingdom also places great emphasis on developing awareness of money laundering activity through training and education. This has been underpinned by the publication of money laundering guidance notes for various financial sectors, drawn up jointly by the relevant trade associations, the Central Bank and the enforcement authorities. The United Kingdom authorities recognise that, as money laundering techniques evolve and further experience is gained, amendments to the existing legal framework may be necessary. Currently preparatory work is being carried out to implement such of the provisions of the EC Money Laundering Directive as are not already reflected in United Kingdom law. This will enable the authorities to apply basic customer identification and record keeping requirements to bureaux de change, which are increasingly being used for money laundering purposes but are not currently subject to regulation. It was suggested that the United Kingdom should also consider extending the scope of the money laundering offence to cover the proceeds of all serious crimes. The F ATF concluded that the United Kingdom continues to demonstrate

70 THE HUME PAPERS ON PUBLIC POLICY

a strong commitment to developing and maintaining an effective comprehensive system to combat money laundering. Its approach to the problem of laundering, based on close co-operation between the authorities and financial institutions, could serve as a model for other countries.

Notes Chapter 1 pp. 1 to 11 1. For a more detailed exposition of the views of the author see Gilmore 1992: pp ix-xix. 2. As Earl Ferrers was to state on behalf of the Government in the House of Lords on 3 November 1992: "At the moment, money laundering prosecutions can be brought only if the money which is involved is the proceeds of drug trafficking. I do not think that it can be right to allow those who, for example, disguise the profits of dealing in pornography, or who convert the profits of a major fraud or a robbery, to escape with impunity". The new provisions against money laundering in Germany criminalise, in Section 261 of the Penal Code, the laundering of the proceeds by drug traffickers and members of criminal a~sociations as well as in relation to other unlawful acts which carry a minimum sentence of imprisonment of one year or more. 3. As has recently been stated in a UN context in relation to developments in the proceeds of crime area: "While these international initiatives are to be welcomed, it is unfortunate that in such a newly emerging multilateral area ofinterest, significant differences already exist" (United Nations 1992: 20). 4. Furthermore, Article 1 of the Directive covers situations where the predicate offence took place in another Member State or in the territory of a third country. See Gilmore 1992: 257. 5. The Swiss have declined to participate in this Agreement following its rejection in a referendum held on 7 December 1992. 6. Other illustrations of progress could easily be provided. For example, the Republic of Botswana has in place legislation which creates the criminal offence of money laundering, provides for mutual legal assistance in the investigation and prosecution of money laundering, permits the confiscation of the proceeds of crime, and recognises money laundering as an extraditable offence. See e.g. the Proceeds of Serious Crime Act 1990, the Mutual Assistance in Criminal Matters Act 1990, and the Extradition Act 1990. Other Commonwealth members in southern Africa, such as Zimbabwe, have also enacted modem legislation of relevance in this context and others, such as Swaziland, are in the process of so doing. See e.g. Segopolo 1992.

72 THE HUME PAPERS ON PUBLIC POLICY

Chapter 2 pp. 12 to 33

1. 2.

3.

4. 5.

This is the text of a Public Lecture given in the University of Edinburgh under the auspices of the University's Department of Public International Law with the support of The David Hume Institute. According to the Concise Oxford Dictionary of Quotations (p. 262) this phrase was uttered by the Roman Emperor Vespasian- AD9 to 79- in Latin 'Pecunia non olet'. He was answering Titus' objections to the imposition of a tax on toilets! F ATF Members- Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Iceland, Ireland, Italy, Japan, Luxembourg, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, Turkey, United Kingdom, United States, as well as the Commission of the European Communities and the Gulf Cooperation Council. Perhaps the best compilation of these instruments is Gilmore 1992. However the Task Force did not undertake to determine what steps would be adequate to meet the requirements of the Vienna Convention. So, the adoption of the proposals and recommendations of the Task Force would not necessarily constitute full compliance with the obligations assumed by the Task Force countries as parties to the UN Vienna Convention.

Chapter 5 pp. 50 to 59

1 2. 3.

4.

5.

6.

All three versions are obtainable from the British Bankers Association, 10 Lombard Street, London EC3V 9EL at a cost of £1 per copy. Narcotic drugs are derived from natural plants (e.g. coca bush, opium poppy, or cannabis plant) while psychotropic substances are based on manufactured chemicals. The Committee comprises representatives of the central banks and supervisory authorities of Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Sweden, Switzerland, the United Kingdom and the United States. Copies are available from the F ATF Secretariat, OECD, 2 rue AndrePascal, 75775 Paris, Cedex 16, France. Section 98 of the Criminal Justice Act 1988 affords protection from suit where disclosure is made of a suspicion or belief that property derives from, or is in connection with, an indictable offence, other than a drug trafficking offence. The issue is discussed in some detail in a paper the Bank of England submitted to the Treasury and Civil Service Committee. See House of Commons Treasury and Civil Service Committee First Special Report Session 1992-93 Banking Supervision and BCCI: the response of the Bank of England to the second and fourth reports from the Committee Session 1991-92.

Bibliography Agence Europe, 5 June 1993, No. 5994 (new series), 9. Bailhache, P., 1991. Offshore banking- friend or foe? Paper presented to the Meeting of Law Officers of Small Commonwealth Jurisdictions, Nicosia, Cyprus, 19-23 August 1991 (typescript). Beare, M. E., et al 1990. Tracing of illicit funds: money laundering in Canada. Ottawa, Ministry of the Solicitor General of Canada. Bingham Report 1992. Report of the inquiry into the supervision of the Bank of Credit and Commerce International (chairman Lord Justice Bingham). HC (1992-93) 198. Bundestag 1992. Drucksache 12/2704, Entwurf eines Gesetzes uber das Aufspuren von Gewinnen a us schweren Straftaten (Gewinnaufspurungsgesetz- GewAufspG). Commonwealth Schemes on mutual assistance in the administration of justice, 1991. London: Commonwealth Secretariat. Das Parlament, Vol. 43, No 29-30, Bonn, 16/23 July, 1993. Department of Trade and Industry 1990. Banking services law and practice: the Government's response. HMSO: Cm 1026. Der Spiegel, 24 February 1992, No.9, Vol. 46, 130. Ehrenfeld, R., 1992. Evil money: encounters along the money trail. New York: Harpers Business. Eisenberg, U., 1993, Straf(verfahrens-)rechtliche Massnahmen gegenuber "Organisiertem Verbrechen", Neue Juristische Wochenschrift, no vol no, 1033. European Commission (Commission of the European Communities) 1992. Financial services: the single market is complete (Revised ISEC/B21/92). European Parliament 1991. Recommendation of the committee on legal affairs and citizens' rights on the common position established by the Council with a view to the adoption of a directive on prevention of use of the financial system for the purpose of money /aundering(C3-006219I-SYN 254). Rapporteur: Mr. Geoffrey Hoon, Session Documents A3-0082/91. European Parliament 1992a. Report of the committee of enquiry into the spread of organised crime linked to drugs trafficking in the Member States of the European Community. Rapporteur: Mr. Patrick Cooney, Session Documents No.A3-0358/91. European Parliament 1992b. Report ofthe committee on civil liberties and internal affairs on the entry into force of the Schengen agreements. Rapporteur: Mr. L. van Outrive, Session Documents No.A3-0288/92. FATF (Financial Action Task Force on Money Laundering) 1992. Annual report 1991-1992. Paris. Foster, N. (editor), 1992, EEC legislation. 3rd edition. London, Blackstone Press. Freiberg, A. 1992. Criminal confiscation, profit and liberty. Australian and New Zealand Journal of Criminology, 25, 44 fT. Gesetz zur Bekampfung des illegalen Rauschgifthandels und anderer Erscheinungsfor-

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mender Organisierten Kriminalitat (OrgKG), 15 July 1992, Bundesgesetzblatt, I, 1302. Gilmore, W., 1991. Going after the money: money laundering, the confrscation of the assets of crime and international co-operation., Working Paper VI, Working Paper Series "A system of European police co-operation after 1992", Project Group European Police Co-operation, Department of Politics, The University of Edinburgh. Gilmore, W ., 1991. Combatting international drugs trafficking: the 1988 United Nations Convention against illicit traffic in narcotic drugs and psychotropic substances. London: Commonwealth Secretariat. Gilmore, W., 1992. International efforts to combat money laundering. Cambridge International Documents Series, 4. Cambridge: Grotius Publications Ltd. Home Office, 1992. Criminal justice bill: summary of existing law on confrscation and money laundering and recent developments in international co-operation. November. London: C2 Division, Home Office. House of Lords 1990. Money laundering. Select committee on the European Communities, December 1990, session 1990-91, 1st report (with evidence). London HMSO Jack Report, 1989. Banking services: law and practice (chairman R B Jack). HMSO: Cm622. Jimenez, H., 1992. Inter-American measures to combat money laundering: the OAS model regulations concerning laundering offenses connected to illicit drug trafficking and related offenses. International Enforcement Law Reporter. No vol no. 165. Levi, M., 1991. Regulating money laundering: the death of bank secrecy in the UK. British Journal of Criminology, 31, 109 ff. Louis, J.- V., 1990, The community legal order. 2nd edition, Luxembourg, Office for Official Publications of the European Communities. McClean, J.D., 1992. International judicial assistance. Oxford. Clarendon Press. MacPhail, I. D., 1987. Evidence- a revised version of a research paper on the law of evidence in Scotland. Edinburgh, Law Society of Scotland. Nilsson, G., 1991. The Council of Europe laundering convention: a recent example of a developing international criminal law. Criminal Law Forum, 2, 419 ff. Organization of American States, 1992. Report ofthe committee on judicial andpolitical affairs on the draft inter-American convention on mutual assistance in criminal matters. OAS Document, OEA/Ser.G, CP/doc.2244/92, 24 March 1992. Pecchioli, R. 1992. The Financial Action Task Force. Paper presented to the Council of Europe Money Laundering Conference, Strasbourg, France, 28-30 September 1992 (typescript). Rosello Lopez, J.L., 1992. The EC directive on money laundering. Paper presented to the Council of Europe Money Laundering Conference, Strasbourg, France, 28-30 September 1992 (typescript). Sallon, C., and Bedingfield, D., 1993. Drugs, money and the law. Criminal Law Review, 40, 165. Scottish Law Commission 1989. Forfeiture and confrscation. Discussion Paper no 82. Edinburgh. Segopolo, D., 1992. Mutual assistance in criminal matters - developing country perspectives. Commonwealth Law Bulletin, 18, 1538 ff. South Pacific Forum 1991. Workshop on extradition, drug trafficking, mutual assistance in criminal matters, and terrorism, Sigatoka, Fiji, 2-6 September 1991: agreed record. Suva, Fiji. Forum Secretariat, doc. SPFS (91) 18. Sproule, D., and StDenis, P., 1989. The UN drug trafficking convention: an ambitious step. Canadian Yearbook of International Law, 27, 263 ff. Steiner, J., 1992. Textbook on EEC law. 3rd edition. London, Blackstone Press.

BIBLIOGRAPHY 75

Stewart, D., 1990. Internationalizing the war on drugs: the UN convention against illicit traffic in narcotic drugs and psychotropic substances. Denver Journal ofInternational Law and Policy, 18, 387. Treasury, 1992. Implementation of the EC money laundering directive: the money laundering regulations. London, HM Treasury. United Nations 1992. Money laundering and associated issues: the needfor international co-operation. United Nations Document E/CN.15/l992/4/Add.5, 23 March 1992. New York. Vallance, P., 1992. Money laundering: the situation in the United Kingdom. Paper presented to the Council of Europe Money Laundering Conference, Strasbourg, France, 28-30 September 1992 (typescript).

Abbreviations BCLC CMLR CrAppR ECR FSupp KB OJ

Butterworth's Company Law Cases Common Market Law Reports Criminal Appeal Reports European Court Reports Federal Reports (USA) King's Bench Law Reports Official Journal of the European Communities

Note: Law reports are usually published in annual volumes (often more than one per year), and are cited by the relevant year, volume number where appropriate, the abbreviated form of the report series as above, and page number. The Official Journal of the European Communities is in two main sections, the L section containing the legislative material of the Communities (in particular the final text of Directives), and the C section other material including drafts of proposed legislation. Both are cited by year, part number and page.