This guide to money laundering has been produced in order to inform and guide readers on features surrounding money laundering, terrorist finance, financial sanctions and bribery.
The Home Office estimates that around £20 billion per year is generated through serious organised crime. Purchasing property both in the U.K and abroad remains the most proficient method for criminals to successfully launder proceeds. With such a large scale of criminal activity at work, there is a substantial threat to people’s livelihoods, if they are not are aware of the correct procedures and preventative measures that they can take to alleviate the risk.
Primarily, this guide aims to assist businesses to develop procedures to effectively protect themselves and their members against criminal activity. Additionally, Money Laundering Regulations will be outlined in detail, to prevent business being prosecuted for non-compliance with this legislation.
Interpreting and implementing anti-money laundering procedures will also be explained, as will the risk-based approach that all businesses are expected to take. Furthermore, examples of suspicious activity and signs to be mindful of will also be highlighted.
Finally, legislation will be explained to ensure that all businesses are aware of both their responsibilities and the consequences of failing to adhere to all necessary regulations.
1) What is Money Laundering?
Money laundering is the transformation of proceeds derived by criminal activity into seemingly legitimate assets. Therefore, this process sees the true and legitimate source of the proceeds changed as a result of criminal measures.
The process of money laundering can take place through many transactions and can affect many accounts. Substantial amounts of this activity involves overseas transactions, which makes it more difficult for police to track fraudulent processes.
With this said, money laundering does not need to be as complicated. Small amounts of fraudulent property can be sourced from false disclosures and records, such as tax evasion.
Money Laundering can be limited to just one transaction and does not have to be consigned to monetary actions. For example, changing one property for another can still constitute money laundering.
Money Laundering Regulations
Regulations dealing with Money Laundering apply across a variety of business sectors, including credit businesses, accountants and estate agents. All businesses covered by Money Laundering Regulations have to be supervised by a recognised authority. Professional bodies such as the Law Society cover a number of businesses. However, many will have to register with HMRC if they fall into one of the following categories:
- Money Service Businesses
- Dealers of High-Value assests
- Company or Trust Service providers
- Accountancy Service providers
- Estate Agencies
Anti Money Laundering Monitoring
Businesses must put certain measures in place in order to prevent themselves from falling foul of money laundering if they are bound by Money Laundering Regulations. These measures include:
- Self-assessing potential risks of the business being targeted by criminals
- Thoroughly checking the identity of all customers
- Checking identities of ‘beneficial owners’ of corporate bodies and partnerships
- Recording and monitoring all customer businesses transactions and reporting anything out of order to the National Crime Agency
- Ensuring that sufficient management controls are in position
- Making sure that all documents relating to finance, identity, risk assessments and management procedures are safely logged and maintained
- Ensuring that all staff adhere to regulations and are sufficiently trained
2) Reporting Suspicious Transactions
As part of the money laundering controls that all businesses must put in place, a nominated officer (sometimes known as a money laundering reporting officer) must be appointed. If a business does not have any employees, than a nominated officer does not need to be appointed.
If any member of the business suspects or actually knows that another person is directly involved in money laundering or financing terrorist activity, then they must inform the nominated officer immediately. It is down to the nominated officer to decide whether the information needs to be passed on to the National Crime Agency.
As soon as the nominated officer comes to the decision that there is substantial reason to suspect money laundering or terrorist financing, then they must inform the NCA at the earliest opportunity. It is imperative then that the nominated officer gets consent from the NCA to complete any transactions. In some instances, it will not be possible for the transaction to be delayed before gaining consent. If this is the case, the nominated officer should inform the NCA when sending over their report.
The nominated officer informs the NCA of any suspicious activity or transaction by filling out a Suspicious Activity Report (SAR).
Suspicious Activity Report
Under the Proceeds of Crime Act 2002, (POCA) and the Terrorism Act 2000, a SAR must be completed by the nominated officer for all transactions where fraud is suspected.
There are different ways in which a SAR can be created and then sent to the NCA:
The most common and effective way of producing a SAR is through the NCA SAR Online System. 96% of SAR’s are thought to be produced in this manner. Once the nominated officer has registered and activated their account, they will be able to create reports immediately.
SAR Online is able to provide an instant acknowledgement of receipt and a unique reference number for each report. Each report is logged onto the UK Financial Intelligence Unit’s (UKFIU) database, and each SAR is instantly available to all UK law enforcement agencies. SAR’s then can either prove to be the starting blocks for a new investigation or provide information on existing cases.
There are in excess of 1.5 million SAR’s currently on the database.
What to include in a SAR
SAR’s are often used multiple times for a variety of different purposes. One SAR could be used to inform police about a theft or fraud and it could also be used to inform HMRC about tax evasion.
To this end, nominated officers should include as much information as possible in a SAR. Firstly, they much include a relevant header, such as ‘Terrorism’ to aid recipients on what the report relates to. Details of the subject/counterparty and their transaction details must be included.
Next, as much detail as possible on who is involved, why their behavior is suspicious and what stage their transaction is must be included. Additionally, when reporting businesses or companies, the nominated officer must try to include information on directors, subsidiaries and where their goods have been financed from and are presently located.
3) The Nominated Officer
The Nominated Officer must be somebody who is part of the business and must not be an external contact. If a person is an officially regulated sole trader with no employees, then they themselves assert the nominated officer position.
As mentioned, the nominated officer is the, ’go to’ person to report any suspicious activity that a person feels is linked to money laundering. The nominated officer must than decide whether or not to report the issue. Overall then, the nominated officer is responsible for:
- receiving confidential reports of suspicious activity regarding the suspicion of money laundering from all employees in the business
- the consideration and evaluation of all reports in order to ascertain whether or not there is, or could be, evidence of money laundering
- the consideration and evaluation of all reports in order to ascertain whether or not there is, or could be, evidence of money laundering
- subsequently passing on this perceived suspicious activity to the National Crime Agency, by thoroughly completing a Suspicious Activity Report (SAR)
- requesting the NCA for their permission to continue with any suspicious transactions that have been reported, ensuring that no transactions are illegally continued
Other responsibilities that can be given to a nominated officer are:
- full control over the implementation of anti-money laundering procedures
- planning and carrying out money laundering risk assessments
- keeping records of all suspicious activity
- training all staff on money laundering prevention
Appointing the right person
When appointing a nominated officer, businesses members should take the time to choose the correct person. A nominated officer should be trustworthy, able to accept responsibility and should be senior enough in the company to have easy access to customer files. Furthermore, the person should be able to work individually and take big decisions, some which could affect customer relationships.
If a business is a Money Service Business or a Trust or Company Service Provider, the nominated officer must pass the, ‘fit and proper persons test,’ which will confirm their eligibility for the role.
If the nominated officer is away, for example on annual leave, then the role of nominated officer can be assigned to another person within the business to cover the absence. To this end, it is essential that a deputy officer is appointed and that they are fully aware of what their role entails.
4) Alleviating the risk
Money laundering can occur in a number of different ways and can come with many risks. These risks can be categorised into customer, transaction and geographic risks.
Risk based approach
All businesses that are directly bound by Money Laundering regulations have to make sure that their approach to anti money laundering and terrorist financing meet an appropriate level of risk. This means that businesses need to ensure that their efforts are focused on situations where risks of money laundering are at their greatest.
As a starting process, businesses should conduct a full assessment on the vulnerability of their products towards money laundering. The assessment should focus on the vulnerability of:
- the products and services provided by the business
- their financing procedures
- customer or third party profiles
- the geographical location of persons providing products
- the businesses itself
- the source of finance
Once an assessment has been produced, businesses should be able to efficiently document risks and then devise plans on how they will alleviate these risks moving forwards. Risks that businesses, particular property professionals, may have to deal with, include:
- funds being sourced from unusual third party sources
- inconsistent or inaccurate information
- transactions that do not take place face to face
- transactions that appears economically inefficient
These examples are merely a few risks that could be highlighted. Businesses should take the time to efficiently manage their own risks. Nominated officers should be asked for advice and support during all assessments.
Customer due diligence
When a relevant person in the regulated sector wishes to form a business relationship or make a transaction, customer due diligence is required. To alleviate the risk of money laundering and terrorist financing, it is imperative that customer due diligence is performed properly.
The Office of Fair Trading advises that customer due diligence should be carried out by a two stage identification process. Firstly, customers should be identified by providing information such as their full name, address and date of birth. Next, this information should be verified by obtaining data from the customer. For most transactions, one of the following should be enough to identify them:
- Driving Licence
- National Identity card
- Identity card produced by the Electoral Office of Northern Ireland
If a customer is unable to produce any of these documents, then the following may be used:
- Old driving licence
- Evidence of qualification for state of authority funded benefits, such as pension or council tax benefit
To comply with customer due diligence, these must be supported by secondary documentation, such as
- utility bill
- bank or building society statement
- mortgage statement
Identification is a key part of customer due diligence, but the Office of Fair Trading is keen to make customer due diligence a wider concept, involving thinking about why a customer chooses to make a transaction. This is to try and ascertain more information on the nature of a relationship, which could highlight potential risks which lead to money laundering being uncovered.
5) Suspecting Money Laundering
There are a variety of warning signs that can be noted in order to recognise suspicious behavior and hopefully eradicate the risk of fraud. These include:
- transactions which are not made between independent parties
- questionable motives for using the business, for example the location of a property suggesting that a more local firm would have been more suitable
- full or part settlements in currency. This could suggest tax evasion, insolvency or a matrimonial agreement
- customers asking for substantial amounts of money to be held in their client account for no particular reason
- person making the transactions turning down services that would assist them or they should find attractive
- customers seemingly awkward and agitated when answering due diligence questions
- counterparties reluctant or unable to give information on the source of their funds when requested
- cash from the sale/rental of a property being sent to an unfamiliar third party
- selling a property for a price considerably higher or lower than the market price , or a transaction which does not seem viable or efficient
- patterns of transactions considerably change or progress at a considerable pace
- transactions for the same property either successive or over a short period of time
- introducing unknown third parties during the latter stage of transaction process
- unusual means of funding for example, complex loans or other finance
- unexplained changes in customer financial circumstances
This is by no means an exclusive or exhaustive list, nor should all of the above be considered suspicious indefinitely. However, they should be used as indicators for potentially fraudulent behavior.
6) Money Laundering in Property transactions
Property professionals must be alert and wary to the threat of crime relating to the sale, purchase or letting of a property. Crimes such as these could be related to fraudulent financing of these transactions, or using the property for illegal uses.
Examples of money laundering in properties can include:
- criminal property used as full or partial payment for a purchase relating to another property or to pay rent, for example from the proceeds of prostitution, drug dealing or human trafficking
- funds derived to pay for a property which have derived from mortgage fraud
- landlords that do not comply with legal requirements, such as the Housing Health and Safety Rating System, may have saved funds which have been criminally sourced
Again, these examples are not exhaustive but are designed to assist property professionals. It must also be remembered that it does not matter when the crime occurred, even if the crime took place before the business or property professional was informed or were attracted to suspicious behavior.
It is also important to consider that money laundering is not limited to the person making the transaction. Counterparties and other outside sources must also be considered for suspicious activities and therefore for a SAR.
Bribes can be defined as gifts or incentives designed to influence a subject, whether financial or otherwise and can be of both low and high value. Bribery is commonly related to money laundering, corporate governance and professional ethics. Behaving in an ethical manner towards rules which govern a profession or business is the most simple way of avoiding falling foul of bribery allegations.
The Bribery Act of 2010 contains new regulations that affect both the person giving and accepting a bribe. In addition, it is now an offence to bribe a Foreign Public Official, with offences also present for corporates that do not do enough to prevent bribery.
Bribing another person
This is when a customer, or a third party acting on their behalf, either gives, offers or promises a bribe to a person/organisation for them to unethically and improperly perform a function or activity. Alternatively, this could be where the briber knows or believes that the acceptance of a bribe constitutes the improper performance of a function. Under the act, it is deemed irrelevant whether the person(s) to whom the gain is promised or offered is the same person that is intended to oversee the incorrect performance of the activity.
Accepting a bribe
Accepting a bribe covers when a person or counterparty acting with intentions on their behalf either receives, makes plans to receive or willing accepts a bribe to perform or oversee the improper working of a relevant function. It does not matter whether the recipient accepts or agrees to accept their advantage directly or through a third party source. Furthermore, it does not matter whether a bribe received by a person is for their benefit or for the benefit of an external party.
Bribing a Foreign Public Official
Legislation regarding bribes towards a foreign public official (FPO) cover when a person or third party gives, offers or promises a bribe to an FRO in a bid to influence them to obtain or retain an advantage of some kind. It must be noted however that bribery is not committed if the FPO is permitted by law to be influenced by financial or other gains.
Corporate offences towards failure to prevent bribery
Commercial organisations within the U.K can be subject to bribery charges if someone associated with the business is found to have offered a bribe to another person with the intention of gaining or retaining an advantage for business requirements.
It must be noted that an associated person is anyone that performs functions on behalf of the corporation. Their capacity with the organisation is not relevant, meaning that the person can be an employee, agent, subsidiary or somebody that the corporation does not directly control.
Additionally, a foreign company that conducts business in the United Kingdom can still be prosecuted under the Bribery Act 2010, even if the potential advantage to the business is designed to occur outside of Britain.
8) Financial Sanctions
It is the duty of every business in the U.K to adhere to the financial sanctions regime set out by law. All people working within the United Kingdom must abide with these obligations. It is however down to individual personal and businesses to determine the procedures that they will take in order to ensure these prohibitions are not broken. Adherence to financial sanctions must be proven by the retention of necessary records.
HM Treasury provides a secure list of all financial sanction targets. This contains the names of both individuals and entities that have been outlined by the United Nations, European Union and the United Kingdom under regulation relating to a financial sanction programme in the U.K, where there is a legal requirement for assets to be frozen, the name of the target is included in the secure list.
The majority of financial sanctions are outlined in statutory acts and/or EC regulations corresponding to specific regimes. For example, the Terrorist Asset-Freezing Act 2010 covers all terrorism concerned asset freezes.
Under the financial sanctions regime, offences can be outlined as:
- Helping to or directly dealing with funds for a designated named person
- Assisting in making funds or resources directly or indirectly available to a designated person
- Making funds or economic resources, in the event of terrorism financial services, available for a designated person
- Knowingly and actively contributing to activities that will directly or indirectly breach financial restrictions
Penalties for breaches of all financial sanctions are available to view in the relevant statutory rulings. Persons found guilty of any offence will face either a fine and/or imprisonment. The maximum term of imprisonment is at present seven years.
9) Terrorism Act 2000
The Terrorism Act 2000 covers legislation relating to property, financing and money laundering itself. Terrorism can be defined as the use or threat of action where this threat is intended to influence the government, intimidate the public or to seemingly advance a political, religious and radical ideological ethos.
Terrorist acts committed can involve:
- extreme violence towards persons
- serious damage to properties
- putting a person’s life at risk
- engineering a serious health risk to all or a section of the public
- planning to or actively interfering with electronic systems
People involved in terrorist activity could look to utilise property in order to finance their actions. Terrorist property can be defined as:
- Money or other types of property that have or are likely to be used for terrorist purposes. Property is still classed as terrorist owned even if its original source is legal
- Any monetary or other proceeds which are derived from acts of terrorism
Fundraising and possession
Under the Act, it is a criminal offence to be involved in fundraising activity if a person knows or has a reasonable view to believe that money or other property has been raised for eventual terrorist use. Persons can commit offences relating to funding terrorist activity by:
- making or encouraging others to make contributions
- receiving contributions or gains designed to entice support
- giving gifts or loans to terrorist supporters
It is also a criminal offence to be involved in an arrangement where money or other property is made available to a third party suspected of terrorist activities.
Furthermore, it is an offence for a subject to enter into an arrangement where terrorist property is retained or managed by or on behalf or another person by, but not limited to:
- concealment of funds or property
- transferring these to nominees
- removing them from the jurisdiction
It must be noted that subject’s do not commit any of the above offences if they are acting with or with the approval of a police officer. Disclosure of involvement in suspected terrorist activity could also see a person exempt from punishment, providing that they have a reasonable excuse for their actions.
If a reasonable excuse is not presented, persons involved in terrorist activity face a prison sentence of up to 14 years and/or a substantial fine.
Failure to disclose information
As for all suspected acts of money laundering, a person believing that another has committed an offence regarding to terrorism must report their assumption immediately. If a person receives, or perceives information on terrorism relating to a trade, profession, employment or business, they commit an offence if they do not disclose their belief or suspicion and the information on which it is based, to a police officer as soon as possible.
Once again, a reasonable excuse for the non-disclosure of knowledge will also be considered as a defence. If no defence is found to be suitable, the person involved can expect a maximum 5 year fine and/or a fine.
The Terrorism Act also makes it an offence for a person to reveal to a third party that a SAR has been produced relating to their activity. Revealing this information may prejudice any future investigation. This offence carries a maximum 2 year jail term.
10) Useful links
Further information on anti money laundering regulations and official bodies can be found by following these links:
Proceeds of Crime Act 2002 (POCA) – http://www.legislation.gov.uk/ukpga/2002/29/contents
Financial Services Authority- http://www.fsa.gov.uk/Pages/About/What/financial_crime/money_laundering/3mld/index.shtml
Serious and Organised Crime Agency (SOCA)- http://www.nationalcrimeagency.gov.uk/
Financial Action Task Force (FATF) – http://www.fatf-gafi.org/