The impact of Schedule 7 of the Counter‐Terrorism Act 2008 on banks and their customers

Pages351-371
DOIhttps://doi.org/10.1108/13685201011083876
Publication Date12 October 2010
AuthorMiriam Goldby
SubjectAccounting & finance
The impact of Schedule 7 of the
on banks and their customers
Miriam Goldby
School of Law, University of Surrey, Guildford, UK
Abstract
Purpose The purpose of this paper is to discuss the potential impact of measures taken in
accordance with powers introduced by Schedule 7 of the Counter-Terrorism Act 2008 on banks and
their customers.
Design/methodology/approach The paper analyses the legal provisions setting out these
powers and comments on their scope; discusses the guidance issued with respect to these provisions
by the Joint Money Laundering Steering Group, as well as other commentary on these provisions;
examines the remedies available to those affected by the measures taken in exercise of the Schedule 7
powers; and comments on the use made of these powers to date and the relevant outcomes.
Findings – The paper concludes that while the Schedule 7 powers are useful in permitting a targeted
response to money laundering and terrorism financing, they can be needlessly damaging to business
unless used in a proportionate and risk-sensitive manner.
Originality/value – The paper analyses critically the first judicial review decision made in respect
of the exercise of Schedule 7 powers.
Keywords Money laundering,Terrorism, Financing, Banking
Paper type Conceptual paper
1. The role of the financial sector and the new provisions of the CTA
The role of the financial sector in the fight against money laundering and terrorism
financinghas expanded rapidly in recentyears. In the UK, this role is undertakenby banks
and financial institutions in compliance with several different pieces of legislation,
includingthe Proceeds of Crime Act (POCA)2002 (Part VII), the TerrorismAct 2000 (Part
III), the Money Laundering Regulations(MLR) 2007, the Financial Services and Markets
Act 2000 andthe Systems and Controls part of the FinancialServices AuthorityHandbook.
This role consists in carrying out several functions. First of all, regulated private sector
bodies have the obligation to perform customer due diligence (CDD)[1], which means
complyingwith know-your-customerrequirementsand monitoring customeraccounts for
suspicious activity on an ongoing basis.Second, banks and other regulated bodies must
comply with reporting requirements in that they are to report suspicions of money
laundering as well as any suspicious transactions that may be about to take place over
their systems[2]. Finally, regulated bodies must also keep records relating to their
customers, accountsand transactions for certain minimum periods of time[3].
The Counter-Terrorism Act (CTA) enacted in November 2008, provides new
anti-money laundering (AML) and counter-terrorism financing (CTF) provisions
applicable to the private sector in its Schedule 7. The schedule gives new powers to
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1368-5201.htm
The author is grateful to Dr Jane Marriott for her comments on an earlier draft of this paper and
to Ms Noreen O’Meara for a helpful discussion of remedies in the field of human rights.
Impact of
Schedule 7
351
Journal of Money Laundering Control
Vol. 13 No. 4, 2010
pp. 351-371
qEmerald Group Publishing Limited
1368-5201
DOI 10.1108/13685201011083876
HM Treasury to issue Directions[4] in relation to non-European Economic Area (EEA)
countries because of the risk of money laundering or terrorist financing activities being
carried on in the country or by its government or residents. Directions may be given if
Financial Action Task Force (FATF) advises, or if Treasury “reasonably believes” that
such activities are being carried on[5]. In the latter case, Treasury must also reasonably
believe that this poses a significant risk to UK national interests[6]. A third situation
where a Direction may be given is where the Treasury reasonably believes that the
development or production of nuclear, radiological, biological or chemical weapons
in a non-EEA country, or the doing in the country of anything that facilitates
the development or production of any such weapons, poses a significant risk to the
national interests of the UK.
These Directions can order credit or financial institutions[7] to apply enhanced
CDD[8] and/or enhanced ongoing monitoring[9] in relation to persons who are carrying
on business, or who are resident or incorporated in the relevant country, or in relation
to such country’s government[10]. They may also impose on such institutions new
obligations for systematic reporting[11] and/or obligations to limit or cease business
with designated persons[12]. Failure to comply with these Directions can lead to civil
penalties imposed by one of the enforcement authorities[13], or criminal sanctions[14].
General Directions may be given to a description of persons operating in the financial
sector, or all persons operating in that sector, in which case they must be contained in
an Order made by the Treasury. The Order must be laid before Parliament if the
Direction is to cease business with a person or persons designated in the Order[15].
A Specific Direction is one addressed to a specific person, rather than to a class of
persons or to everyone operating in the financial sector. If such a Direction is made,
the Treasury must give notice of it to that person[16]. In this case, the existence of the
Direction would not have to be made known to the public[17] which would be
particularly important, as it avoids tipping off where the addressee has been ordered to
undertake enhanced CDD or ongoing monitoring or to report systematically on its
customer. As provided by para. 9(6) of Schedule 7, the requirements imposed by a
Direction must be proportionate having regard to FATF’s advice or the risks to the
national interests of the UK that the Direction is intended to address.
The Schedule 7 powers were used on 12 October 2009, when the Treasury issued a
Direction to the UK financial sector to cease all business relationships[18] and
transactions with Bank Mellat and Islamic Republic of Iran Shipping Lines (IRISL)
the “designated persons”. The Direction is contained in the Financial Restrictions (Iran)
Order 2009[19] (hereinafter “the Iran Order”). The Order was made on the basis that
“the Treasury believe that activity in Iran that facilitates the development or
production of nuclear weapons poses a significant risk to the national interests of the
United Kingdom.”[20] It was explained in a Ministerial Statement by the Exchequer
Secretary to the Treasury dated 12 October 2009[21] that:
[V]essels of the Islamic Republic of Iran Shipping Lines (IRISL) have transported goods for
both Iran’s ballistic missile and nuclear programmes. Similarly, Bank Mellat has provided
banking services to a UN listed organisation connected to Iran’s proliferation sensitive
activities, and been involved in transactions related to financing Iran’s nuclear and ballistic
missile programme. The direction to cease business will therefore reduce the risk of the UK
financial sector being used, unknowingly or otherwise, to facilitate Iran’s proliferation
sensitive activities.
JMLC
13,4
352

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