Money Laundering Compliance and Investigations across EMEA

This is an Insight article, written by a selected partner as part of GIR's co-published content. Read more on Insight

Our June 2016 overview of money laundering was published just two months after the leak of the Panama Papers, which was already leading to significant pressure on regulators to respond firmly to the public outcry over the content of the papers. The leak revealed widespread use of offshore asset-owning offshore structures, both for legitimate purposes and for illegitimate means such as money laundering. That pressure has not abated, and governments around the world have continued and strengthened their fight against money laundering.

The UK has been at the centre of this fight. Shortly after the leak, Prime Minister David Cameron hosted a much-feted Anti-Corruption Summit in London,¹ ‘as part of the global drive to expose, punish and drive out corruption’. Leaders of 43 countries – from both the wealthy Western world and countries plagued by corruption and money laundering such as Nigeria and Afghanistan – gathered alongside NGOs and experts to discuss and agree a common approach to tackling corruption. The summit concluded with the signing of a Global Declaration Against Corruption, mapping out the participants’ plans to tackle corruption and money laundering.² Numerous individual states made separate statements of the concrete actions they would take.

The Summit is clear evidence of continuation of an important recent trend: cross-border coordination and cooperation among governments and state agencies to tackle money laundering and associated problems such as terrorist financing. The continued threat from terrorism following the recent attacks in Berlin and London has only added to the understanding that money laundering efforts must be coordinated internationally, and domestic anti-money laundering (AML) legislation must be updated to penalise corrupt individuals or entities and their associates.

The Summit did not stand alone in the efforts to encourage cooperation, but rather led to a host of new bodies and initiatives, including:

The Global Forum for Asset Recovery that will focus on returning stolen assets to participant countries, starting with Nigeria, Sri Lanka, Tunisia and Ukraine. The forum received commitments from 20 countries, including France, Germany, Switzerland and the United Kingdom, to strengthen and reinforce domestic legislation to assist in the recovery of stolen assets.³

The launch of the International Anti-Corruption Coordination Centre (IACC) by the Australia, Canada, New Zealand, Switzerland. the United Kingdom and the United States, and Interpol, the worldwide policing organisation. The IACC, which was to become operational by April 2017, will enable law enforcement agencies from around the world to gather in London to coordinate an effective approach to tackling ‘grand corruption’. It will be hosted within the International Corruption Unit of the UK’s National Crime Agency (NCA).

Institutional Integrity Partnerships, entered into by a number of states (including Afghanistan, Australia, Bulgaria, Georgia, Germany, Ghana, Korea, Mexico, the Netherlands, Nigeria, Norway, Romania, Switzerland, Tanzania, Ukraine, United Kingdom and the United States), the UN and the Commonwealth, will facilitate the exchange of national anti-corruption experience and practice.⁴

Global AML efforts mean that companies and individuals across Europe, the Middle East and Africa must act to ensure that they have adequate, up-to-date compliance systems to minimise their risk exposure. Such action is of particular importance in a regulatory and enforcement landscape that is increasingly hostile towards alleged money launderers and its facilitators.

What is money laundering?

Money laundering is the process by which the illicit sources of assets obtained or generated by criminal activity are concealed to obscure the link between the funds and the original criminal activity. Laundered funds are frequently proceeds from crimes such as bribery, drug smuggling, human trafficking, illegal arms sales and sanctions violations.

Money laundering is distinct from, but very often related to, other financial crimes, such as terrorist financing and tax evasion. All three exploit similar vulnerabilities in legal and financial systems to conceal money from regulators and authorities.

United Kingdom

Over recent years, European authorities have started to adopt more aggressive, US-style approaches to investigating and prosecuting money launderers and the institutions that facilitate money laundering. This continues to be a trend.

Such efforts are perhaps clearest in the UK, which is seeking to shed an emerging image as a repository for dirty money. In addition to hosting the Anti-Corruption Summit, the UK government also issued the 2016 Action Plan for Anti-Money Laundering. The plan, following a national risk assessment, outlined three priorities:

create a more robust law enforcement response to money laundering threats;
reform the supervisory regime and ensure companies that facilitate or enable money laundering are brought to task; and
increase the UK’s international ability to tackle money laundering and terrorist financing threats by working with international groups and governments.⁵

The UK has had some apparent early success in effecting at least the third priority, as demonstrated by the NCA’s hosting of the IACC. In respect of the first two priorities, Home Secretary Amber Rudd announced proposals in December 2016 for a review of the UK agencies responsible for tackling economic crime.⁶ The Financial Times has reported that this audit will encompass the NCA, the Serious Fraud Office (SFO), the Financial Conduct Authority (FCA), Her Majesty’s Revenue and Customs, the Competition and Markets Authority and the City of London Police.⁷ While the extent of the review is not yet clear, the government appears to be serious about reforming the UK’s ability to fight economic crime. Further, the government has just announced plans to create a new Office for Professional Body Anti-Money Laundering Supervision.⁸ The Office will sit within the FCA and will bring together sometimes conflicting AML guidance issued by the 25 organisations that supervise different professional sectors. The Treasury stated that UPBAS would ‘bring the UK’s anti-money laundering regime into line with the latest international standards, and ensure consistently high standards of supervision across all sectors’.

The Panama Papers too have led to action. A cross-agency taskforce was established in April 2016 to analyse the data leaked. In November 2016 Chancellor of the Exchequer Philip Hammond revealed that the task force had placed more than 30 individuals and companies under investigation for financial crime.⁹

The FCA has followed through on the statement in its 2016/2017 business plan that investigating and prosecuting money laundering is one of its key priorities. In January 2017, the agency announced that it had fined Deutsche Bank £163 million for significant deficiencies in the Bank’s AML framework – the largest penalty it has handed out for inadequate AML controls.¹⁰ The FCA explained that the size of the fine reflected the seriousness of Deutsche Bank’s failings. The bank was granted a 30 per cent discount for agreeing to settle early in the investigation and for its ‘exceptional cooperation’ and agreement to a large-scale remediation programme. The action was significant for the extent of the collaboration between the FCA and the New York State Department of Financial Services, which separately fined the bank US$425 million. Similarly, in 2017, Finma (the Swiss Financial Market Supervisory Authority), the FCA and the Singaporean Monetary Authority cooperated as part of an action under which Coutts Bank disgorged US$6.57 million for violations of AML rules. Coutts had allowed funds associated with alleged corruption in Malaysia to flow through Switzerland, though it had reason to be suspicious of the transactions.¹¹ These decisions reinforce the message that regulators are coordinating their AML investigations. We expect such cross-border collaboration to increase.

The government is also expected to make more use of deferred prosecution agreements (DPAs). DPAs, another American import, were introduced to the UK in February 2014 under the provisions of Schedule 17 of the Crime and Courts Act 2013. They are available to (and are being used by) the SFO to resolve criminal actions against companies by deferring prosecution in return for certain conditions, including fines and usually changes to behaviour. The SFO has secured four DPAs to date. None of them have been brought in relation to money laundering offences, but the first DPA, concluded with Standard bank plc, arose out of a self-report to the SFO after the bank had filed a suspicious activity report (SAR) pursuant to the Proceeds of Crime Act 2002 (POCA). That connection, along with the fact that DPAs can be entered into in respect of the suite of money laundering offences under POCA, is reason enough for UK corporates to ensure their AML compliance systems are robust, up to date, and comprehensive enough to detect and prevent money laundering.¹²

UK legislation

The UK government has also been active on the legislative front, with a number of significant new measures.

Criminal Finances Bill

The Criminal Finances Bill, in committee stage at the time of writing, is expected to become law later this year. The Bill contains measures aimed at improving UK enforcement agencies’ ability to recover the proceeds of crime, prevent the financing of terrorism, and tackle money laundering and tax evasion. The Bill proposes significant changes to the UK’s anti-money laundering laws under POCA, and introduces new criminal offences for failure to prevent the facilitation of tax evasion.

The Bill creates unexplained wealth orders (UWOs), which prosecutors and regulators can use to require a person or entity, whether within or outside the UK, suspected of involvement in or association with serious criminality, to explain the origin of assets with a value greater than £100,000 if those assets appear to be disproportionate to their known income. A failure to provide a convincing response would give rise to a presumption that the property can be recovered as the proceeds of crime. UWOs can also be used against foreign politically exposed persons (PEPs), such as politicians and government officials, and those associated with them, even in the absence of suspicion of serious criminality. UWOS will have retrospective effect, so can be issued in respect of suspicious property, whether in the UK or elsewhere, acquired before the date the Bill takes effect.

The Bill extends the moratorium period for consent in respect of SARs filed under POCA from 31 days to more than six months. POCA requires that regulated companies, such as banks and insurance companies, file SARs with the NCA where they suspect that a transaction may involve the proceeds of crime, and enables them to seek consent to proceed with the transaction. Under the regime, if the NCA refuses consent within seven days, the moratorium period kicks in, allowing investigators time to gather evidence to determine whether further action, such as restraining the funds, should be taken. The NCA considers that 31 days is not long enough, and the new bill allows the moratorium period to be extended up to six times.

The Bill proposes the introduction of disclosure orders in respect of money laundering investigations (they are already available for fraud investigations).

The Bill creates mechanisms that will enable regulated entities to share information with one another about suspected money laundering. This approach has already been piloted under the Joint Money Laundering Intelligence Taskforce (JMLIT), under which banks and the NCA share information. In the second quarter of last year, such sharing helped to deliver 37 arrests of individuals suspected of money laundering as well as the closure of 114 suspicious bank accounts.¹³

The Bill creates a new offence, applicable only against companies, of failure to prevent the facilitation of tax evasion. A company will commit a criminal offence where it fails to prevent someone who acts for or on behalf of the company from committing a UK tax evasion offence or an equivalent offence under foreign laws, where there is a nexus to the UK.

Money laundering regulations

AML laws in the UK and across the EU are required to change in 2017, since the EU’s Fourth Money Laundering Directive (4MLD) has to be implemented by EU member states by 26 June 2017.¹⁴

The UK government has issued a draft of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, which will revoke the Money Laundering Regulations 2007 when they come into force. At the time of writing, the regulations remain subject to consultation, but are in or near their final form. Significant changes to the legislation will include the following.

Enhanced due diligence (EDD) will now apply to domestic PEPs (such as MPs, judges, etc) as well as foreign PEPs, assessed on a case-by-case basis, proportionate to the risk that the PEPs pose. Firms should also apply a risk-based approach to the close family members and close associates of PEPs, as well as former PEPs. In March 2017, the FCA published guidance for financial services firms on how to conduct risk assessments in respect of certain categories of PEP.¹⁵ This guidance and 4MLD state that transactions or business relationships involving PEPs should not be refused solely due to a discovery that an individual or their close associate is a PEP.

HMRC will launch a register of beneficial ownership over trusts with tax consequences, whose trustees will be expected to update on an annual basis to include information identifying the trust’s beneficiaries, trustees and other significant controllers.

Corporates will be required to provide significant identifying information to regulated businesses ahead of transactions. This builds on the government’s creation last year of a register of persons with significant controls (PSCs), which implements a requirement of the directive for companies and other legal entities to hold and make available ‘adequate, accurate, and current’ information on their beneficial owners to competent authorities and any other person or organisation that can ‘demonstrate a legitimate interest in it’.

The turnover threshold to exempt persons who engage in financial activity on an occasional or very limited basis from AML requirements will be lifted to £100,000.

Simplified due diligence (SDD) will no longer be available for a set list of customers or transactions. Rather, firms will need to consider in each case whether the customer and transaction are sufficiently low risk to warrant the use of SDD.

Sanctions for breaches of the regulation have been increased.

Failure to prevent economic crimes

A law to criminalise a more general failure to prevent economic crimes is now, having been mooted in 2016, the subject of formal consultation.

The law is expected to mirror the offence of failure to prevent bribery in the Bribery Act, and the new law of failure to prevent facilitation of tax evasion, discussed above, in connection with a list of crimes, including money laundering, false accounting or fraud. As is the case with the other laws, it would be a defence for the company to show that it had reasonable procedures in place to prevent the crime, or that it was not reasonable to expect the company to have such procedures in place.

Moves towards this law can be seen in the context of the Ministry of Justice’s broader Call for Evidence on the reform of corporate criminal liability, which closed in March 2017. This follows a promise at the 2016 Summit that the government would open a full consultation on the state of corporate criminal liability. The response and government conclusions may well lead to significant changes in the structure of the proposed law, along with other laws as well. Corruption Watch, an anti-corruption NGO, stated of the Call for Evidence: ‘The Government has recognised that current corporate liability laws are not adequate for purpose… But it is not clear there is enough political will in the Government to currently do anything about it…The Call for Evidence provides a very big space for business to say, enough is enough.’¹⁶

Continental Europe

Governments of other European countries have continued to adopt US-style approaches to targeting money launderers and its facilitators.

As noted above, all 28 members of the EU are busy implementing local law transposition of 4MLD, which should lead to greater enforcement (and enhanced compliance requirements) over the years to come. Not content with 4MLD, however, the institutions of the EU are currently preparing 5MLD, which takes greater cognizance of terrorist financing. The new directive will tackle a number of areas, including stronger AML checks on customers from high-risk countries, greater intra-EU information sharing, and efforts to minimise the use of anonymous payments through pre-paid debit cards. There is as yet no date for the finalisation and transposition of 5MLD, but it will likely occur after Brexit.

There have also been some significant additional legislative developments in the member states.

In December 2016, France passed the Sapin II Law, providing for significant changes in the French anti-corruption and AML regime. Sapin II expands France’s extraterritorial jurisdiction over certain corruption offences, including money laundering. French criminal laws are now applicable to worldwide acts of corruption committed by French citizens and legal entities. Sapin II also requires companies with an annual turnover of at least €100 million and more than 50 employees to establish anti-corruption programmes; creates an anti-corruption agency that will monitor companies’ compliance structures; and introduces deferred prosecution agreements for certain specified offences.

In July 2016, Slovakia passed the Criminal Liability of Legal Persons Act. Companies can now be held liable for a raft of criminal offences, including money laundering, where the offence is committed on their behalf by an associated person.

Middle East

Four Middle Eastern states continue to be identified by the Financial Action Task Force (FATF) as having strategic deficiencies in their AML regimes: Afghanistan, Iraq, Syria and Yemen.¹⁷ None of these has fully implemented systems to address their AML deficiencies. However, some significant developments have taken place.

In Afghanistan, substantial progress has been made through the establishment of improved provisions for asset freezing and confiscation, and the country has established systems to criminalise money laundering and terrorist financing.¹⁸ At the London Anti-Corruption Summit, even though Afghanistan (along with Nigeria) was called ‘fantastically corrupt’ by David Cameron in conversation with the Queen and the Archbishop of Canterbury ahead of the Summit, the country made extensive commitments to expose and tackle corruption;¹⁹ in fact, in terms of numbers of new commitments made at the Summit, Afghanistan was in the top five,²⁰ with 80 per cent of its commitments judged as ‘ambitious’ or ‘somewhat ambitious’ by Transparency International.²¹ Many of the larger countries at the Summit fell well short of such efforts.

In Syria, because of the security situation, the FATF has not even been able to conduct an onsite visit to assess whether the country’s process of implementing the required reforms and actions to its AML action plan is underway. The FATF continues to monitor Syria, but the current potential for progress would seem limited. Yemen poses the same problems: the FATF has been unable to conduct an onsite visit there since 2014.

Iran is still regarded as a high-risk jurisdiction by FATF, which is monitoring its progress in implementing an action plan to address its AML deficiencies. The FATF is due to review Iran’s progress in June 2017. Until this review, FATF recommends that international financial institutions apply enhanced due diligence to all business relationships and transactions with Iranian individuals and companies.²²

Across the Middle East, though, there is notable progress in the development of sophisticated corporate AML programmes. Earlier this year, Deloitte reported that 65 per cent of Middle Eastern organisations responding to a survey indicated that their compliance investment had increased over the past two years; 63 per cent expected investment to increase over the next two years.²³ In fact the Middle East and Asia are the only two regions in the world where compliance spending is increasing.²⁴ PWC found that 2016 brought a 4 per cent increase (over 2014) in the number of Middle Eastern organisations reporting economic crime.²⁵ Finally, 2016 saw the establishment of the Dubai Economic Security Centre (DESC), which seeks to prevent and detect financial crimes, including money laundering, through cooperation among the country’s judiciary and government bodies, and local and international regulators. The DESC is authorised to use ‘all available means’ to carry out its remit of supervision, investigation, criminal detection and information exchange. All companies licensed to engage in economic activity in Dubai are subject to the Centre’s authority.²⁶

Africa

Six African nations attended the London Anti-Corruption Summit: Ghana, Kenya, Nigeria, South Africa, Tanzania and Tunisia. All gave significant commitments to tackling corruption within and beyond their borders. President Muhammadu Buhari of Nigeria – the other ‘fantastically corrupt’ state – not only agreed with that accusation,²⁷ but also committed to a review of Nigeria’s financial crimes legislation. He said the institutions key to the country’s efforts in fighting financial crime were not working owing to a ‘myriad of challenges’, including overlaps in mandate, gaps in legislation, judicial corruption, funding issues, deficiencies in human capital, leadership inadequacy and internal corruption.²⁸

In 2016, Uganda was the only African nation on FATF’s list of jurisdictions with strategic deficiencies, and it has yet to meet last year’s targets.²⁹ This year it has been joined by Ethiopia,³⁰ which has not implemented FATF’s 2015 recommendations to develop an adequate AML framework. In February 2017, Ethiopia made a high-level political commitment to work with both the FATF and the Eastern and Southern Africa Anti-Money Laundering Group to strengthen the effectiveness of its AML framework, fully integrate non-financial businesses and professions into its AML regime and implement the results of the country’s national risk assessment.

It is evident that certain African states are increasingly committed to improving their AML efforts, but more work remains to be done to effectively combat money laundering on the continent.

Conclusion – compliance policies as strategy

Financial services firms and their advisers should implement robust and comprehensive compliance policies to detect and prevent money laundering and must ensure that they continue to be compliant with all applicable AML legislation, especially considering the speed at which these laws are changing. Non-compliance with AML laws can be an expensive mistake, as evidenced by the FCA’s continued enforcement and penalisation efforts. Effective systems, on the other hand, can serve not only to prevent failures, but may also prove a defence to findings of criminality by rogue employees. There is, therefore, no reason not to invest the time and resources to get it right.

Notes