Dirty money

A key battleground in the fight against this menace is stemming the flow of dirty money that funds the fanatics, and Financial Services companies are playing their part in this fight. FST asked the British Bankers Association what 2007 is likely to bring.

This year will be busy for legislators across Europe, as the third European Money Laundering Directive is transposed into the respective member states’ national legislation. From the UK perspective, much work is involved. The UK Treasury issued a consultation document in the summer of 2006 and is publishing the new draft rules this January. There will then be another consultation period, which industry will respond to, before legislation is approved by Parliament in the early summer, working towards implementation by the financial sector by the December 15 deadline this year.

While every member state has its own processes for transposing EC directives, industry associations across Europe will be involved in similar kinds of processes. For the BBA the work doesn’t stop with consultation responses and lobbying though. The UK financial sector has itself put together guidance for its members on the practical application of money laundering legislation. The process of updating the 2006 Guidance, written under the aegis of the Joint Money Laundering Steering Group (JMLSG), will begin once the draft rules are published in January.

Of course, given that the legislation is implementing an already agreed Directive, there is a fair expectation of what the rules will look like already. “The new rules aren’t expected to change radically the existing regulations, but there will be areas that we’ll need to amend in the Guidance,” says David Coates, secretary to the JMLSG and Director of Financial Crime at the BBA. A key area, and one that the banking industry needs to take on board, may be a clearer understanding of the rules on reliance. This is the area of due process when new business is introduced to financial institutions by an intermediary. Essentially when a firm takes on a new customer introduced by a third party it needs to be sure that it has confidence in the firm making the introduction or jurisdiction supervising the introducing firm is roughly equivalent to UK standards.

It’s not enough for a bank to rely on the fact that because a new customer operates in an equivalent jurisdiction internationally that this absolves it from considering due diligence issues. The quality of that equivalent jurisdiction needs to be looked at very carefully, and there is a limit as to how far the new guidance will be able to provide detail on the ranking of other jurisdictions.

The other challenge that will need attention by the Treasury and regulators other than the FSA is the expansion of the scope of the legislation. Under the Directive some new areas of business will be covered by regulation or more effective AML for the first time. For example, estate agents will now need to be regulated and while some of these will be companies operating nationwide with the resources to tackle compliance, some will be very small businesses. This of course won’t affect the FSA-regulated financial services industry directly, but it would be no surprise if small business advisors are receiving more calls for help once these rules come on stream in these new sectors.

Away from the nuts and bolts of the new rules, we asked the BBA how well the JMLSC guidance has gone down in the UK, as it’s not a widely copied model across Europe. “One of the particularities of the UK is that we’ve developed a risk based-approach to the legislation,” says Coates. “While this brings some benefits for industry, in terms of focusing compliance efforts more efficiently, and minimizing the impact on the majority of customers, it also presents some challenges.”

The problem is that while at the executive level the risk based approach can be discussed, agreed, and the judgements made can be relied on, these decisions have to be passed down to the operational level in a way which enables hundreds of staff translating these judgements into decisions on a daily basis. “It’s clear firms, and the FSA monitoring teams, need to ensure a level of some consistency and firms need help and clarity to aid those decisions,” says Coates. “This is why the industry needed guidance , and as we go forward the success (or otherwise) of this approach will be tested.”

There are other benefits of having industry-focused guidance in place. The UK Treasury has given the industry feedback about how it has used the guidance in pan-European meetings in Brussels. It has been very pleased with the resource which the Guidance represents, and it reports that the reaction from other member states has also been positive.

So might other European countries begin to develop similar kinds of material? According to the BBA the guidance is tied to the risk based approach adopted by banks in the UK, so the question is whether this is adopted among other member states. Interestingly, the Financial Action Task Force (FATF) as a whole has been looking very closely at the risk-based approach in 2006.

FATF has set up a working group to assess this approach, and is likely to report its findings at some point in 2007. “I don’t know what it is going to say, though we of course think there are advantages to the risk-based approach. If it reports positively on the detailed application of the risk-based approach then we might find that FATF endorsement influences the way in which other nations regard it,” Coates explains.

More generally we ask, how is the industry in Europe feeling about all the regulatory action around money laundering? After all, there has been an enormous amount of activity in the last five years, at a time when many industries have been calling for less regulation.

“Well, everyone accepts that there is a very serious terrorist threat at the moment,” says Coates, “and that governments need to get on top of this. The alleged plot of last summer in the UK just illustrates that this is really a national security issue, and the industry is happy to do what is required of it to help.”

Banks in the UK have been proactive in reporting any concerns, and 65 percent of all Suspicious Activity Reports in 2005 originated from banks. Once it goes over to the criminal agencies though banks are not privy in detail to how useful it is in all cases, especially in the pre-trial stage.

The issue of feedback is important to the industry, as it helps it make sense of the time and effort it is exerting on money laundering. “In the UK the new Serious Organised Crime Agency is really getting into gear, and it was really useful to get the feedback that the authorities were pleased with the industry’s co-operation on those suspected of being involved in last year’s airport plot.” says Coates, adding that the issue of collaboration between the authorities and the industry will be a theme across Europe.

The industry has to fulfil its obligations to the legislation and national security, there’s no question on that. But on the other hand detecting money laundering cold from the data takes systems, data and manpower to analyse, and this all comes at a cost for the industry. There is also the risk of upsetting innocent customers, so in purely business terms the industry obviously wants to make its efforts meaningful and smart. And that requires closer collaboration with authorities.

This collaboration also needs to be on international terms as well. The BBA points out that as systems tighten up, the bad guys tend to look for new weak points in systems. And when you’re thinking about the international money system it is clear this is not a problem that can be tackled at national levels.

In the UK nowadays criminals attempt to get their money over the border as quickly as possible – because our domestic systems mean laundering the cash in the UK is that bit more difficult. According to the BBA, the way to counter this is through more and better co-operation both within the European Union and globally.