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UK Financial Services, regulations and ethics

12 Other regulatory and legislative requirements

In this section, we establish the main regulations relating to the fight against money laundering.

It is often hard for criminals to use funds gained from criminal activities openly, especially if they are carrying out monetary transactions where they can be questioned as to where the money came from. To enable them to use the proceeds of illegal activities without their original source being detected, they will resort to money laundering. The process will also attempt to make the funds appear perfectly “clean”, with an apparently legitimate reason for their existence.

One definition of money laundering is “the process by which criminals convert the proceeds of illegal activities into legitimate funds”.

Examples of crimes heavily associated with money laundering include drug trafficking and terrorism; however, the illegal proceeds could be from virtually any other activity.

There are several forms of money laundering and it is an international problem, which can affect all industries. Nobody can accurately identify the financial scale of the problem of money laundering in the UK economy, but estimates suggest it could run into billions.

Key stages of money laundering process

Money laundering is usually a three-stage process:

1. Placement

Illegal funds are paid into legitimate financial arrangements with reputable institutions such as life assurance policies or building society accounts.

2. Layering

This involves making several transactions to hide the original source of the criminal funds. The number of transactions is unlimited depending upon how far the criminal wants to go in hiding the source of funds. Often large sums of money from criminal activities are broken up into smaller denominations before the laundering process takes place.

3. Integration

This is the process by which the criminal funds finally look clean in that they appear to be fully integrated into the economy, having gone through several transactions to hide their origins.

Financial services organisations are most frequently involved at the placement and layering stages. For example, a bank account is opened in a false name, the proceeds are then withdrawn and placed into a life assurance bond, the bond is surrendered early and the “clean” proceeds transferred to an individual’s account overseas.

The UK and other members of the EU are members of the Financial Action Task Force (FATF), which is committed to legislation to combat money laundering.

Proceeds of Crime Act (POCA) 2002

The Proceeds of Crime Act 2002 (POCA) became law in January 2003. The legal position for money laundering activities is now primarily governed by this Act. The law is further underpinned by amendments made in the Serious Organised Crime and Police Act 2005 and the implementation of European directives via the Money Laundering Regulations 2007. We shall consider these later. POCA is still very important as the statute that records the major money laundering offences and was further amended by the Criminal Finances Act 2017.

The main types of offence under the Proceeds of Crime Act 2002 are:

Laundering or assisting someone else in laundering the proceeds of crime

Failing to report knowledge or suspicion of money laundering

Tipping off, or giving somebody warning that their activity might come under scrutiny by the authorities

Under the first category above, all of th...

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... account opening mandates, to be kept for five years after the relationship with the customer has ended.

The date when the relationship with the customer has ended can be the date of:

The closing of the account

The carrying out of a one-off transaction or the completion of several transactions

The commencement of proceedings to recover debts payable on insolvency

All other records of activity on an account should also be kept for the same five-year period.

Records may be kept on microfiche or as computerised document images rather than in paper format. This can ease the burden of retaining records for five years. Each company tends to have its own procedures for record-keeping. Regardless of the recommended retention period for records, all records of any customer, where a suspicious transaction has been reported, or where they are known to be under investigation, must be kept until the case is closed.

Investigation

Any customer under suspicion of money laundering will be investigated. The investigators will require the records to enable them to follow an audit trail.

The things the investigators might need to find out include:

The potential beneficiaries of the client account

The volume of funds/transactions flowing through the account

The original source of the funds

How funds were paid in or withdrawn, for example, by cash or cheque

The identity of the person making the transaction

The destination of the funds

How the instruction and authority were given, and in what form

Training

The Money Laundering Regulations stipulate that registered organisations should take appropriate measures to ensure that all relevant employees are:

(a) Made aware of the law relating to money laundering and terrorist financing;

and

(b) Regularly given training in how to recognise and deal with transactions and other activities which may be related to money laundering or terrorist financing.

No mention is made in the regulations of the frequency of training. In the past, it was stipulated that such training should take place at least every two years. It is now up to relevant organisations to decide when training should take place in accordance with their own risk strategy.

The Assets Recovery Agency

The Assets Recovery Agency was established to disrupt organised criminal enterprises through the recovery of criminal assets and aims to promote the use of financial investigation as an integral part of criminal investigation.

In October 2007, the Serious Crime Act 2007 received Royal Assent. It set out the Government’s decision to merge the operational elements of the Assets Recovery Agency (ARA) with the Serious Organised Crime Agency (SOCA), and the Agency’s training and accreditation functions with the National Policing Improvement Agency (NPIA). On 7 October 2013, the National Crime Agency (NCA) became fully operational.

It also extended to certain prosecutors the power to launch civil recovery action under the Proceeds of Crime Act 2002.

Other forms of financial crime

In addition to money laundering there are other forms of financial crime including: fraud, cybercrime, terrorist financing, bribery and corruption and market abuse.

The Bribery Act 2010 aims to reduce the effects of bribery with penalties applying to both individuals and firms. Regulated firms have to have procedures to prevent bribery and fully implement them.

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