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Money laundering regulation


Anti-money laundering and financial sanctions legislation

Historical development




This section of the Legaleze article on anti-money laundering regulation describes the development of international and UK measures over the last thirty years or so directed at combating money laundering and counter terrorist financing.

For completeness, we also cover briefly the subject of international economic and financial sanctions because these also concern managers of businesses and their advisers in relation to compliance with the law on making and receiving payments and monitoring business relationships.

The development of anti-money laundering regulation, counter-terrorist measures in the financial context and economic sanctions is very much inter-twined. However, with a view to clarity, these three topics are considered separately.

International anti-money laundering


The author Jeffery Robinson wrote (i): “the phrase [money laundering] perfectly describes what takes place – illegal, or dirty, money is put through a cycle of transactions, or washed so that it comes out the other end as legal, or clean, money. In other words, the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to reappear as legitimate income”.

International efforts at government level to combat money laundering go back more than thirty years. Legislative and enforcement measures were concerned initially with drug trafficking, but later extended to measures encompassing terrorist and general criminal activities. Among the major steps taken internationally were:

* In 1980, the Committee of Ministers of the Council of Europe adopted a recommendation on measures against the transfer and the safekeeping of funds of criminal origin.

* The United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances was adopted in Vienna in 1988 (the Vienna Convention) and was concerned with drug trafficking.

* The Council of Europe agreed the Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime in Strasbourg in 1990; this convention was aimed at general criminal activity.

* The Financial Action Task Force on Money Laundering (FATF) was established by the G-7 Summit that was held in Paris in 1989. Recognising the threat posed to the banking system and to financial institutions, the G-7 Heads of State or Government and President of the European Commission convened the Task Force from the G-7 member States, the European Commission and eight other countries.

The FATF is now a well-established inter-governmental body based in Paris and has currently 34 member states (including the G7/8 states) jurisdictions and 2 regional organisations (the EU Commission and the Gulf Co-operation Council. The FATF is a policy-making body which works to generate the necessary political will to bring about national legislative and regulatory reforms in these areas. The FATF has developed a series of Recommendations that are recognised as the international standard for combating of money laundering and the financing of terrorism.

EU anti-money laundering legislation


Following a proposal made by the European Commission, the Council of the EEC (as it was then) adopted Council Directive 91/308/EEC of 10 June 1991 commonly known as the First Money Laundering Directive (the 1991 Directive) on the prevention of the use of the financial system for the purpose of money laundering. This Directive required EEC member states to ensure that credit and financial institutions would check identities of customers, monitor transactions above ECU15,000  and report suspicious transactions to the authorities.

Directive 2001/97/EC of 4 December 2001, known as the Second Money Laundering Directive (the 2001 Directive) significantly changed the scope of the 1991 Directive, notably by extending:

* the scope of criminal activities covered by anti-money laundering from the proceeds of drugs offences (using the definition in the Vienna Convention) to a much wider definition of money laundering based on a broader range of predicate or underlying offences;

* in addition to credit and financial institutions, more types of businesses were added to the regulated sector; in particular investment firms, currency exchange offices ("bureaux de change") and money transmitters;

* the obligations of the Directive concerning customer identification, record keeping and the reporting of suspicious transactions to a limited number of activities and professions shown to be vulnerable to money laundering, including notaries and independent legal professionals when participating in financial or corporate transactions, including providing tax advice.

The 1991 Directive as modified by the 2001 Directive was replaced by Directive 2005/60/EC of the European Parliament and of the Council of 26 October 2005 or Third Money Laundering Directive (the 2005 Directive). This Directive was designed to take account of international coordination and cooperation, in particular the Recommendations of the FATF which were substantially revised and expanded in 2003. Among the main changes to the existing legislation were:

* Assisting in terrorist financing was added to money laundering as a prohibited activity.

* In accordance with new international standards, the 2005 Directive introduced more detailed provisions relating to the identification of customers including a requirement to identify the ultimate ‘beneficial owner’ of legal entities and trusts (‘customer due diligence’). Enhanced customer due diligence was required in relation to individual customers who were currently or in the past entrusted with prominent public functions and immediate family members or known close associates.

* Customer due diligence measures also had to include obtaining information on the purpose and intended nature of the business relationship, monitoring the relationship including scrutiny of transactions and source of funds.

* The regulated sector was again extended to include the buying and selling of real property or business entities, real estate agents, life insurance intermediaries, trust and company service providers, managing of client money, securities or other assets, opening or management of bank or securities accounts, trading in goods for cash in an amount of EUR 15 000 or more and casinos.

* Ensuring that directors of a registered currency exchange office, trust and company service provider or a casino are fit and proper persons.

* Suspicious transactions should be reported to the member state’s financial intelligence unit (FIU).

* Establishing a new EU Committee on the Prevention of Money Laundering and Terrorist Financing, replacing the Money Laundering Contact Committee set up by the 1991 Directive.

Regulation (EC) No 1889/2005 of 26 October 2005 on controls of cash entering or leaving the Community was passed in order to implement the FATF SR IX recommendation on cash couriers.

Regulation (EC) No 1781/2006 of 15 November 2006 on information on the payer accompanying transfers of funds implemented the FATF SR VII recommendation on wire transfers.

Directive 2007/64/EC of 13 December 2007 on payment services in the internal market (Payment Services Directive), in combination with the Third Money Laundering Directive, implemented the FATF SR VI recommendation on alternative remittance.

The EU Commission made a proposal for a Fourth Money Laundering Directive in February 2005 (2013/0025 (COD). The proposal for a Fourth Money Laundering Directive was enacted the Fourth Money Laundering Directive 2015/849/EU of the European Parliament and of the Council of 20th May 2015 on the prevention of the use of the financial system for the purpose of money laundering or terrorist financing (OJ L 141, 05.06.2015, p73). The EU also enacted the Funds Transfer Regulation 2015/847/EU (“funds transfer regulation”) of the European Parliament and of the Council of 20th May 2015 on information accompanying transfers of funds (OJ L 141, 05.06.2015, p1). Amendments have since been made (see below: Anti-money laundering in the UK).

International and EU counter-terrorism measures

A number of international counter-terrorism conventions have been promoted under the auspices of the United Nations (UN) and its agencies. These range from the Vienna Convention on Diplomatic Relations of 1961, a number of conventions concerned with the protection of aircraft and shipping, to the International Convention for the Suppression of Terrorist Bombings of 1997 and the International Convention for the Suppression of the Financing of Terrorism of 1999.

The UN General Assembly adopted a "Global Counter-Terrorism Strategy" in September 2006.

The Council of Europe Convention on the Prevention of Terrorism 2005 (CECPT) was concluded in Warsaw on 16 May 2005.

The EU Council adopted Council Regulation (EC) No 2580/2001 of 27 December 2001 on specific restrictive measures directed against certain persons and entities with a view to combating terrorism. This Regulation freezes financial assets and economic resources owned or controlled by persons and entities listed by regulation from time to time. The Regulation also prohibits the provision of financial services to such persons. At the time of writing, the most recent list is contained in Council Implementing Regulation (EU) No 125/2014.

International and EU economic sanctions


International sanctions are adopted against states or organisations from time to time to punish and discourage the commission of crimes against humanity, terrorism and other acts deemed to be unacceptable. Such sanctions may restrict or forbid financial, trade and other dealings with specified states, organisations or individuals associated with them.

The Charter of the UN signed in 1946 empowered the UN Security Council to decide what measures not involving the use of armed force were to be employed to give effect to its decisions, and to call upon the Members of the United Nations to apply such measures. These included complete or partial interruption of economic relations and means of communication.

United Nations sanctions include for example those taken at various times against the states of Democratic Republic of Congo, Somalia, South Africa, Zimbabwe, Iran and Iraq, and against the organisations known as Al-Qaida and the Taliban.

The Council of the EU may adopt economic sanctions under Article 215 of the Treaty on the Functioning of the European Union. Examples of action taken include the Regulations adopted in respect of Burma/Myanmar, Central African Republic, Iran, Ivory Coast, North Korea, Syria and Ukraine.

UK anti-money laundering and counter-terrorism legislation


As on the international level, anti-money laundering legislation and counter-terrorist measures in the financial sense are closely inter-twined.

Anti-money laundering in UK


Money laundering was first criminalised in the United Kingdom in respect of the proceeds of drug trafficking, by means of an offence in the Drug Trafficking Offences Act 1986. The Criminal Justice Act 1993 added further money laundering offences including laundering money from drug trafficking, concealing or transferring proceeds of criminal conduct and ‘tipping-off’, and failure to disclose knowledge or suspicion of terrorism related offences.

The UK government implemented most of the provisions of the EU anti-money laundering 1991 Directive by making the Money Laundering Regulations 1993 (MLR 1993). These regulations came into force on 1 April 1994 and applied to banks and other credit institutions, insurance companies and investment business firms (‘relevant financial business’). These firms were required to maintain procedures for the purposes of preventing money laundering, in particular by training employees in the recognition of money laundering transactions and applying identity checking procedures and report suspicious activities to the regulatory authorities.

In October 1998, the Prime Minister tasked the Performance & Innovation Unit (PIU) of the Cabinet Office with examining asset recovery arrangements with a view to improving the efficiency of the recovery process and increasing the amount of illegally obtained assets recovered. The PIU report was published by the government in June 2000 with a number of legislative and other proposals including:

* the creation of a new agency with lead responsibility for asset recovery and containing a ‘centre of excellence’ for financial investigation training;

* the consolidation of existing laws on confiscation;

* the replacement of the three types of money laundering offence relating to drug trafficking, terrorism or other crime, with a single piece of legislation

The eventual legislation, after much amendment in Parliament, was enacted as the Proceeds of Crime Act 2002 (POCA). Much of this legislation was directed at the creation of the ill-fated Assets Recovery Agency (ii). The Act also reformed and consolidated existing anti-money laundering legislation. However, the Act left in place the separate legislation in the Terrorism Act 2000 dealing with anti-terrorist measures.

The money laundering provisions in POCA Part 7 were largely derived from the Criminal Justice Act 1988 and the Drug Trafficking Act 1994. However, POCA introduced some important changes including:

* any substantive criminal offence is now sufficient to found a money laundering offence; under previous legislation the ‘predicate’ or underlying offence has to be serious (technically an indictable offence);

* acts outside the UK may found an AML offence if the act would be an offence if committed in the UK (subject to a defence in some circumstances if the act was not unlawful in the territory it occurred).

The Money Laundering Regulations 1993 were modified in 2001 by the addition of certain categories of money service business, including bureaux de change, to the meaning of relevant financial business. Customs and Excise were required to keep a register of money service operators.

The Money Laundering Regulations 2003 replaced the MLR 1993 as amended with updated provisions which reflected the 2001 Directive. Additional activities were brought within the scope of the regulations included estate agency work; operating a casino, insolvency practitioners, tax adviser, accountancy and audit services, legal services relating to financial or real property transactions, company and trust formation and management services and dealing in high value goods for cash of 15,000 euro or more. The regulations also required casino operators to obtain evidence of the identity of gaming customers. Customs and Excise were required to keep a register of high value dealers.

Following the EU 2005 Directive, the UK government made the Money Laundering Regulations 2007 (MLR 2007) which replaced the 2003 Regulations with updated provisions which implemented in part the EU 2005 Directive. Identification requirements were extended to identifying the beneficial owner of corporate entities, partnerships and trusts. Customs and Excise were required to keep a register of trust and company service providers. Minor amendments to MLR 2007 were made in 2007 and 2011. Amendments were made in 2012 which among other changes excluded from the scope of MLR 2007 an undertaking which provides credit by allowing time to pay for services, where payment is made over a period of no more than 12 months, and extended the definition of ‘estate agent’ to include estate agents selling property outside the UK.

The EU Commission made a proposal for a Fourth Money Laundering Directive in February 2005 (2013/0025 (COD). The proposal for a Fourth Money Laundering Directive was enacted the Fourth Money Laundering Directive 2015/849/EU of the European Parliament and of the Council of 20th May 2015 on the prevention of the use of the financial system for the purpose of money laundering or terrorist financing (OJ L 141, 05.06.2015, p73). The Directive was implemented in the UK by the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR) replaced the Money Laundering Regulations 2007 (SI 2007/2157) and the Transfer of Funds (Information on the Payer) Regulations 2007 (SI 2007/3298) with updated provisions that implement in part the foregoing EU legislation.

UK financial counter-terrorism

Counter-terrorist legislation of a temporary nature (initially focused on Northern Ireland) comprised the Prevention of Terrorism (Temporary Provisions) Act 1989, the Northern Ireland (Emergency Provisions) Act 1996 and the Criminal Justice (Terrorism and Conspiracy) Act 1998.

This legislation was replaced by the Terrorism Act 2000 (TA 2000). The Act followed Lord Lloyd of Berwick’s Inquiry into legislation against terrorism published in October 1996 (Cm 3420) and the Government’s consultation document ‘Legislation against Terrorism’ (Cm 4178), published in December 1998.

Further additions to counter-terrorism legislation were made in the Anti-Terrorism, Crime and Security Act 2001 and the Prevention of Terrorism Act 2005.

The Terrorism Act 2006 (TA 2006) reformed and extended previous counter-terrorist legislation. Further powers were given to UK law enforcement agencies to counter terrorism threats to the UK. The Act also implemented different international Conventions to which the UK is a party. The measures included both those that were already envisaged prior to the terrorist incidents in London on 7 July 2005 and 21 July 2005 and those that were been included following those incidents.

The Counter-Terrorism Act 2008 amended counter-terrorism legislation in a number of ways, including in the context of this article powers to act against terrorist financing, money laundering and certain other activities.

The purpose of the Terrorist Asset-Freezing etc. Act 2010 (TAFA) Part 1 was to give effect in the UK to UN resolutions relating to terrorism and for the enforcement of Regulation (EC) 2580/2001 on specific measures directed at certain persons and entities with a view to combating terrorism (the EC Regulation).

TAFA introduced offences preventing any person from dealing with funds and economic resources owned or controlled by ‘designated persons’, or making available funds, financial services or economic resources to such persons. ‘Designated persons’ are either persons designated by the Treasury or by EU Regulation (EC) No 2580/2001.

UK sanctions legislation


The United Nations Act 1946 empowered the UK government, acting by the Privy Council, to apply economic sanctions and other measures to give effect to any decision the UN Security Council in respect of sanctions under UN Charter article 41.

Sanctions are also applied from time to time by the EU Council. The UK government will implement such sanctions by means of a statutory instrument made under the European Communities Act 1972 s. 2(2).

 (i)‘The Laundrymen’, Simon & Schuster, 1994

(ii) For a review of the history of the Asset Recovery Agency and criticism of its functioning, see the House of Commons Select Committee on Public Accounts Fiftieth Report.

[Page created: 08/09/2014]


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