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Anti-money laundering framework: Does it stain our rights?

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Crime prevention methods that limit our liberties need to be re-evaluated

Breaking Bad
Breaking Bad

Some human rights are absolute. Most, however, are qualified either by logical necessity or public interest.

In response to threats posed by organised crime, onerous preventive measures have been enacted that have the effect of limiting some of these rights. Even though the fight against crime is most commendable, measures infringing personal liberties should only be accepted if proportionate and effective.

Money laundering is a process of concealing illegally obtained money. Internationally, the legwork for Anti-Money Laundering (AML) enforcement is done by the regulated sector (primarily encompassing financial institutions). Firms are required to submit a Suspicious Activity Report (SAR) to the National Crime Agency (NCA) whenever they suspect money laundering. Any concerns have to be reported to the Money Laundering Reporting Officer who will evaluate the threat and, if necessary, submit a SAR to the NCA.

The authorities then have seven days to prevent the transaction or seize the funds. Under the Proceeds of Crime Act (POCA) 2002, assisting money laundering is a criminal offence punishable by up to 14 years imprisonment (s327- 329), with five years for a failure to report a suspicious activity (s.330- 332). Additionally, The Money Laundering Regulations 2007 require regulated firms to have appropriate controls in place, imposing the Know Your Customer (KYC) requirements and training of staff; lack of such being punishable by up to two years imprisonment (part 3, s45).

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The KYC procedures are the cause of the lengthy requirements to disclose and document personal information (including source of wealth) at the outset, and sometimes even during, any banking or investment relationships. The Joint Money Laundering Steering Group has developed extensive and prescriptive guidelines on due diligence to be conducted on different types of customers. The guidelines are approved by the Treasury and are carefully observed by professionals.

However, satisfying the guidelines is sometimes practically impossible for the most innocent practical or legal reasons. For example, one may not readily document a proof of the source of funds in the case of charitable collections; or requirements for various corporate entities (like annual returns or corporate resolutions) may vary across jurisdictions. Taking into account the international dimension of financial services, it is normal for a fund and its depository to be domiciled in Ireland, while having a UK-based investment manager and clients spread across the EU. And despite harmonisation on the macro-level, details in many cases often prove to be very problematic, even on the European Economic Area level. Especially when the industry, wary of the severe penalties, keeps enhancing its best practices.

Trust that one can get their assets back when needed is imperative in banking, and one normally does not perceive it as a threat to his property rights. However, due to the AML safeguards in place there are circumstances where one cannot withdraw large amounts of cash or effectively transfer money to another, because someone’s suspicion has been triggered. Most customers will occasionally conduct transactions that do not fit the usual pattern (e.g. sale/purchase of property, larger orders) and may be perceived as suspicious. It is not difficult to imagine circumstances in which lack of access to/control of own funds is not only costly but also carries legal consequences. Such delays are coupled with a lack of information, as financial professionals face two years imprisonment for ‘tipping-off’ customers (s333A POCA), or even five years for prejudicing investigations (s342 POCA). Being deprived of control of one’s own funds, even if only temporarily, is quite a drastic measure seriously impairing one’s right to property.

In addition to the ownership and control implications, there is a problem of some persons being denied access to financial services due to these AML regulations. While access to banking is not yet widely recognised as an economic, social and cultural right, such a position is advocated increasingly often. Regardless of its status, undoubtedly the lack of access to financial intermediation can have truly paralysing effects on one’s life or operations. Especially as nowadays using financial intermediation is realistically no longer optional.

Finally, there is an issue of the interplay of the KYC and right to privacy. Subjecting oneself to the ‘necessary due diligence’ is a standard contractual pre-requisite of entering into contracts for financial services. However, one may question whether the extent of the disclosures and evidence required, effectively demanding the customer to prove that his source of wealth is legitimate, does not make a way with the presumption of innocence. Furthermore, in light of recent tax-evasion scandals, the Home Secretary calls for even stricter due diligence. At which point are we prepared to challenge these hurdles as unreasonably restricting one’s access to financial intermediation?

The presumed utility resulting from a strong AML framework is potentially great. If effective, it removes incentives to engage in criminal activity. With that in mind, the inconvenience created by the AML measures (not only perceived as a burden to the financial industry, but predominantly to the customers) can be excused. Administrative hassle is a small price to pay for advancement in combating organised crime and advancing public safety. That is, providing the framework works.

Unfortunately it does not. The NCA’s report for the year 2014/2015 discloses that the SARs received led to 22 arrests and denial of £46,375,449 to criminals.

To put it into context, non-governmental agencies estimate that £48bn is laundered through UK institutions yearly. That means that the authorities sequestered less than 1% of the illicit funds that criminals tried to introduce back to the economy (not the illicit proceeds itself). For the world’s financial capital it does not strike as overwhelmingly effective.

Industrialisation of banking removed a personal relationship between service providers and clients. This, coupled with distorted incentives resulting from the agency problem, encouraged regulators and legislators to introduce layers of complex and prescriptive rules, sometimes forgetting the side effects it may have on the end-users. Employment of crime-prevention measures limiting individual liberties should be scrutinised and re-evaluated. Especially, if they are ineffective.

Marta Bokiej is a University of East Anglia law graduate, who then studied a masters in the regulation of financial markets at Queen Mary University London. This post was one of the standout entries we received for the BARBRI Global Financial Crime Blogging Prize.

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2 Comments

Trumpenkrieg

“Money laundering is a process of concealing illegally obtained money. ”

What, you mean like stuffing it inside a mattress?

Tony Giles

Incredible (and disheartening) that every year our vast AML infrastructure blocks a mere 1% of laundered funds. Clearly, AML/KYC as we know it is fundamentally broken – expensive, inefficient, ineffective. Current players (e.g. Thomson Reuters, LexisNexis) have had 15 years to work out a solution and they have failed to change anything. AML needs disruption, and fast. Some new “RegTech” (regulatory technology) companies are starting to fill this obvious void in the compliance market, though. A good explainer here on RegTech: https://complyadvantage.com/what-is-regtech/.
And if you’re interested, take a look at this list of RegTech companies to follow: https://www.linkedin.com/pulse/40-regtech-startups-follow-jan-maarten-mulder?articleId=8662538503125372109

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