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Dirty money can clean you out

The upshot is that, unless David Blunkett is prepared to change draft legislation in the Proceeds of Crime Bill – published in the last parliament and expected to be reintroduced – legitimate firms could find themselves the victims of confiscation orders with little chance of legal redress.

Earlier this year, for example, the Financial Services Authority revealed that 23 UK banks had handled Pounds 890m looted by former Nigerian dictator General Sani Abacha. Even though counter money-laundering rules are well established – and supposedly well known – among banks, 15 of those involved were said to have “significant control weaknesses”.

Laundering is also bursting out of the financial sector, its favoured target, into other parts of the economy. Firms that are cash-generative, for example in leisure or hospitality, are most at risk, but any company can be caught.

Moreover, says Nigel Morris-Cotterill, head of counter-money laundering consultancy Silkscreen Consulting, many firms don’t understand the current rules. “Most businesses are clueless. They do not understand how the law applies to them and their staff,” he says.

At present, any individual who has suspicions of money laundering is obliged to report them to the police who pass them on to the National Criminal Intelligence Service. Money laundering takes place whenever the proceeds of crime are concealed. This means that because even trivial offences, such as fiddling travelling expenses, involve concealment, they technically count as money laundering, even though the prime purpose of the law is to catch the proceeds of organised crime.

In practice, the NCIS is not interested in trivial matters. It is said that zealous types who’ve tried reporting such offences have been politely invited to remount their bicycles and not waste NCIS time. But because the draft Proceeds of Crime bill applies specifically to summary and indictable offences, if it becomes law, ignoring minor matters will not be an option.

The Institute of Chartered Accountants in England and Wales currently advises members that it’s not sensible to report trivial offences. But Felicity Banks, secretary of the ICAEW’s business law committee, says: “If the law is changed in the way proposed, we will not be able to advise our members in this fashion, as we cannot condone their committing a criminal offence, no matter how trivial. Our members will be left in the position of either wasting police time or committing an offence.”

Banks wants the draft legislation changed so that it catches only serious laundering, such as that included in the EU Money Laundering Directive.

This includes laundering the proceeds of organised crime and other serious offences. But even if the government agrees to this approach – and many are optimistic the new Home Secretary will see reason – it doesn’t mean that FDs are out of danger.

The government plans to set up a Criminal Assets Recovery Agency with powers to confiscate goods and money thought to be the proceeds of laundering.

Banks is concerned that because the main thrust of the draft legislation is to do with confiscation, many innocent businesses could be caught in the net.

For example, a business that had innocently supplied goods to a money launderer’s front company, but not yet been paid, could find confiscation takes precedence over its legitimate debt. Laundered money introduced into an honest business without the owners being aware of its source could also be confiscated.

“To my mind, it would be more sensible to settle legitimate debts before money is confiscated to government funds,” says Banks. “Any government which professes to be business-friendly needs to ensure that this legislation is drafted in a way which does not adversely affect the interests of businesses affected by crime without being complicit in it.”

So what can an FD do to make sure his or her company is not laundering money? The first step is to understand how launderers work. The Financial Action Task Force (FATF), the organisation set up by the G7 countries to fight money laundering, collects information on the latest methods of laundering. These are always developing, but one typical example has three distinct stages. Honest companies can be caught in any of them.

As FATF point out, the first problem the launderer faces – and, in some ways, the hardest to overcome – is to introduce ill-gotten gains into the financial system in ways which make them seem legitimate. In this “placement” stage, the launderer probably breaks up large sums and, perhaps, deposits them in bank accounts in amounts which don’t attract attention.

But with banks under pressure to tighten scrutiny, expect launderers to change tactics. These could involve setting up phoney trading companies to pass the cash around, perhaps through innocent third parties by buying and selling readily transferable goods.

Once the money is in the financial system, the launderer moves into a “layering” stage, where he seeks to distance the money by creating a confusing paper trail. Much of this is done by buying and selling financial instruments.

But again, launderers may increasingly turn to trade in readily convertible goods.

Finally, the launderer moves into the “integration” stage in which he seeks to bring the money together in a medium- or long-term investment that appears above board. He might buy property, shares or even legitimate businesses. By this stage, it is possible for honest managers to be working, unknowingly, for companies wholly owned by dirty money.

With the launderers working across such a wide front it is difficult for any FD to build completely watertight defences. Alex Plavsic, fraud investigation partner at KPMG, says the most important defence is to “know who you are doing business with”. He says: “When an unexpected customer turns up you need to be asking yourself questions, such as who are these people, why haven’t we heard of them before and why are they doing transactions with us which nobody else is doing?”

Plavsic points out that it’s easier to know more about a customer when they’re doing business on credit – as most honest business-to-business customers do – because all the usual credit checks are made. Firms or individuals willing to pay large sums upfront in cash should raise your suspicions. “There are all sorts of good reasons to reject illegal business because in the long run you can’t build your company on the back of it,” Plavsic says.

An obvious danger is a customer or supplier which is in a different class from those you normally deal with, says Morris-Cotterill. “There could also be something unusual about the transaction, such as business coming from a part of the world you haven’t previously dealt with. You need to ask: ‘Hang on, why are we suddenly getting this business?'” he says.

Another cause for suspicion is when a company suddenly experiences an unexpected and dramatic upturn in sales. The boost may be caused by dirty money passing through the firm rather than legitimate trading.

One favourite laundering technique is the advanced deposit scam. The dirty company places a large order and pays the usual upfront deposit, which, depending on the industry, could be up to half the final price, from a bank account in country A. Shortly after, it cancels the order and asks for the deposit to be repaid to a bank account in country B. Even though there will be a cancellation charge, the launderers will be happy to pay it for the benefit of making the transfer through legitimate banking channels. “These days, a cancellation cost of anything less than 15% is not regarded with great horror,” says Morris-Cotterill.

Even though tough new legislation is planned in Britain and FATF is flexing its muscles internationally – last year it published a blacklist of 15 countries, including Russia and Israel, that are not sufficiently co-operative in fighting money laundering – there are no signs of authorities turning the tide. This makes it even more important that FDs build money laundering controls into their own risk management systems where appropriate.

There are two new dangers on the horizon. The introduction of the euro, with its top denomination 500 note, could make dirty cash payments easier.

It may also create a rush to clean old currency while banks are diverted with the changeover, warns Plavsic. E-business is also a threat because it makes it harder to identify your customers, which is a key counter money-laundering control.

Last year only Pounds 44m in illicit assets were seized in the UK – a pitifully small proportion of the Pounds 650m (and probably much more) said to be the proceeds of crime. It is in the interests of business that there is a tougher crackdown on the crooks. But if that comes at the cost of pain for honest firms, business may become lukewarm about playing its part.

In that situation, only the launderers will have won.

  • This article first appeared on Financial Director magazine.

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