Blog

MONEY LAUNDERING: A GLOBAL VIEW

Since two decades money laundering issues and law became inherent of our daily life. Changes in the law on money laundering have taken place and are in train, in Europe, in China and other parts of the world. Striking headlines like ‘Spanish Princess Cristina de Bourbon charges with money laundering and fraud in major corruption investigation’, ‘Messi caught up in money laundering mess’, ‘HSBC sets aside $700m for money-laundering fines’, ‘Vatican Priest charges with money laundering’, Prosecution Office continues to catch lax gatekeepers’, or ‘Lawyer and book keeper convicted of laundering £1.8’, can be found regularly in newspapers and on websites these days. They reflect the results of the ongoing fight against money laundering worldwide.

New rules are intended to prevent money laundering and terrorism financing. The regulators want more timely cross border transaction data on individuals to track risks arising from increasing cross border transfer. In Europe, China and other parts of the world, more or less the same principals are valid.

Definition of money laundering

Money laundering is a generic term used to describe the process of concealing illegally obtained proceeds. It is criminalized all around the world and is considered a grave danger to society due to its strong interaction with organized drugs and white-collar crime.

Money laundering is a complex phenomenon with a wide variety of appearances. In the most simplified picture, the process of money laundering consists of three stages: the placement of criminal proceeds in a financial institution or the purchase of an asset; the layering of proceeds where the criminal attempts to conceal the origin of the proceeds, for example by creating a false paper trail: and lastly, the integration of the proceeds into the legitimate economic and financial system. Various money laundering methods, also known as typologies, can be used to launder money. Examples are the laundering of proceeds through trade in diamonds and the use of virtual currencies like Bitcoin.

Money laundering has a strong international dimension. This phenomenon has been a law enforcement priority since the early 1990s. The international nature of money laundering, combined with estimations on the scope and the distorting effects it may bring about, make money laundering a grave danger to national and international financial markets. There have been numerous attempts to measure the scope of the problem. The International Monetary Fund (IMF), for example, estimated in 1998 that the total global money laundering accounted for 2 to 5 percent of global GDP. Scientist Brigitte Unger calculated that between 3 to 6 billion Euros are laundered within the Netherlands, and that 14 to 21 billion Euros flow into the Netherlands from the twenty countries in which most money is laundered. Schneider roughly estimated in another study that the worldwide turnover of organized crime in 2006 had a value of 790 billion US dollars, which also gives an indication of the extend of money laundering. And the UNODC presented estimations in 2011 concluding that criminal proceeds amounted to 3.6 percent of global GDP, of which 2.7 percent is laundered.

Money laundering is said to bring about negative effects for society. The Financial Actions Task Force (FATF), the IMF and other international organizations have often referred to the distortive nature of organized crime activities against financial markets, which may threaten the investment climate as investors lose confidence in their economic systems. Widespread financial abuse is furthermore said to bring about an increase in crime and corruption, it can lead to societal upheaval, and in extreme situations it can even undermine the democratic basis of government. The short-term effects of money laundering can be unfair competition or missing revenues for Governments. An example of a long-term effect is the damaged reputation of the financial sector.

The various claims of the dangers and seriousness of money laundering are also received with criticism. The estimations should be used with great caution and the lack of (good) empirical evidence of the volume, nature and impact of money laundering makes some wonder about the true necessity of fighting it. In this respect, some considere that ‘money laundering has become one of the great moral panics of our day’. A range of sources, including mass media, assert that it is bad, very interesting, and slightly daring, but do not so much deal with what it is. How it is done or why (otherwise than as a dorm of complicity in some previous offence) it is so damaging. According to some scientists the lack of empirical evidence leads them to conclude that ‘more attention has been devoted to fear factors of crime-money than to a detached balancing of various legal and social interests. Others believe that the most serious aspect of money laundering as such is not the crime itself, but the fact that it facilitates other crimes and allows criminals to access and enjoy the fruits of their illicit behavior.

Despite these critical sounds, there has been an increasing consensus since the end of the 1980s that money laundering must be combated. The fight against money laundering features high on the international agenda and is not an unnoticed one.

Customer information orders

A customer information order is an order that a financial institution must, when required by notice in writing, provide any customer information it has relating to the person specified in the order. The required information must be supplied in such manner, and at or by such time, as the officer requires. A customer information order has effect in spite of any restriction on the disclosure of information, however imposed, and therefore infringes the principle of client confidentiality. The notice in writing may be given by electronic means and may therefore be sent by e-mail.

A customer information order is not a new type of order as it previously existed in the context of terrorist finance investigations and in proceeds of crime investigations.

Customer information orders are available for all three types of investigation. An order may apply to all financial institutions, particular financial institutions or particular descriptions of financial institutions. Essentially such orders will be used to identify accounts, which an individual has opened. Once the accounts have been identified, production orders are then likely to be obtained in respect of them, perhaps followed by restraint orders. A customer information order could be sought, for example, in relation to all the financial institutions in a town or in relation to every branch of a major bank. The investigator will have to satisfy the judge that, where an order is widely drafted, it meets the test of proportionality.

An order in respect of an individual may require the following information:

• the account number of numbers;
• the individual’s full name;
• his date of birth;
• his most recent address and any previous addresses;
• the account opening and closing dates;
• details of any person who jointly holds or held an account with the individual;
• details of other accounts at the institution to which the individual is a signatory.

An order in respect of an account held by a company limited liability partnership (or similar body) may require the following information:

• the account number or numbers;
• the body’s full name;
• a description of any business which it carries on;
• the country or territory in which it is incorporated or established and any number allocated to it under companies legislation;
• any VAT reference number;
• the address of its registered office and any previous registered office;
• the account opening and closing dates;
• details of what proof of identity was obtained by the institution when the account was opened;
• the full name, date of birth, most recent address and any previous addresses of any signatory to the account.

The required items of information may be extended or reduced by statutory instrument.

The requirements, which must be satisfied for a judge to make a customer information order are that:

• if the investigation is a confiscation investigation, there are reasonable grounds for suspecting that the person specified in the application has benefited from his criminal conduct; or
• if the investigation is a civil recovery investigation, there are reasonable grounds for suspecting that the property specified in the application is recoverable property or associated property and that the person specified in the application holds all or some of the property; or
• if the investigation is a money laundering investigation (which, in this context, may include an investigation into terrorist money laundering, there are reasonable grounds for suspecting that the person specified in the application has committed a money laundering offence; and
• there are reasonable grounds for believing that customer information which may be provided in compliance with the order is likely to be of substantial value (whether or not by itself) to the investigation for the purposed of which the order is sought; and
• there are reasonable grounds for believing that it is in the public interest for the customer information to be provided, having regard to the benefit likely to accrue to the investigation if the information is obtained.

One need to consider that a statement made by an institution in response to a customer information order may not be used in evidence against that institution in criminal proceedings except in limited circumstances. This restriction is to ensure that information obtained through compulsory disclosure powers is not used in breach of the European Convention on Human Rights. Despite this restriction there are, at least in theory, circumstances where the information could be used against an institution in a prosecution of it for breach of the Money Laundering Regulations.

There are three criminal offences connected with customer information orders. First, it is an offence without reasonable excuse to fail to comply with a requirement imposed under a customer information order. A financial institution guilty of this offence on summary conviction is liable to a fine. Secondly, it is an offence, in purported compliance with a customer information order, to make a statement, which is known to be false or misleading in a material particular. Thirdly, it is an offence, in purported compliance with a customer information order, to recklessly make a statement, which is false or misleading in a material particular. A financial institution guilty of either of these offences is liable on summary conviction to a fine not exceeding the statutory maximum or, on conviction on indictment, to a fine.

Recognizing and reporting suspicious activity

The criminal law imposes a mandatory obligation on all management and staff within the regulated financial sector to report as soon as is practicable where they have knowledge or suspicion of money laundering, or where there are reasonable grounds to suspect money laundering, and the information is gained in the course of their regulated business activities. The law generally requires that persons handling relevant financial business must report their knowledge or suspicion to ‘a nominated officer’. This is to any member of staff who handles or is managerially responsible for handling transactions that may involve money laundering.

Definition of ‘suspicion’

Suspicion is an unusual basis for criminal liability in the several European countries. It is not defined as such. Suspicion is used as a trigger for liability because law enforcement authorities often act on suspicion. A higher test would deprive them of potentially valuable intelligence. It also prevents those that are willfully blind from avoiding liability.

The courts in certain countries have not had the opportunity to clarify the meaning of ‘suspicion’ in the context of money laundering. However, courts in other countries have described it as ‘a degree of satisfaction, not necessarily amounting to belief, but at least extending beyond speculation as to whether an event occurred or not.’

A dictionary definition of suspicion is ‘an act of suspecting: state of being suspected: the imagining of something without evidence or on slender evidence: inkling: mistrust. The authors of Confiscation and the Proceeds of Crime quote this definition and conclude that ‘as suspicion is a word in daily usage, it should be interpreted as defined in the dictionary. Thus any inkling or fleeting thought that the property might be the proceeds of drugs trafficking will suffice.

Thus suspicion is thought to lie somewhere above mere speculation/gut feel but below belief.

Some Guidance Notes for the financial sector in the UK state that ‘suspicion is personal and subjective and falls short of proof based on firm evidence… a person who considers a transaction to be suspicious would not be expected to know the exact nature of the criminal offence or that the particular funds were definitely those arising from the crime.

There is no need for knowledge or suspicion of the crime that gave rise to the property or the identity of the person who committed the crime. Essentially all that is necessary is knowledge or suspicion that the property being dealt with is ‘dirty money’.

The Guidance Notes helpfully provide the following specific grounds for suspicion:

• transactions which have no apparent purpose and which make no obvious economic sense;
• where, without reasonable explanation, the transaction being requested by the client is out of the ordinary range of services normally requested or is outside the experience of the firm in relation to the particular customer;
• where, without reasonable explanation, the size or pattern of transactions is out of line with any pattern that has previously emerged;
• where the customer refuses to provide the information requested without reasonable explanation;
• where a customer who has entered into a business relationship uses the relationship for a single transaction or for only a very short period of time;
• the extensive used of offshore accounts, companies or structures in circumstances where the customer’s needs to not support such economic requirements;
• unnecessary routing of funds through third party accounts;
• unusual investment transactions without a discernable profit motive.

For further information and comment, please contact Arthur Flieger (flieger@fliegerlaw.com, +32 3 238 77 66)

© 2017 A. Flieger – This publication is defined to provide accurate and authoritative information in regard to the subject matter covered. It is transmitted with the understanding that the publisher is not engaged in rendering legal, or any other professional services. If legal advice or other expert assistance is required, professional services should be sought. You can always contact A. Flieger at flieger@fliegerlaw.com.