Financial crime staff in UK firms or in those firms with substantial links to the UK would be well advised to read the 2018 National Strategic Assessment of Serious and Organised Crime (the Assessment) recently published by the National Crime Agency (NCA).
The Assessment was published shortly after Rob Wainright, the recently departed head of Europol, said in an interview “Professional launderers – and we have identified 400 at the top, top level in Europe – are running billions of illegal drug and other criminal profits through the banking system with a 99 percent success rate.”
The Assessment notes: “The threat from SOC (Serious and Organised Crime) is increasing in both volume and complexity and will continue to do so in both the short to medium term”.
Accordingly, both at a UK and an EU level, financial crime staff should not be complacent when addressing SOC.
It is unsurprising that the Assessment concludes that “the SOC victim impact is wide ranging”.
The NCA documents the threats from many criminal activities including child sexual exploitation and abuse, organised immigration crime, modern slavery and human trafficking, fraud, cyber crime, firearms and drugs.
To counter these threats, the NCA has build up organised crime maps of the members of 4,629 serious and organised crime gangs.
Proceeds of crime
The proceeds of the criminal activities outlined in the Assessment will be of particular interest to financial crime staff as criminals seek to use the services and products offered by firms.
Whilst acknowledging there are no reliable estimates of the volume of money laundering in the UK, the NCA estimates there is a “real possibility” that it amounts to “hundreds of billions of pounds” on an annual basis, partially due to the UK’s “large, open financial sector”, which affords a “plethora of professional services” and “complex and varied ways to launder money”.
Russia, Hong Kong, Pakistan and the United Arab Emirates are observed by the NCA to have “the most enduring effect” on the UK across a variety of money laundering threats.
Also of note is that “the majority of financial services and professional providers are not criminally complicity or negligent with regards to money laundering, these are areas of high risk”
NCA versus the FCA
It is striking that the NCA, through the Assessment, names various jurisdictions as presenting a serious and organised crime threat to the UK.
Its policy is in stark contract to the Financial Conduct Authority (FCA) which has refused to publish a list of those countries it deemed to be high risk in terms of money laundering in response to a Freedom of Information Act request in 2015.
The FCA successfully argued in front of The Information Commissioner’s Tribunal that publication may harm relations with foreign countries.
The previous year saw the government of the Cayman Islands protest vigorously at the Caymans inclusion in a FCA response to a similar question.
The list of high risk countries appeared on the FCA’s website for six weeks before it disappeared.
One may wonder whether the public identification of high risk jurisdictions by state agencies represents confused thinking at the heart of UK government and whether the UK’s relations with those jurisdictions identified by the NCA suffer as a result of publication.
High End Money Laundering (HEML) using corporate structures and financial markets is an area for the NCA’s focus, as billions of pounds are believed to be laundered through these vehicles.
In capital markets, criminals exploit the sheer scale of the volume, depth and liquidity of the markets that make it difficult for firms and regulators to identity money laundering.
Foreign exchange (FX) services are of particular concern to HMRC, who have responded by introducing a new registration system for FX firms in order to increase their understanding of the sector.
The top end of the London property market is particularly vulnerable to criminals, who often operate via companies and trusts to acquire and hold the properties.
Such criminals use professional enablers, including lawyers and accountants, who unwittingly, set up companies and trusts to assist criminals disguise their activities.
It is disappointing that although the Senior Managers and Certification Regime (SMCR) has been in place in banks for over two years that the NCA notes “corrupt individuals within financial firms pose a threat.”
It will be interesting to see whether the current extension of the SMCR to all FCA regulated firms identify such corrupt people and remove them from the industry.
Trade based money laundering (TBML) is another concern for the NCA.
The complexity and scale of international trade as well as varying standards of national standards and regulations across the world make TBML attractive to criminals.
The NCA believes that funds originating from countries with known money laundering risk, including countries with high risks of bribery and corruption, are invested into UK businesses.
Traders in gems and precious metals have been known to be used to mix criminal funds alongside lawful proceeds.
Cash continues to be used by serious and organised crime gangs to launder funds, no doubt attracted by the anonymity it affords as well as the opportunity to break up an audit trail.
Cash intensive businesses, such as scrap metal merchants, nail bars and takeaways are deemed to be particularly attractive to criminals, who often use money service bureaux to move their funds around the world.
The NCA predicts that due to the de-risking by financial institutions of the remittance and other sectors, criminals will seek other means to launder their funds.
Looking forward, the NCA feels that as a result of Brexit, UK businesses will, on the urging of the British government, seek to increase trade with non-EU countries and hence increase the risk of TBML.
The NCA believes that Unexplained Wealth Orders (UWOs) may have an effect on the perception as the UK as a safe place to launder funds is likely to depend on the amount of assets seized that are linked to UWOs.
Given the generally poor record of seizing and confiscating the assets of criminals under the Proceeds of Crime Act 2002, the effect of UWOs, in this respect, may turn out to be disappointing.
Bribery and sanctions risk
International bribery and sanctions evasion is another area of focus for the NCA.
Foreign corrupt Politicly Exposed Persons (PEPs) appear to find the UK an attractive place to launder their funds, particularly into London property.
Whilst acknowledging the scale of corrupt PEP investment in the UK is unknown, the NCA observes that Nigerian, Pakistani and Russian PEPs feature prominently in their files.
Offshore jurisdictions that offer secrecy and no or low taxes continue to be used to disguise the beneficial ownership of assets physically located in the UK controlled by corrupt PEPs.
Accounts in the names of family members of corrupt PEPs are commonly used to launder funds, as is UK real estate, which the NCA observes are increasingly being used for the purposes of bribery.
In the view of the NCA, a small number of lawyers, accountants, estate agents and trust and company service providers continue to assist corrupt PEPs.
However, the NCA believes that some of these professionals are simply negligent or unwitting rather than being knowing participants in the laundering process.
Although regime change in developing countries affords the opportunity to reduce bribery and corruption, the NCA notes, where bribery and corruption is pervasive in the infrastructure of such countries, incoming governments remain susceptible to corruption.
Without qualification, the NCA states: “UK registered companies continue to bribe overseas to improperly obtain new contracts, extend existing contracts or to obtain sensitive information about competitors.”
Apart from undermining the foreign policy objectives of the UK government and international community, those who evade international sanctions pose a reputational risk to the UK, the NCA believes.
Whilst the scale of sanctions evasion is unknown, the NCA estimates the risk of evasion is heightened as the range and scope of international sanctions increases.
Financial crime staff in UK firms or in firms with a strong UK nexus would be well advised to carefully review the NCA’s Assessment and seek to identify where their firms may be attractive to serious and organised crime gangs due to the services and products they offer, revise their risk assessments and risk mitigation controls accordingly.
Staff are also recommended to consider if any of their clients have strong links to countries identified by the NCA as being as high risk.
While it is unlikely that firms will have a direct exposure to such criminal activities as human trafficking, modern slavery and organised illegal immigration, contacts with charities working in these fields could be explored in order to gain a greater understanding of how criminal gangs use financial services firms to launder their illegally acquired funds and assets.
About the writer: Denis O’Connor is both a Fellow of the Institute of Chartered Accountants in England & Wales and the Chartered Institute of Securities and Investment. He was a member of the British Bankers’ Association Money Laundering Committee from 2003 -10; and a member of the JMLSG’s Board and Editorial Panel between 2010 and 2016.
He has been a frequent speaker at industry conferences on financial crime issues, both in the UK and abroad.
This article is expressing personal opinions and is meant for information purposes only. The article does not intend to replace professional or legal advice. It is recommended that readers seek independent professional or legal advice, or speak to authorised persons/organisations.