The Impact of Recent Money Laundering Legislation on Financial Intermediaries

Pages131-147
Publication Date01 Mar 1995
DOIhttps://doi.org/10.1108/eb025694
AuthorNicholas Clark
SubjectAccounting & finance
Journal of Financial Crime Vol. 3 No. 2 —Analysis
ANALYSIS
The Impact of Recent Money Laundering
Legislation on Financial Intermediaries
Nicholas Clark
INTRODUCTION
The Criminal Justice Act 1993 (CJA 1993) intro-
duces a wide array of offences designed to combat
the threat of money laundering. While not the first
piece of legislation with such a purpose, the CJA
1993 is a major bulwark in the United Kingdom's
anti-laundering legislation, creating several offen-
ces for what might at first seem barely criminal
behaviour. Furthermore, the Money Laundering
Regulations1 of the same year place an onerous
burden on financial institutions to put in place
systems to combat laundering.
The CJA 1993 and the Regulations, enacted to
fulfil the UK's obligations arising from the EC
Money Laundering Directive, together mark a
major overhaul of Britain's legislation in this ara,
and this paper attempts to consider their implica-
tions for the financial services industry. It first
briefly outlines what money laundering is and why
it is of crucial importance for the modern criminal.
It goes on to explain the inherent threat posed to
financial institutions by money laundering. There
then follows an overview of the current legislation.
Its central theme is then explored: the uneasy
and ill-defined relationship between civil and
criminal liability. There are very real dangers posed
to the financial services industry by the suspicion-
based reporting system. The last few years have
seen
a
judicial willingness to impose what amounts
to liability as a constructive trustee on those who
knowingly assist in the disposal of funds in a
fraudulent breach of trust.2 At the same time, the
recent legislation perpetuates the 'know your cli-
ent' ideal of the Financial Services Act 1986 (FSA
1986).
Is such knowledge not dangerous in view of
the potential civil liability faced by a financial
intermediary who comes to know too much?
Bearing in mind the potential financial catastro-
phe facing an intermediary who is unaware of the
civil law consequences of 'over-compliance' with
the new legislation, this question is of particular
relevance at the moment. It is the author's belief
that the recent plethora of decisions on liability for
assistance in a breach of trust can only add to the
dangers.
The answer, if any, to this question rests on the
vexed issue of the state of knowledge required for
intermediary liability to be imposed. The recent
judgments of the courts in this area are considered
side by side with an examination of what knowl-
edge is required of financial intermediaries by the
new legislation. In particular, the implications of
the decisions in
Fitters
(a firm) v Miro,3 Agip
(Africa)
Ltd v Jackson4 and Royal Brunei
Airlines
v Tan5 will
be considered.
The paper goes on to consider another problem
that the financial services industry may face: claims
against institutions for refusing to carry out a cli-
ent's instructions if they have disclosed their suspi-
cions to the authorities. If they report a suspicion
that turns out to be groundless, the Act gives them
immunity from actions for breach of confidence,6
yet leaves open the possibility of a claim for defa-
mation or breach of contract.
MONEY LAUNDERING AND ITS
IMPORTANCE TO THE CRIMINAL
'The modern money launderer will no doubt
adopt rather more sophisticated techniques than
the gem carriers of India or the Knights Tem-
plar, but his objectives and essential
modus
oper-
andi will be the same. The objectives will be to
obscure the source and thus the nature of the
wealth in question and the modus
operandi
will
inevitably involve resort to transactions, real or
imagined, which will be designed to confuse the
onlooker and confound the enquirer.'7
Page 131
Journal of Financial Crime Vol. 3 No. 2 Analysis
Money laundering, simply, is the process by which
the proceeds of crime or fraud are made to appear
as if they have emanated from a legitimate source.
Today this typically involves a complex web of
transactions, often across several jurisdictions, so
that the proceeds of violent crime in, say, Italy
resurface as the seemingly normal profits of
a
pizza
restaurant in New York. The aim is thoroughly to
confuse any investigator who attempts to trace the
'hot' money either by 'losing' it or by creating an
intricate web of transactions that is virtually
impossible to follow.
By any criteria, the global level of money laun-
dering is staggering. In 1989, the Financial Action
Task Force estimated that the money being laun-
dered globally through banks amounted to some
US$85bn each year.8
There are various reasons, summarised by Hay-
nes,9
why money laundering has been increasingly
focused on by law enforcement agencies. Origi-
nally these agencies fought organised crime by
seeking to imprison those at its heart. This was
ineffective, and asset forfeiture came to be seen as
the key to combating such crime, for if the crimi-
nal is prevented from enjoying the fruits of his
labour then his motivation for committing that
crime also disappears. As the US Drug Enforce-
ment Administration found, the most effective way
of 'immobilising drug organisations [was] by
removing their financial resources ... incarceration
of the highest level violators alone was not sub-
stantially disruptive to many drug trafficking orga-
nisations and an attack against their acquired assets
was necessary'.10 To an extent, however, there is a
vicious circle: stringent legislation enabling asset
forfeiture merely makes it necessary for the crimi-
nal to launder his money more effectively (to hide
those assets), which in turn requires further anti-
money-laundcring legislation.
Before considering the inherent dangers posed
to financial institutions by money laundering, it is
necessary to explore the various different stages of
a laundering transaction. While no two systems are
the same there are recognised patterns in many of
them, comprised under the following three head-
ings:
Placement:
the actual disposal of illicitly earned
cash into eg a banking system;
Layering:
separating the proceeds of the crime
from their source through complex and often
illusory transactions to disguise the provenance
of the funds;
Integration:
the reintroduction of the proceeds
into the financial system as apparently normal
and legitimate business funds.
Financial intermediaries of some sort are nearly
always necessary for a successful laundering opera-
tion, and it is this aspect of laundering that is now
considered.
THE THREAT POSED TO FINANCIAL
INSTITUTIONS BY MONEY
LAUNDERING
Be it a bank, accountant, solicitor or insurer, inevi-
tably a financial intermediary of some sort will be
required for a successful money laundering opera-
tion.
This being so, it is perhaps equally inevitable
that the authorities have decided to lean on those
organisations that are so heavily involved in laun-
dering, albeit often unwittingly, for their coopera-
tion. If all financial intermediaries are required to
report their suspicions then the launderer will find
his task that much harder. London, of course, as
one of the world's major financial centres, has a
special responsibility in this regard.
The other reason that financial intermediaries
have been compelled by legislation to cooperate is
that the authorities have ascertained that there are
certain stages in a typical laundering process that
are more valuable to recognition as such. These
are:
(i) the entry of cash into the financial system;
(ii) cross-border flows of
cash;
(iii) transfers within
and from the financial system.11 The metaphor of
dropping a stone into a pool is appropriate: when
the dirty money is first deposited it creates a
noticeable ripple, but if unnoticed then it may well
remain undiscovered. These stages necessarily
involve the involvement of banks or other deposit-
taking bodies, hence the importance of banks' vigi-
lance in detecting unusual transactions at the point
at which the launderer is most vulnerable to expo-
sure.
Most financial intermediaries and their employ-
ees are honest; some are not. A dishonest person
who works for an organisation that is able to help
launder funds is easily corrupted:
'Money laundering is now an extremely lucra-
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