POLICING IN CENTRAL AND EASTERN EUROPE: Comparing Firsthand Knowledge with Experience from the West,
© 1996 College of Police and Security Studies, Slovenia


A COMPARATIVE ANALYSIS OF THE EFFECTIVENESS OF THREE DIFFERENT APPROACHES TO COMBATING MONEY LAUNDERING

Andrew Haynes

INTRODUCTION

Despite the fact that all three countries are signatories to the U.N. Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances 1988, Australia, the United Kingdom and the United States all adopt approaches to combating money laundering which contain critical differences. What this paper seeks to do is briefly analyse each countries' approach and ascertain whether the results achieved hold any lessons for the countries of central and eastern Europe.

AUSTRALIA

Pursuant to the U.N. Convention Australia passed the Cash Transaction Reports Act of 1988. It had already passed the Proceeds of Crime Act 1987, which made money laundering a criminal offence, and the Mutual Assistance in Criminal Matters Act 1987 which facilitated co- operation with other Governments. The 1988 Act is complemented by a raft of State laws1 which exist because it is in many instances the State Governments jurisdiction to deal with the problem. The effect of the 1988 Act is to require banks and other financial dealers to:

The reports have to be made to the Australian Transaction Reports and Analysis Centre - AUSTRAC, which was set up in 1989 pursuant to the Act of 1988.

It is worth mentioning that there have been problems with one aspect of the Act - the definition of "reasonable grounds". S.16 requires cash dealers to report when they have "reasonable grounds to suspect" that they have information about the financial transaction which:

  1. "may be relevant to investigation of an evasion, or attempted evasion, of a taxation law;
  2. may be relevant to investigation of, or prosecution of a person for, an offence against a law of the Commonwealth (but not a State); or
  3. may be of assistance in the enforcement of the Proceeds Act or regulations made under that Act as soon as practicable after forming that suspicion."

AUSTRAC have issued a guideline2 which assists. It states that:

"The suspicion relates to a transaction considering all the circumstances of the transaction. As a general principle, any transaction which causes a dealer to have a feeling of apprehension or mistrust about the transaction considering:

  1. its unusual nature or circumstances; or
  2. the person or group of persons with whom they are dealing and based on the bringing together of all relevant factors including knowledge of the person's or persons' business or background should be reported as a suspect transaction."

The range of bodies required to report under the Act are widely defined and cover:

In addition to this requirement, members of the public are required to report cash transfers in or out of Australia of A$5,000 and over.

Where Australia is slightly unusual in respect of its money laundering regulations is that it applies them (like the United States) to tax evasion as well as mainstream criminal activity.

AUSTRAC itself

The organisation was established with a view to accumulating and analysing all the reported data relating to financial movements. The data is loaded into a computer system which then carries out two functions. One is to enable the operators to call up company names and scan the reported transactions into the system. Cash flows can then be followed by calling up the names of senders or recipients of the money concerned. Secondly the software will itself call up the most suspicious looking combinations of financial movements for further analysis.

The benefits are two fold. Firstly, the material provides data which can be used to provide evidence for criminal prosecution and these prosecutions in turn lead to financial seizures and tax clawbacks which enable the system to be run at a profit. Secondly, public knowledge about the system may cause those with criminal activities in hand to avoid Australia. It is not a panacea however. Launderers will inevitably become more sophisticated in establishing financial arrangements which do not appear to be suspicious. They can also fall back on cruder methods including shifting the cash out of the country physically to a more accommodating jurisdiction and pay it into the banking system there.

Law enforcement agencies access to information

A range of agencies can gain access to the system to analyse data. These are: the Taxation Office, the Customs Office, the Federal Police, the Securities Commission, the National Crime Authority, the State and Territory Police Forces, Queensland's Criminal Justice Commission, New South Wales' Crime Commission, New South Wales' Independent Commission Against Corruption and the Royal Commission into the New South Wales Police Service.

General access is allowed, which consists of computer access to data and in some instances data holdings. In some cases specific access is permitted which is made up of material submitted by reporting financial institutions or referrals from AUSTRAC itself.

What is unusual is that the Australian system has built its money laundering data receiving agency into the heart of the anti money laundering and tax evasion system. It receives data, assists in tracking down suspicious transfers or combinations of transfers and it also provides data to the policing agencies. The capacity to do this is in part a consequence of the medium size of the Australian economy and its relative isolation, which mean that such a system can be made to work effectively. In addition the lack of large scale securities activity such as is found in London and New York simplifies the task of tracking down those transactions which involve criminal activity.

UNITED KINGDOM

Prior to the U.N. Convention the United Kingdom had already passed laws3 requiring banks and other financial institutions to report suspicious transactions relating to drugs and in a separate Statute, other criminal offences. The most recent steps involve the passing of the Drug Trafficking Act 1994 and an associated piece of delegated legislation, the Money Laundering Regulations 1993. Taking these in turn.

THE DRUG TRAFFICKING ACT 1994

This consolidates the earlier statutory enactments relating to the subject. The key elements are:

  1. that it is a criminal offence to knowingly handle the direct or indirect proceeds of drug trafficking unless the recipient can show they paid full economic value for whatever they received. This does not of course extend to having provided goods or services which may have been of value in the drug trafficking!
  2. Disclosure to the police or Customs and Excise that monies being handled are believed to be the possible proceeds of drug trafficking is not a breach of any duty of secrecy.
  3. It is made a criminal offence not to disclose to the police (or in the case of someone employed in a financial institution to their firm's Money Laundering Reporting Officer) as soon as reasonably possible knowledge received that a person is engaged in laundering drug money. The only exception is where the person in receipt of the information is a professional legal adviser who has discovered the fact in the process of providing legal advice or advice in contemplation of legal proceedings.
  4. Tipping someone off that they are being or are about to be investigated in relation to laundering drug money is made a criminal offence.
  5. Where information has already been provided to the authorities it is an offence to leak further information which is likely to prejudice any investigation. Professional legal advisers are exempt from this provided they are not in communication with their clients with a view to furthering a criminal purpose.

THE CRIMINAL JUSTICE ACT 1993

This Act had already passed amendments to the Criminal Justice Act 1988 which are broadly similar to the laws set out in the previous section. It provides a parallel raft of criminal laws where the laundering relates to the proceeds of crimes other than drug trafficking.

Part IV of this Act made amendments to the Northern Ireland (Emergency Provisions) Act 1991 and the Prevention of Terrorism (Temporary Provisions) Act 1989. The change that is of significance in the context of this article is that in taking criminal proceedings to determine whether someone has benefitted from terrorist related activities, the civil burden of proof is applied in valuing the proceeds. This may be a pointer to future steps should the existing money laundering legislation prove inadequate in the general criminal arena.

THE MONEY LAUNDERING REGULATIONS 1993

The delegated legislation puts in place a series of regulations requiring banks and financial institutions to set up systems and training to prevent laundering. The rules apply to "relevant financial business" which covers banks and those carrying on investment business as defined in the Financial Services Act 1986. This catches the same range of institutions as are covered in Australia.

The focus of the rules is that a number of steps are taken, specifically:

It is a criminal offence if they are not, and the offence may be held against the company and any relevant senior officer who is involved.

Identity checking must be carried out when significant business is carried on.4 This is of limited use as it would be a fairly unresourceful criminal who could not produce forged documents or successfully adopt another's identity.

GUIDANCE NOTES

There has also been a third level of regulation. This has been in the form of three sets of agreed Guidance Notes which have been issued to bankers, insurance and retail investment firms and wholesale, institutional and private client investment business firms. These have been put together by the Joint Money Laundering Steering Group run under the auspices of the British Bankers Association. Although not laws in themselves they represent acknowledged best practice and it would be extremely difficult for a firm within these areas to break them and not find that they were subject to both criminal prosecution and potential disciplinary sanctions by their professional body (where appropriate).

The areas covered are:

  1. The procedures to be covered when identifying clients and the circumstances where this is, and is not necessary.
  2. Procedures to be adopted in identifying those controlling limited companies.
  3. The record keeping requirements.
  4. The kinds of financial activity which should raise suspicion.
  5. Suitable internal reporting procedures and systems for onward reporting to the National Criminal Intelligence Service.
  6. Staff training programmes.

THE NATIONAL CRIMINAL INTELLIGENCE SERVICE

This was established for two main reasons. Firstly, the United Kingdom does not have a national police force. This can cause practical day to day problems in law enforcement. It has also been known to result in certain foreign police agencies refusing to pass on information to them but instead passing it to the Customs and Excise. This is a national body who were traditionally the "policing " agency against smugglers. In the modern world they also collect the proceeds of Value Added Tax.

Secondly, the police and Customs and Excise have quite different cultures and tend to attract personnel with different personality profiles. This difference has tended to cause a certain amount of friction and on occasion, non co-operation.

For these reasons it was decided that a new body should be established which would combine elements of both organisations. It was hoped that it would end the split in law enforcement and also assist by creating a new agency with a clear focus and carefully chosen personnel. There have been elements of success, but there are problems. Staff are not always moved there permanently but are often seconded for a period of time, after which they return to their original agency. This can have long term benefits as lines of communication are built between the three agencies. It can however also result in a lack of continuity with corresponding restrictions on the effectiveness of the Service.

There have undoubtedly been improvements, but there is no public evidence of the kind of impact that AUSTRAC has made. In all fairness the nature of the institution means that its public profile will be lower. It is also essentially a repository for the reporting of others' suspicions. However, unlike AUSTRAC there is no overall, coherent structure of information, only a random collation of what others choose to report as suspicious. (This was not helped in the early days when one bank decided to display its frustration at the reporting system by filing suspicious transaction reporting forms for anything which looked even remotely suspicious.) However, the enormous scale of the financial economy in the United Kingdom, and particularly London, means that an AUSTRAC type approach would simply not be viable at the current level of software technology. The countries of central and eastern Europe all have smaller financial economies than Australia though, so the antipodean experience should be worth serious consideration.

The function of the National Criminal Intelligence Service is anomalous. When they receive reports they forward them to the Customs and Excise or the relevant regional police force. It is the Customs or the police who will then decide what the appropriate next step is, not the National Criminal Intelligence Service. It therefore has little effective function in terms of radically altering either the effective prosecution rate against those who commit laundering crimes or of causing those who may be considering doing so to shy away either from the crime and/or even the jurisdiction.

UNITED STATES

The United States was the first major country to attack the problem of money laundering in a serious way. Indeed the United Nations Convention on the subject was largely the product of American lobbying and arm twisting. The main requirements are reporting transactions above a certain size ($10,000) which is similar to the Australian approach. However, the main effect has been to fill warehouse space in Detroit with paper work to little measurable benefit from the point of view of law enforcement. (Indeed one of the companies which gained a contract to print the reporting forms was a firm using the transaction to launder money!). However, an attempt has been made to mitigate the potential for unnecessary paperwork by the Money Laundering Suppression Act 1994 which removes the need to file such a report if the other party to the transaction is either another bank, a Federal, State or local government or a business of no value from the point of view of law enforcement. The customer identification checking and suspect transaction reporting procedures are similar to both Australia and the United Kingdom.

There is however an additional element. The banking regulators5 all require that financial institutions report the situation on a standard reporting form where:

  1. the institution believes that an officer has committed a crime;
  2. the loss to that institution exceeds $1,000. This increases to $5,000 if there is no identified suspect; and
  3. that institution has reason to believe that it is being used to launder money.

The relationship between that financial institution and the customer then finds itself in ambiguous territory. There is no requirement that the institution breaks off relations, indeed from the point of view of law enforcement it would be counter-productive if it did as the customer would simply disappear and use another institution who may not be suspicious. However, they are not protected from criminal prosecution6. It is difficult to imagine the authorities seeking to prosecute under such circumstances unless the institution proceeded to assist the laundering of proceeds and in so doing was not acting or offering to act in liaison with the authorities. There is however statutory protection from civil proceedings under Federal, State or local laws.7

An important development in the United States was the requirement that a wide range of businesses should have to make returns to the Inland Revenue where customers spent over $10,000. The businesses concerned are airlines, finance companies, hotels, pawn brokers, restaurants and wholesalers and retailers of certain commodities. This is to stop launderers spending their proceeds or using consumer goods and airline tickets to launder money by purchasing them and selling them shortly afterwards. To be reportable the transaction must be paid for in cash, bank draft, travellers cheque or money order. The customer has to be informed on a standard form of the fact that the report has been made.

The enforcement arrangements are fragmented8, largely for historical reasons, between the Treasury which has overall responsibility, the bank regulators (see above), the Securities and Exchange Commission, the Internal Revenue Service and the Postal Service. In practice the Treasury's powers are largely delegated to the Internal Revenue Service, the Customs, the Bureau of Alcohol, Tobacco and Firearms and the Secret Service. In addition the Justice Department has overall responsibility where there has been a criminal offence in addition to the laundering itself. Its powers are largely delegated to the FBI and the DEA.

CONCLUSIONS

In a paper as short at this is required to be it is impossible to do anything beyond scratching the surface. However, it is possible to discern a number of key points.

  1. The various systems have key differences for historical and cultural reasons. In the United States for example a number of key prosecutions have been facilitated by "sting" operations. Such arrangements are very restricted under United Kingdom law and just about impossible in Australia. This type of factor can distort the data and render largely useless a straight comparison of statistics concerning relative success rates.
  2. Different countries regard the crime of laundering with slightly differing degrees of importance for both legal and political reasons. This inevitably affects the extent to which resources will be committed.
  3. The different scale of the respective countries' financial economies mean that the United Kingdom and the United States cannot conceivably approach the issue in the way which the Australians have.

Overall the United States has seemed to have acquired the most successful track record in consistently breaking up laundering operations. However, the crime has continued to become more common and involve ever increasing amounts of money in any event. Australia on the other hand has developed a system which offers the greatest potential to small and medium sized countries through the AUSTRAC system which can presumably be purchased to save re- inventing the wheel. If this could be coupled with a United States types "sting" facility it ought to be possible to amount a two fisted assault having accurate data constantly available on the one hand and a facility for going for the jugular where suspicions are raised by such data, or other more mainstream policing methods.

NOTES

1. Financial Transaction Reports Act 1992 (NSW), Financial Transaction Reports Act 1992 (Qld), Financial transaction reports Act 1992 (NT), Financial Transaction Reports (State Provisions) Act 1992 (SA), Financial Transaction Reports Act 1993 (Tas) and the Financial Transaction Reports Act 1995 (WA).

2. AUSTRAC Information Circular No.1, section 5.

3. These may be found in the Drug Trafficking Offences Act 1986 and the Criminal Justice Act 1988.

4. This applies to one off transactions exceeding ECU15,000 or linked transactions exceeding this amount. It also applies where the person handling the money is suspicious that the transaction is a laundering arrangement.

5. i.e., the Federal Reserve Board, the Office of Comptroller of the Currency, the Office of Thrift Supervision, the Federal Deposit Insurance Corporation and the National Credit Union Administration.

6. the Banking Secrecy Act 1992 s.5318(g)(2).

7. the Banking Secrecy Act 1992 s.5318(g)(3).

8. see Butterworths International Guide to Money Laundering Law and Practice, ed Parlour, pages 238-9.


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