TI-UK Submission to HM Treasury National Risk Assessment on Terrorist Financing and Money Laundering by Transparency International UK

National Risk Assessment of Money Laundering and Terrorist Financing HM Treasury / Home Office Submission by Transparency International UK (TI-UK) May 2014

TI-UK response to the National Risk Assessment of Money Laundering and Terrorist Financing

Submission by Transparency International UK (TI-UK) Introduction When the proceeds of corruption – stolen from around the world – are laundered through the UK, it is a criminal issue, a moral issue, an aid-effectiveness issue, a reputational issue for the City of London, and a national security issue to detect, seize and recover those assets. Available estimates and legal case studies of grand corruption indicate that the scale of proceeds of corruption laundered through the UK is vast. Based on academic estimates and Organisation for Economic Cooperation and Development (OECD) asset recovery data, the UK is unlikely to have 1 frozen any more than 0.75% of global proceeds of corruption per annum. The UK has an opportunity to take a proactive leadership role in the detection and recovery of the proceeds of corruption laundered through its jurisdiction. This submission draws from TI-UK research into the lessons learned from the UK asset recovery efforts related to the Arab Spring “Closing Down the Safe Havens: Ending Impunity for Corrupt 2 Individuals by Seizing And Recovering Their Assets in the UK” (Dec 2013) and the Combating 3 Money Laundering and Recovering Looted Gains: Raising the UK’s Game (June 2009) . TI-UK has conducted a range of work to understand and improve the detection and recovery of the proceeds of corruption here in the UK. Most recently, TI-UK issued an Anti-Money Laundering (AML) warning in 4 response to Ukraine on 21 February 2014. Transparency International research is regularly used to inform private sector AML and Anti-Bribery Control (ABC) assessments, particularly the Corruption 5 Perceptions Index and Global Corruption Barometer. For more details on Transparency International, please see Annex II. The UK has strengths that should support effective AML investigations and assist in seizing the proceeds of corruption. They include: • The global importance of London as a financial centre; • UK political focus on the issue at the highest levels • A commitment to legislate to improve anti-money laundering (ML) and asset recovery • Law enforcement focus and ring-fenced resourcing of policing of proceeds of corruption • HM Treasury Supervision Reports • Financial Conduct Authority (FCA) new penalty regime and an emphasis on AML compliance regarding politically exposed persons (PEPs) • International convening power to bring together and support investigators from around the world • Commitments to transparency of corporate beneficial ownership • A well-resourced AML compliance community in banking with a developed professional development framework of events and trade publications However, there are major problems with the effectiveness of the UK AML regime for detecting, pursuing and deterring corrupt capital flows. In summary, inputs of effort and money into the system are not producing effective outcomes. At a basic level, an effective AML regime for corrupt capital should prevent the proceeds of corruption from entering the UK and, if and when they do, it should lead to corruptly acquired assets being identified, recovered and returned. Where possible, guilty parties should be brought to justice. This is happening in only a handful of cases. 1

For the period covering 2010-2012, Calculated by taking the 2010-2012 STAR/OECD figure of UK asset freezing (US $225.5 million per annum) (http://www.oecd.org/corruption/Illicit_Financial_Flows_from_Developing_Countries.pdf ) as a percentage of the mid-point of the Baker et al’s 2003 estimate for corrupt global flows (referenced in Closing Down the Safe Havens), US $30 billion. - Baker 2005 in StAR Challenges, Opportunities, and Action Plan (2007) http://www.unodc.org/pdf/Star_Report.pdf 2 http://www.transparency.org.uk/our-work/publications/809-closing-down-the-safe-havens 3 http://www.transparency.org.uk/our-work/publications/10-publications/154-combating-money-laundering-and-recoveringlooted-gains-raising-the-uks-game 4 http://www.transparency.org.uk/our-work/publications/10-publications/879-chancellor-letter-to-ti-uk-on-ukrainian-assets-inlondon 5 http://www.transparency.org/research/cpi/overview and http://www.transparency.org/research/gcb/overview

TI-UK response to the National Risk Assessment of Money Laundering and Terrorist Financing

Summary of key points The UK’s current system of AML is not fit for purpose for tackling the proceeds of corruption. Contributing factors to the ineffectiveness of the UK’s AML regime in relation to the proceeds of corruption include: At a strategic and policy level… A relatively slow sanctions regime High legal barriers to a successful restraint order Lack of illicit enrichment offence Reliance on a conviction in the origin state No special powers for freezing assets in post-revolutionary or highly corrupt environments. Vulnerabilities in close connections to Overseas Territories and shell companies Limited recognition of lobbying activity undertaken by potential perpetrators of grand corruption in the UK • The ability of those suspected of grand corruption to exhaust the proceeds of corruption in legal fees defending a case until there is nothing left to recover • • • • • • •

At an investigative and prosecution level… • General non-investigation of the corrupt who are still in, or associated to power • Relative lack of coordination of law enforcement • Geographic limitations of policing investigations to (Department for International Development) DFID priority countries. • Limited police, Crown Prosecution Service (CPS) and Serious Fraud Office (SFO) resources for (expensive) investigations • Low risk appetite due to the risk of legal damages being brought against the police, SFO or CPS • The failure to recover policing costs through recovered assets in politicised cases At a regulatory level… A disparate regulatory framework for AML in the UK. Inadequacies of regulators’ risk assessments. Wide variation in enforcement of AML regulations. No official consensus of the scale of money laundering and a general lack of data PEP risks undermining understanding of the problem and lack of transparency • Regulatory weaknesses in non-banking sectors • Low requirements for a ‘fit and proper’ test for Trust and Company Service Providers (TCSPs).

• • • •

At a private sector level… • • • • • • • • • •

Widespread shortcomings of AML procedures (known in banking, possibly worse in other sectors). Limitations of estate agents money laundering requirements. Very low Suspicious Activity Report (SAR) filing by gatekeeper sectors. The legal profession exemption from reporting suspicions. Lack of personal responsibility for ML failings ‘De-risking’ by major banks Land registry ownership secrecy Lack of transparency over trusts. Lack of a data sharing system for Income and Asset Disclosure (IAD) registers for PEPs Poor indicators in use for successful application of AML and non-systematic monitoring of refused business

TI-UK response to the National Risk Assessment of Money Laundering and Terrorist Financing

In response, to these failings we set out 31 recommendations to help improve the situation. Chief among these are: 1. Coordinate the UKâ&#x20AC;&#x2122;s law enforcement and international liaison activity in relation to grand corruption into one organisation, such as achieved in the US through a dedicated Department of Justice Kleptocracy Unit 2. Consider creating a legal basis for restraining assets on an illicit enrichment offence and unexplained wealth, as Guernsey and 44 other nations have achieved 3. Pursuing corruption cases even where the origin state is defensive against the corruption allegation, as France and Switzerland have achieved. 4. Enable quicker freezing of assets post-revolutionary environments, as Canada and Switzerland have achieved. 5. Radically improve regulatory monitoring, enforcement and meaningful sanctions of Money Laundering regulations 2007, across all relevant sectors, particularly in the property sector. Much can be learned from the other experience in other developed nations. A full annex of good practice around the world is available in Annex I. This submission is divided into the following sections: 1.

The scale of threat from money laundering of the proceeds of corruption

Strengths in the UK AML regime

Ineffectiveness of the UK AML regime for corrupt capital 3.1 3.2 3.3 3.4

What contributes to ineffectiveness at the legislative level? What contributes to ineffectiveness at an investigative level? What contributes to regulatory ineffectiveness? What contributes to private sector ineffectiveness?

Recommendations

TI-UK response to the National Risk Assessment of Money Laundering and Terrorist Financing

1. The scale of threat from money laundering of the proceeds of corruption. It can be stated with a high degree of confidence that the UK is likely to provide a substantial role as a centre for transactions and investments of corrupt illicit funds and as a centre for intermediary professional services which facilitate money laundering. The UK is an attractive location for international financial and professional services and for buying property. It is not surprising that, in the same way that the UK attracts legitimate business, it is also a target for organised crime and corrupt politicians and officials. The UK is the world’s largest centre for international banking, with an 18 per cent share of cross-border bank lending in September 2011 and banking sector assets which are the second largest in the world after the US. Foreign banks held 48 per cent of total assets, which is a higher proportion than in most other major economies. In addition, 251 foreign banks were physically located in the UK in 2011, more than in any other country. Furthermore, London is the largest currency trading centre in the world, with nearly 41 per cent of 6 global foreign exchange trading going through intermediation of dealers in the UK. Corruption has a deplorable effect on our societies – corroding justice, good governance and prosperity. The UK is a global financial centre, open for business with the world. It is one of our country’s great strengths, but it brings with it responsibilities: to ensure that we take the appropriate steps to prevent money laundering; and that we act to stop the proceeds of overseas corruption from 7 being hidden here - Home Secretary The Rt Hon Theresa May MP, 29 April 2014 Global Financial Integrity, a research and advocacy organisation focused on illicit financial flows, estimates that developing countries lost on average £351.5 billion per annum through illicit flows over 8 the decade ending 2010, with the rate increasing towards the end of decade. Recent US estimates have put the worldwide cross-border flow of the proceeds of crime, including corruption, at US $1.6 9 trillion. The European Commission estimates that, across all 10 States, corruption costs Europe around £144 billion per year.

European

Union

(EU)

Member

Prior to its abolition in early 2013, the UK Financial Services Authority (FSA) provided an estimate on its website, using an International Monetary Fund (IMF) methodology, that £23-57 billion was being 11 laundered within and through the UK each year. While the estimates are uncertain, they provide a rough idea of the magnitude of the problem and the need for the UK to effectively detect, restrain and deter the proceeds of corruption passing through the UK. Case studies provide a further indication of the scale of illicit funds flowing through the UK: •

In the case of General Sani Abacha and his conspirators, an estimated £780 million of money stolen while he was dictator of Nigeria is believed to have been laundered through UK 12 banks.

•

James Ibori, former Governor of Delta State in Nigeria from 1999 to 2007, who pled guilty to ten counts of money laundering, is estimated by UK law enforcement to have embezzled 13 £150 million of Nigerian public funds. Reporting around the Ibori court case shows he

6 Transparency International UK, Closing down the Safe Havens, Ending impunity for corrupt individuals by seizing and recovering their assets in the UK, (Dec 2013), p.6, available at http://www.transparency.org.uk/our-work/publications/809closing-down-the-safe-havens 7 https://www.gov.uk/government/speeches/home-secretary-speech-at-ukraine-forum-on-asset-recovery 8 GFI Illicit Financial Flows from Developing Countries: 2001-2010 , (Dec 2012), available at http://www.gfintegrity.org/storage/gfip/documents/reports/IFF2012/tip_sheet_iff_2012-embargoed.pdf 9 http://www.justice.gov/iso/opa/ag/speeches/2014/ag-speech-140429.html 10 http://europa.eu/rapid/press-release_IP-14-86_en.htm 11 Closing Down the Safe Havens, p.5 12 http://www.theguardian.com/business/2001/oct/05/warinafghanistan2001.afghanistan1 13 http://www.globalpost.com/dispatches/globalpost-blogs/africa/nigerian-ex-governor-admits-guilt-money-laundering

TI-UK response to the National Risk Assessment of Money Laundering and Terrorist Financing

bought a house in Hampstead, north London, for £2.2m, and a property in Shaftesbury, 14 Dorset, for £311,000. •

Saadi Gadaffi owned a £10 million home in Hampstead, London via a company named Capitana Seas Ltd. After Gadaffi was deposed, the transitional government in Libya was 15 granted a default judgment against Capitana Seas Limited.

•

According to a document leaked to Global Witness, between June and September 2010 the Libyan state oil fund deposited over $1bn with HSBC. The deposit allegedly brought the balance with the British bank to $1.42bn, up from $292.7m three months earlier. The document also suggests that the total assets managed by the state oil fund – Libyan 16 Investment Authority (LIA) – swelled from $54bn to $64bn in the space of three months. In addition, a structured investment product managed by HSBC may have been worth as much as $274m to the LIA. Whilst Libya was not on any international sanctions list at the time, the 17 money was later frozen.

Property is a key risk area for the UK. ‘Parking’ assets and investing them in the UK is very attractive to foreign investors, particularly in the London property market. While there is very little understanding about the specific risk of money laundering in the sector, the scale of foreign funds in UK property is substantial and often sourced from high risk countries. Foreign buyers bought up to 75% of new homes in central London over the past year, and foreign buyers reportedly accounted for 49% of all properties, new and existing, worth more than £1m in 18 central London over the same period. Savills reports indicate that more than £7bn of foreign 19 investment was spent on high-end London homes in 2013. A recent leak of information from the British Virgin Islands (BVI) suggests that in 2011, £3.8 billion worth of UK property was bought by BVI-registered companies, out of a total of £7 billion offshore 20 money, and the trend is increasing. Purchases made through offshore vehicles represent a money laundering risk, are a source of tax evasion in the UK, and afford the true owners anonymity when purchased with nominee directors. A media investigation revealed an estimated US$588 million (£350 million) worth of vacant properties on a prestigious London road ranked last year as the second most expensive street in Britain. The empty buildings include a row of 10 mansions worth US$123 million (£73 million), which have stood largely unused since they were bought between 1989 and 1993. Most of the properties are registered to companies in the British Virgin Islands, Curaçao, the Bahamas, Panama and the Channel Islands, 21 allowing international owners to remain anonymous. The UK government recognises that corruption, and associated money laundering, is a threat 22 originating from serious and organised crime groups within the UK. It should also be noted that the perpetrators of grand corruption represent the most sophisticated and well-resourced type of serious and organised crime. Those same individuals who also locate their business and family operations in the UK are likely to use their considerable wealth and experience to corrupt and influence UK institutions and public services if they see the need to do so. At the national strategic level, there is a lack of awareness about the extent of the role of the proceeds of corruption in the UK economy and in the City of London, which can restrict national security decisions and independent foreign policy. During the recent Ukraine crisis, the UK Prime Minister was advised that “the UK should not support for now trade sanctions … or close London's financial centre 14

http://www.bbc.co.uk/news/world-africa-17739388 http://www.globalwitness.org/library/%C2%A310m-house-expensive-london-suburb-recovered-libya 16 http://www.globalwitness.org/library/new-leaked-document-reveals-hsbc-held-14bn-libyan-funds 17 http://www.thebureauinvestigates.com/2011/05/26/analysis-hsbcs-links-to-corrupt-and-repressive-regimes/ 18 http://www.theguardian.com/housing-network/2013/nov/14/london-property-foreign-investors 19 http://www.telegraph.co.uk/finance/newsbysector/constructionandproperty/10553748/London-best-city-for-foreign-propertyinvestment-opportunities.html 20 http://www.icij.org/front-men-disguise-offshore-players 21 www.theguardian.com/society/2014/jan/31/inside-london-billionaires-row-derelict-mansions-hampstead 22 UK Serious and organised crime strategy (Oct 2013), available at https://www.gov.uk/government/publications/seriousorganised-crime-strategy 15

TI-UK response to the National Risk Assessment of Money Laundering and Terrorist Financing 23

to Russians" . However this policy advice may well have been influenced by the high volume of Russian investment in the City. The think-tank Open Europe (quoting Office for National Statistics 24 figures), put the volume of Russian investment in the UK at £27bn. Clearly, not all Russian capital flows into the UK are the proceeds of corruption and crime, but a sizeable proportion is highly likely to be. The Russian Central Bank, quoted in the Financial Times, estimated that in 2012, USD $56 billion 25 left Russia as the proceeds of crime. The problem arises as UK law enforcement, regulators and the UK government are largely unable to distinguish legitimate funds from corruptly acquired capital flows into the UK. Against this scale of threat, the United Nations Office for Drugs and Crime (UNODC) estimate that the global detection rate of illicit funds by law enforcement is as low as 1 per cent for criminal proceeds, 26 and the seizure rate is possibly 0.2 per cent. The UK National Audit Office (NAO) estimates that only 27 26p out of every £100 is confiscated from organised criminals. If dealing with money laundering from across all organised crime is ineffective in the UK, dealing with the perpetrators of grand corruption is even more challenging due to specific problems associated with these cases. Everyone accepts that money-laundering is a major issue… in the developing world in particular there is a constant, never-ending haemorrhage back into the developed world and our banking system of 28 money that should be going to the poor. Something should be done about it - Lord Brennan The available evidence indicates that the UK is an attractive place for the world’s corrupt to launder their ill-gotten gains. Due to the inadequacies of the UK’s detection, restraint and recovery of the proceeds of corruption, it seems likely that the corrupt are able to launder ill-gotten gains into the UK with relative impunity. British Overseas Territories (OTs) and Crown Dependencies (CDs) are also believed to play a substantial role in facilitating illicit funds. In 2011, the UNODC and the Worldbank Stolen Asset Recovery (STAR) initiative analysed over 150 grand corruption cases and found that out of the corporate vehicles involved in money laundering associated with the cases, the following territories 29 had hosted the secret corporate vehicles: BVI (91); United Kingdom (24); Cayman Islands (15); Bermuda (12); Jersey (12); Isle of Man (7)). Oxfam estimates US$7.18 trillion is held in accounts 30 situated in British OTs and CDs.

http://www.channel4.com/news/will-sanctions-against-russia-hurt-the-uk-economy http://www.openeurope.org.uk/Article/Page/en/LIVE?id=19785&page=FlashAnalysis 25 http://www.ft.com/cms/s/0/cf1ec118-a099-11e3-8557-00144feab7de.html#axzz31odfg9Mc 26 UNODC Estimating illicit financial flows resulting from drug trafficking and other transnational organized crimes (Oct 2011), http://www.unodc.org/documents/data-and-analysis/Studies/Illicit_financial_flows_2011_web.pdf 27 National Audit Office, Report by the Comptroller and Auditor General, (December 2013), p.4 available at http://www.nao.org.uk/wp-content/uploads/2013/12/10318-001-Confiscation-Book.pdf 28 http://www.publications.parliament.uk/pa/ld201314/ldhansrd/text/131209-0003.htm#13120942000679) 29 StAR The Puppet Masters: How the Corrupt Use Legal Structures to Hide Stolen Assets and What to Do About It (2011) http://star.worldbank.org/star/publication/puppet-masters 30 http://www.oxfam.org.uk/media-centre/press-releases/2013/05/tax-haven-cash-enough-to-end-extreme-poverty [accessed: 5 Dec 2013] 24

TI-UK response to the National Risk Assessment of Money Laundering and Terrorist Financing

2. Strengths in the UK AML regime We recognise that, after years in which UK political will for detecting and recovering the proceeds of grand corruption was questionable, there has been a marked increase in the political effort put towards investigation and enforcement of identifying and recovering the proceeds of grand corruption. The UK can reasonably claim to be doing well among its international peers, but all countries are doing badly in absolute terms. The UK has invested in practical projects to support investigations focused on securing more stolen assets and returning them to victims, particularly in relation to the Arab Spring nations and in response to the recent revolution in Ukraine. Specific strengths of the UK AML regime for the proceeds of grand corruption include: Political focus - During the UK Presidency of the G8 in 2013, the UK took steps to highlight the importance of securing the proceeds of corruption from the Arab Spring nations and recover them to origin nations. Likewise, the UK government has taken a leading role in highlighting the need for asset recovery for the people of Ukraine and supporting international dialogue on that issue. Most recently, the Home Secretary The Rt Hon Theresa May MP, opened the Ukraine Forum on Asset Recovery by stating “Cracking down on corruption, and working to recover stolen assets, is an issue which has 31 increasingly gained international importance and is one we must we continue to work hard on.” 32

Policy focus - The NAO, the Public Accounts Committee , and the Home Office in its Serious and 33 Organised Crime Strategy , have all recognised the shortcomings of the UK money laundering system and poor asset recovery rates from proceeds of all forms of crime. Legislative focus -The government has committed to legislate on asset recovery to improve the 34 effectiveness of investigations and close loopholes. Corporate transparency - The UK has made a commendable step in being the first G20 nation to commit to a public register of company beneficial ownership. Secret company ownership has been identified as a major barrier to effective AML and effective law enforcement investigations of money laundering. Law enforcement focus - In 2013, the new National Crime Agency (NCA) was launched and the UK Serious and Organised Crime strategy committed the NCA to prioritise Money Laundering under its 35 new Economic Crime Command. As of February 2013, investigations by the Metropolitan Police Proceeds of Corruption Unit into allegations of corrupt foreign politicians or officials laundering money through the UK had reportedly resulted in eight successful prosecutions and over £100m has been 36 recovered or seized. Investigator taskforce surges in post-revolutionary environments - The UK has responded to asset recovery challenges with a significant degree of innovation. In response to the Arab Spring and Ukraine crisis, the UK developed a ‘taskforce model’ whereby a range of UK experts from law enforcement, lawyers and prosecution liaison officers can be surged to a particular foreign jurisdiction to support asset recovery proceedings. In addition, the UK played a key role in both the Arab and Ukraine forums on Asset Recovery. Most recently, the NCA and the Metropolitan Police, accompanied by CPS prosecutors, travelled to Ukraine to support these highly complex money laundering and asset recovery investigations. HM Treasury Supervision Reports - Since November 2011, HM Treasury has invested in cross sector surveys of money laundering supervisors’ performance. While the surveys raise cause for

https://www.gov.uk/government/speeches/home-secretary-speech-at-ukraine-forum-on-asset-recovery http://www.parliament.uk/business/committees/committees-a-z/commons-select/public-accountscommittee/news/confiscation-orders-report-publication-sub/ 33 NCA, Serious and Organised Crime Strategy (Oct 2013), https://www.gov.uk/government/publications/serious-organisedcrime-strategy 34 Ibid. 35 Ibid. 36 BBC, 01/02/2013, http://www.bbc.co.uk/news/uk-21296405 32

TI-UK response to the National Risk Assessment of Money Laundering and Terrorist Financing

concern and are limited in their current level of detail and transparency, they represent a welcome 37 improvement on understanding across the 28 money laundering supervisors in the UK. Innovative funding for policing and investigations - The DFID funding model has ensured that high quality law enforcement expertise from the Metropolitan Police and City of London Police are directed towards international corruption, rather than being subsumed into domestic policing priorities. However, the geographic focus of these units tends to be countries where the UK has an aid relationship through DFID. As such, many jurisdictions, particularly former Soviet Union states, do not fall within the geographic focus of these units. International convening power - For proceeds of corruption investigations, the UK has twice demonstrated in recent months the ability to convene investigators and policy leads from around the world to advance money laundering and asset recovery investigations related to countries of political focus. Both the Ukraine Forum on Asset Recovery and the Arab Forum on Asset Recovery are believed to have provided value to investigators. Promising but underutilised case law - The UK Proceeds of Crime Act 2002 (POCA) criminal case law appears to have granted authority to restrain assets through a money laundering offence without explicitly identifying a specific predicate offence. The landmark POCA case R v Anwoir [2008] held that prosecutors can prove that property derives from crime “by evidence of the circumstances in which the property is handled which are such as to give rise to the irresistible inference that it can only 38 be derived from crime”. This case could potentially be hugely valuable in the targeting of corrupt flows in the UK from both a criminal and civil perspective. Evidence of regulatory focus in the banking regulator - The FSA 2011 thematic review of money laundering and PEP risks, though its findings represent dramatic failings in the sector, at least demonstrate that the banking regulator – in its former incarnation – has invested in understanding the 39 scale of the problem. The Financial Conduct Authority (FCA) has also developed a new penalty regime (as outlined in the Decision Procedure and Penalties Manual) which applies to AML breaches 40 committed from 6 March 2010 and under which larger fines are expected. Evidence of regulatory significant sanctions in the banking sector - In January 2014, the FCA fined Standard Bank £7,640,400 for failings relating to its AML policies and procedures over corporate customers, connected to PEPs. While these fines are small in comparison to US equivalents and are unlikely to provide a compelling deterrent to abusive behaviour, it represents an investigation and sanctions process that can produce results in the finance sector. The fine is the first AML case to use the new FCA penalty regime, which applies to breaches committed from 6 March 2010 onwards. The financial regulator has stated that under the new regime larger UK AML fines can be expected in the 41 future. A well-resourced AML compliance community in banking - Estimates vary widely as to how much the banking sector spends on AML compliance in the UK, but it is – no doubt – a large investment. A 2005 City of London Study placed the figure at £255 million and indicated that the UK spent more, as 42 a proportion of GDP, than any other country. Interview based surveys, including the KPMG Global Anti-Money Laundering Survey, indicate that costs have risen dramatically for financial services 43 providers between 2004 and 2011. The Australian government has noted the difficulties associated 44 with quantifying the costs of AML and Combatting the Financing of Terrorism (CFT) regimes. In addition to a well-funded compliance community, the capacity of AML in the UK is strengthened by a variety of trade media publications and the availability of continuing professional development conferences and events in the UK. 37

Anti-money laundering and counter terrorist finance supervision reports - https://www.gov.uk/government/publications/antimoney-laundering-and-counter-terrorist-finance-supervision-reports 38 Closing Down the Safe Havens, p.8 39 FSA, Banks’ management of high money-laundering risk situations, (June 2011), available at http://www.fsa.gov.uk/pubs/other/aml_final_report.pdf 40 http://fshandbook.info/FS/html/handbook/DEPP/6/5A 41 http://www.fca.org.uk/news/standard-bank-plc-fined-for-failures-in-its-antimoney-laundering-controls 42 http://www.zyen.com/PDF/AMLR_FULL.pdf 43 http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/anti-money-launderingv2.pdf 44 http://www.aic.gov.au/publications/current%20series/rpp/100-120/rpp117/08_costs.html

TI-UK response to the National Risk Assessment of Money Laundering and Terrorist Financing

Non-conviction based asset forfeiture (NCBAF) - The UK also has a powerful legal tool in nonconviction based asset forfeiture (NCBAF). In NCBAF, the standard of proof is on the balance of probabilities – lower than the “beyond reasonable doubt” standard for criminal proceedings – and the issue of PEP immunity can be avoided as the proceedings are brought against the asset rather than an individual. The UK has not generally sought to use civil forfeiture powers to target corrupt assets located both in the UK and even overseas, although it could do so if it could demonstrate a predicate offence. Such is the case with the former Nigerian President General Sani Abacha, against whom NCBAF could and should have been used (although it would now have a limitation issue); instead the US has used its own civil forfeiture powers to freeze assets held in the UK and elsewhere allegedly belonging to the deceased General. Only one case of this seizure option being used in the UK to target corrupt assets was identified during the course of TI-UK’s research, that of SOCA V Agidi. Overall, innovative approaches are being trialled by the UK and the focus across politics, policy, and law enforcement is welcome. However, these efforts and money, to date, are taking place within the narrow confines of a system that is failing to deliver for PEP AML. In fact, it is the very increase in the UK’s activity that has served to highlight that, despite the increased efforts and some notable successes, the system is not producing results in proportion to the size of the problem.

3. Ineffectiveness of the UK AML regime for corrupt capital An effective AML regime for corrupt capital should restrict and prevent the flow of proceeds of corruption into the UK, as a result of regulated entities refusing to service suspicious transactions. When the proceeds of corruption have been invested into or through the UK, an effective AML regime should allow for corruptly acquired assets to be identified, recovered and returned, and where possible for guilty parties to be brought to justice. Effective penalties and asset recovery should provide a deterrence to the corrupt using the UK as a safe haven for corruptly acquired assets. While there is very limited data on the extent to which suspicious business is being refused by the UK private sector, asset recovery results are extremely low compared to the likely scale of the crime. By this measure, the UK AML regime is failing to tackle the proceeds of grand corruption flowing through the UK. The current levels of asset recovery in the UK and elsewhere are insignificant compared to the scale and threat of the problem. The Dec 2013 NAO report ‘Confiscation orders’ indicated that only 26p out 45 of every £100 is confiscated from organised criminals. In 2011, the UNODC estimated that the global detection rate of illicit funds by law enforcement is as low as 1 per cent for criminal proceeds, and the seizure rate is possibly 0.2 per cent. Between 2006 and 2009, across 30 OECD countries, an average of only US $0.4 billion of assets had 46 been frozen per annum. Across the OECD, this corresponds to just 0.07 per cent of the assessed 47 annual illicit flows over the same period according to the Global Financial Integrity methodology. A 2010 StAR/OECD study revealed that during the same period, (2006 and 2009), the UK froze US $229.6 million (18.7% of the total frozen), and had recovered and returned $2.2 million (0.8% of the 48 total). A different StAR survey of UK asset recovery between 2006 and 2009 provided a higher figure, indicating that the UK had contributed to recovery and return of £20.7 million (US$33.4 million) 49 of corruptly acquired assets. In 2014, the OECD updated its analysis on illicit financial flows across the 30 countries, covering the period 2010-12. It shows modest progress in OECD countries with regard to stolen asset recovery. In the period, OECD countries froze US $1.4 billion (an average of US $0.7 billion per annum), and 50 returned US $147 million (an average of US $73.5 million). The report also quotes figures produced jointly by StAR/OECD on the proceeds of corruption for the same period, revealing that the UK froze 45

National Audit Office, Report by the Comptroller and Auditor General, (December 2013), p.4 available at http://www.nao.org.uk/wp-content/uploads/2013/12/10318-001-Confiscation-Book.pdf 46 Closing Down the Safe Havens, p.5 47 Ibid. 48 Ibid.,p6 49 Ibid, 50 http://www.oecd.org/corruption/Illicit_Financial_Flows_from_Developing_Countries.pdf, p.14

TI-UK response to the National Risk Assessment of Money Laundering and Terrorist Financing

US $451 million (32% of the total, averaged at US $225.5 million per annum), and returned US $67m 51 (45% of the total, averaged at US $33.5 million per annum). Again, the UK was one of 4 countries which returned frozen assets. The UK’s performance on asset freezing and repatriation is therefore an improvement from the 2006-2009 period, and this is to be commended. Confusingly, in response to a parliamentary question recently, Karen Bradley MP, Minister for Modern Slavery and Organised Crime in the Home Office indicated that the UK has not repatriated any assets 52 to another country since 2008-9. However, this contradicts figures provided by the OECD which 53 suggests that the UK returned US $67 million between 2010-12. These different official estimates of asset recovery by the UK are possibly a symptom of a system that is failing to address the problem. However, even at the highest estimate, asset freezing and asset recovery is very small in relation to the vast scale of the threat. Based on conservative estimates, the UK is unlikely to have frozen any more than 0.75% of global corrupt financial flows per annum for the 54 period covering 2010-2012.

3.1 How limitations in current legislation contribute to AML ineffectiveness A slow sanctions regime - The UK (and the rest of the EU) took thirty-seven days to freeze assets relating to Mubarak, compared to Swiss action within hours after the regime collapsed in February 2011. The UK and EU rely on a lengthy process for agreeing designated sanctions in order to freeze assets following a regime change. This slow sanctions process inevitably creates a wide window for asset flight. Arguments that the UK benefits from unified sanctions voice from across the EU overlook the fact that Austria was able to establish independent sanctions through its central bank in relation to 55 the Ukraine revolution and later support the EU sanctions process. High legal barriers to a successful restraint order - Even when SARs are filed, the barriers to a successful restraint process for the assets are substantial. The UK’s present regime gives the NCA a period of seven days within which to refuse its consent to a suspicious financial transaction. If it refuses its consent, the NCA has a period of 31 days (the moratorium period) to obtain a court order freezing the account. A period of 31 days is insufficient time in which to investigate complex corruption cases with international dimensions. The UK’s legal requirement to restrain suspected criminal assets is based on reasonable cause, rather than the lower bar of suspicion, and a defined link to a predicate offence. These hurdles can be very high when dealing with corruption. Recognising the difficulties of prosecuting PEPs for corruption, the present regime of a maximum window of 31 days in which to commence an (international) investigation and either launch proceedings domestically or trigger criminal proceedings abroad is plainly not fit for purpose. Lack of illicit enrichment offence - The UK has no offence of unexplained wealth or “illicit enrichment”. The UK does have the power to issue wide confiscation orders under the UK POCA where it can show the accused, post-conviction, leads a ‘criminal lifestyle’; corruption is not listed as a ‘criminal lifestyle’ offence under Schedule 2 of POCA. The UK can also make use of powers within Part 5 of the UK POCA with money laundering offences where no predicate offence is required, though it is rarely used in corruption cases. In October 2013, the Australian Government announced that it intended to introduce tougher and more effective “unexplained wealth” legislation and removing the right of defendants to pay for their legal expenses by using cash and property restrained during unexplained wealth proceedings. Reliance on a conviction (or realistic prospect of) in the origin state - Because of the inadequate timelines for the restraint process, the UK Financial Investigation Unit (FIU) ideally requires their counterpart investigators in the origin state to already be leading a domestic criminal investigation or conviction if the UK FIU is to successfully restrain a transaction. This is because an investigation or conviction in the origin country will assist investigators in meeting the grounds for ‘cause to believe’ 51

Ibid., p.91 http://www.publications.parliament.uk/pa/cm201314/cmhansrd/cm140401/text/140401w0003.htm#14040211001773 53 http://www.oecd.org/corruption/Illicit_Financial_Flows_from_Developing_Countries.pdf 54 Calculated by taking the 2010-2012 STAR/OECD figure of UK asset freezing (US $225.5 million per annum) as a percentage of the mid-point of the Baker et al’s 2003 estimate for corrupt global flows (referenced in Closing Down the Safe Havens), US $30 billion. 55 http://www.businessweek.com/news/2014-02-28/austria-freezes-ukraine-accounts-before-eu-specifies-sanctions 52

TI-UK response to the National Risk Assessment of Money Laundering and Terrorist Financing

that the assets are the proceeds of corruption, as required by UK courts. In contrast, the Guernsey FIU retains the authority to refuse consent for transactions indefinitely where there are strong grounds for suspicion of criminality, without the need for a conviction in the origin country. These powers have been used to great effect in the case of assets belonging to Tomi Suharto, the son of former Indonesian President Suharto. No special powers for revolutionary environments - Unlike other nations, the UK makes no legislative distinction between money laundering and the special circumstances of asset recovery relating to PEPs and grand corruption in post-revolutionary environments, compared to any other crime. Without special powers for post-revolutionary situations, the UK must wait for law enforcement and the judiciary in a post-revolutionary state to develop capacity and independence to the extent that it can take forward complex corruption charges before assets can be restrained in the UK. In contrast, Canada has introduced fast-tracked asset freezing and recognition of the special considerations required for grand corruption through the Foreign Assets of Corrupt Foreign Officials Act and Switzerland has even stronger powers. In Switzerland, the “Lex Duvalier Act” named after the former Haitian President, enables the Swiss authorities to freeze corrupt assets if the origin state was unable to take forward an Mutual Legal Assistance (MLA) process and has a non-functioning state. The ability of those suspected of grand corruption to exhaust the proceeds of corruption in legal fees defending a case - In the UK, those accused of grand corruption may draw down on the identified suspect assets to fund legal fees, raising the risk that frozen assets will be depleted. The investigation into James Ibori is a laudable example of the UK taking the lead when the victim state appeared reluctant or incapable to do so. Ibori was the Governor of Delta State in Nigeria from 1999 to 2012. He pleaded guilty to 10 counts of money laundering and was sentenced to 13 years in prison in the UK. Although the offences were committed in Nigeria, Ibori used a UK lawyer and as such the UK courts were able to maintain jurisdiction under sections 327-329 POCA. It is also commendable that Ibori’s appeal against the jurisdiction of the UK courts over his Nigerian assets was rejected at the Court of Appeal). However, to demonstrate the challenges of asset recovery in cross border investigations, Ibori’s assets still have not been recovered despite his admissions of guilt. The case demonstrates the complexity, cost and longevity of cross border asset recovery proceedings. Vulnerabilities in close connections to Overseas Territories and shell companies - Close business and financial relationships with the British OTs expose UK intermediaries to money laundering risks and prevent effective Know Your Customer checks being carried out. The due diligence trail can often stop or become exceptionally difficult when a secret corporate vehicle in the OTs is uncovered. Without legislation in the OTs on money laundering and beneficial ownership, at least, being brought up to the level of the UK, connections to the OTs will remain a money laundering risk. Limited recognition of lobbying and influence activity within the UK undertaken by potential perpetrators of grand corruption - Perpetrators of grand corruption are likely to use their considerable wealth and experience to corrupt and influence UK institutions and public services if they see the need to do so. There is limited understanding of the scale of lobbying undertaken by PEPs and corrupt regimes targeted in the UK, though investigative media work has identified that lobbying firms are happy to accept business from high-risk states and claim to be able to achieve high level 56 influence with UK policy making. Ukrainian gas billionaire Dmitry Firtash was arrested in March 2014 in Austria on a US warrant for corruption, dating from 2006, and is awaiting extradition. UK media reporting indicates that Firtash visited the Foreign and Commonwealth Office in London on 24 February to meet officials and advise on the response to the Ukraine crisis. Firtash was one of Ukraine’s most powerful figures under deposed president Viktor Yanukovich. The Independent newspaper reported on Firtash’s close links to senior UK politicians through the British Ukrainian Society. Firtash was also donated large sums of funds to Cambridge University, and has large property close to Harrods in central London. He is 57 currently on bail having posted a EUR 125 million bond. 56

http://www.independent.co.uk/news/uk/politics/caught-on-camera-top-lobbyists-boasting-how-they-influence-the-pm6272760.html 57 http://www.bloomberg.com/news/2014-03-21/firtash-released-from-vienna-custody-on-record-bail-bond.html

TI-UK response to the National Risk Assessment of Money Laundering and Terrorist Financing

3.2 What contributes to ineffectiveness at an investigative level? Law enforcement coordination - The UK’s law enforcement and international liaison activity in relation to kleptocracy is currently being carried out by the Metropolitan Police Service, the SFO, the City of London, the NCA, the Home Office and the CPS. The NCA lead in the Serious Organised Crime Strategy may help coordinate these policing efforts and the recent joint taskforce approach to Arab Spring and Ukraine asset recovery is also believed to have helped focus this effort. However, the multiple organisations, interests and departmental budgets involved in the UK inevitably leads to a level of incoordination. This set-up stands in contrast to the US, where the US Department of Justice has established a dedicated Kleptocracy Asset Recovery Unit bringing together prosecutors and investigators. General non-investigation of the corrupt who are still in power - Largely as a result of the above systemic shortcomings, the UK has not pursued cases where the origin state is defensive against the corruption allegation. The UK’s AML system, for proceeds of corruption, is largely one of turning a blind eye to the proceeds of corruption until there is a revolution in the origin state, and then, if the new origin country government is favourable to the UK, a large amount of effort is to put in to start origin country investigations. These investigations are often taking place many years and in some cases decades after the crimes of theft and corruption first took place. Once a supportive regime does eventually emerge in the origin state, a substantial amount is expected of them, not least a sustained commitment to pursue an extremely complicated and costly domestic conviction, an understanding of the UK common law system and MLA process, and a good command of the English language to articulate precise legal terms. In contrast, both France and Switzerland have recently developed investigations and frozen assets in relation to individuals associated to active and incumbent regimes or officials. These investigations are taken forward despite diplomatic pressure and a defensive origin 58 state. Geographic limitations of policing investigations - The UK corruption law enforcement units in the Metropolitan Police Service and the City of London Police are generally limited in scope to DFID priority countries or where there is high UK political interest, this excludes key risk countries – including within and bordering the EU. Limited police resources for expensive investigations and low risk appetite - Relying on policing budgets alone, at current resource levels, the UK is not likely to be able to tackle the scale of corrupt funds flowing into the UK. This problem is hampered by the political emphasis on returning all assets to origin states, without recovering policing costs – as is mandated under the UN Convention Against Corruption 2003 (UNCAC). There is also a risk that law enforcement and prosecution agencies demonstrate a low risk appetite for cases of grand corruption due to the risk of legal damages being brought against the police, SFO or CPS.

3.3 What contributes to regulatory ineffectiveness? Disparate regulatory framework for Money Laundering in the UK - The Treasury has 28 appointed AML/CTF supervisors which oversee eight broad sectors and a diverse range of firms which include financial institutions, credit institutions, law firms, accountancy firms, estate agents and 59 casinos. For accountancy alone there are up to 13 bodies with regulatory responsibility for money

Luxury houses in Paris, fleets of cars and bank accounts have all been restrained and sold in relation to Teodoro Nguema Obiang, son of the President of Equatorial Guinea ( http://www.bbc.co.uk/news/world-africa-26666871); and Swiss authorities froze 800m Swiss francs (£550m; $910m; 650m euros) as part of the inquiry into Uzbek leader's daughter Gulnara Karimova ( http://www.bbc.co.uk/news/world-europe-26543458) 59 AML/CFT supervisors: Association of Accounting Technicians (AAT); Association of Chartered Certified Accountants (ACCA); Association of International Accountants (AIA); Association of Taxation Technicians (ATT); Chartered Institute of Management Accountants (CIMA); Chartered Institute of Public Finance and Accountancy (CIPFA); Chartered Institute of Taxation (CIOT); Council for Licensed Conveyancers (CLC); Department of Enterprise, Trade, and Investment Northern Ireland (DETNI); Faculty of Advocates (Scottish bar association) (FoA); Faculty Office of the Archbishop of Canterbury (AoC); Financial Conduct Authority (FCA); Gambling Commission (GC); General Council of the Bar (England and Wales) (GCBEW); General Council of the Bar of Northern Ireland (GCBNI); HM Revenue & Customs (HMRC); Insolvency Practitioners Association (IPA); Insolvency Service (SoS); Institute of Certified Bookkeepers (ICB); ; Institute of Chartered Accountants in England and Wales (ICAEW); Institute of Chartered Accountants in Ireland (ICAI); Institute of Chartered Accountants of Scotland (ICAS); Institute of Financial Accountants (IFA); International Association of Book-keepers (IAB); Law Society of England and Wales (LSEW); Law Society of Northern Ireland (LSNI); Law Society of Scotland (LSS); Office of Fair Trading (OFT).

TI-UK response to the National Risk Assessment of Money Laundering and Terrorist Financing

laundering regulations. Such a disparate regulatory structure is likely to lead to inconsistency in monitoring, detection, enforcement, sanctions, training and development and priority messaging. Inadequacies of regulators’ risk assessments - HM Treasury requires that each money laundering supervisor has a good understanding of what it means to have a risk-based approach. However in the 2013 Anti-money laundering and counter terrorist finance (ML/TF) supervision report by HM Treasury, Supervisors were asked to report if the ML/TF risks varied across the firms they supervise. 52% of 60 supervisors reported that the ML/TF risks do not vary across the firms they supervise. It is difficult to imagine the risk criteria those supervisors may be using to conclude that all firms face an equal risk, regardless of size, location, commercial focus, historical ML performance, and different performance (presumably) on compliance inspections. Wide variation in enforcement of ML regulations - In 2013, Supervisors were asked by HM Treasury to provide more information regarding their enforcement activity, including how they 61 measure that this action is proportionate, effective, dissuasive, and adequately applied. The survey results demonstrated differing approaches by regulators to sanctions. Of the 522 reported enforcement actions taken by accountancy sector supervisors, 44% were action plans or warning letters and 3% were fines. Of the 1381 reported enforcement actions taken by public sector 62 supervisors: 29% were action plans or warning letters and 11% were fines. No official consensus of the scale of money laundering - The banking conduct regulator has withdrawn its estimate of the scale of money laundering in the UK. There is therefore no current regulatory estimate of the threat faced by the banking sector. It is difficult to see how a risk-based approach to AML and a government focus on AML effectiveness can be sustained without an estimate of the threat. There are no official figures on the total value of assets held by PEPs in the UK or any obligation on regulated entities to report on the scale of PEP business, or even to report when 63 there has been a financial sanctions breach. Regulatory weaknesses in non-banking sectors - Out of the 28 regulators with responsibility for supervising UK Money Laundering Regulations 2007, only the FSA (FCA) has conducted a detailed thematic survey of AML and PEP risks and published it to the public. While the report indicated widespread failings, the remaining sectors have not examined and understood the money laundering risks to the same extent, and it is a strong likelihood that their sectors’ performance would be even worse. The sectors are seen as gatekeepers to the financial system, and their role is evident in most, if not all corruption cases. The Financial Action Task Force (FATF), an AML standard-setter, describes gatekeepers as individuals that “protect the gates” to the financial system through which 64 potential users of the system, including launderers, must pass in order to be successful”. Gatekeepers include lawyers, estate agents, accountants, financial advisors, and trust and company service providers. Lawyers and accountants have not been subject to similar AML monitoring by their own regulatory authorities. This must be addressed as, if anything, such professions may have a higher PEP AML risk than large financial institutions, as serious and organised crime groups will often target the weakest link when seeking to launder funds. Furthermore, intermediaries may have more direct personal relationships with PEP clients and may be more personally reliant on maintaining the income stream from such clients, all reducing the likelihood of effective AML risk management. Low requirements of the ‘fit and proper’ test for TCSPs - TCSPs are subject to AML requirements and Her Majesty’s Revenue and Customs (HMRC) is responsible for their registration on the basis of a ‘fit and proper test’. However, this demands no more of an applicant than compliance with a list of negative criteria involving the non-conviction of the applicant of a number of offences. There is no requirement of qualification, experience or competence. It therefore remains to be seen whether the system will be effective in catching those TCSPs who are complicit in facilitating money laundering.

Anti-money laundering and counter terrorist finance supervision reports - https://www.gov.uk/government/publications/antimoney-laundering-and-counter-terrorist-finance-supervision-reports 61 Ibid. 62 Anti-money laundering and counter terrorist finance supervision reports - https://www.gov.uk/government/publications/antimoney-laundering-and-counter-terrorist-finance-supervision-reports 63 http://www.fca.org.uk/about/what/protecting/financial-crime/sanctions 64 FATF Laundering the Proceeds of Corruption (Jul 2011), http://www.fatfgafi.org/media/fatf/documents/reports/Laundering%20the%20Proceeds%20of%20Corruption.pdf

TI-UK response to the National Risk Assessment of Money Laundering and Terrorist Financing

3.3 What contributes to private sector ineffectiveness? The battle for law enforcement to identify a particular account holding the assets is considered one of the most significant difficulties encountered in the early stages of a case. It is exceptionally difficult without financial institutions producing intelligent SARs. The responsibility for detection and deterrence of grand corruption must reside primarily with private sector AML procedures against current transactions. Banks and other private sector institutions, assisted by professional intermediaries such as lawyers and accountants, are the front line in detecting and reporting suspicious transactions. Many elite corrupt figures want to display their wealth and wealthy lifestyle by acquiring “badges of wealth” such as luxury homes, expensive vehicles, speed boats, jewellery for instance. By laundering the proceeds from their corruption to pay for these, they can avoid detection by tax or law enforcement authorities. Art and jewellery dealers, auction houses, real estate agents, lawyers, accountants: all these professionals are possible enablers and as such, should be equally subject to anti-money laundering regulations. Despite the large amount of resource put into AML compliance in some sectors, as discussed above, there remains poor performance in terms of outcomes. Widespread shortcomings of AML procedures in banking - The FSA’s 2011 thematic review of banks’ management of high money laundering risk situations revealed systemic failings in AML compliance by financial institutions with high risk customers and PEPs. The report found that three quarters of the banks reviewed, including a number of major banks, were not managing AML risk effectively. Over half the banks failed to apply meaningful enhanced due diligence (EDD) measures in higher risk situations and more than a third of the banks visited failed to put effective measures in place to identify customers as PEPs. Appallingly, around a third of the banks dismissed serious 65 allegations about their customers without adequate review. The UK FCA’s June 2013 Anti-Money Laundering Report restated the failure of banks to prevent the proceeds of corruption filtering through their systems. Due to regulatory weaknesses in other sectors, it is only in banking that there this relatively high level of understanding about the shortcomings in AML procedures for PEP risks. Limitations of estate agents money laundering requirements - Money Laundering Regulations in the UK only legally require estate agents to undertake due diligence on sellers, not purchasers. This clearly stymies the effectiveness of AML in the property sector. Very low SAR filing by gatekeeper sectors - The volumes of SARs submitted by some of the gatekeeper sectors are far too low considering the scale of money laundering into and through the UK. For example, in 2012-13, Estate Agents contributed only 0.07% of all SARs submitted, which 66 equated to 215 reports, and there were only 91 registered businesses. This figure is not commensurate to the risks posed by corrupt individuals who consider the UK property market a safe haven for laundering the proceeds of corruption. The legal profession exemption from reporting suspicions - A Court of Appeal ruling in 2005 (Bowman Vs Fels) afforded Solicitors Legal Professional Privilege from reporting money laundering suspicions under POCA in certain circumstances. After this ruling SARs from Solicitors fell 67 dramatically, amounting to an 82.7% fall from 2003/4 to 2012/13. Complicit lawyers are an essential component to sophisticated money laundering. The removal of the obligation of lawyers to report their suspicions is highly likely to have dramatically reduced intelligence and investigative leads for money 68 laundering crimes.

FSA, Banks’ management of high money-laundering risk situations, (June 2011), http://www.fsa.gov.uk/pubs/other/aml_final_report.pdf 66 http://www.nationalcrimeagency.gov.uk/publications/94-sars-annual-report-2013/file 67 Calculated by using SARs data from the NCA’s 2013 SARs Report (http://www.nationalcrimeagency.gov.uk/publications/94sars-annual-report-2013/file) and from academic research (http://www.ucl.ac.uk/scs/downloads/research-reports/fleming-LEASARS) 68 http://www.nationalcrimeagency.gov.uk/publications/94-sars-annual-report-2013/file http://www.ucl.ac.uk/scs/downloads/research-reports/fleming-LEA-SARS

TI-UK response to the National Risk Assessment of Money Laundering and Terrorist Financing

Lack of personal responsibility - The Parliamentary Commission on Banking Standards identified lapses in banking that are derived from a lack of individual responsibility, especially at the most senior levels. This is true for money laundering and true for all sectors. The lack of personal accountability denies the ability to sanction individuals and enables impunity for failure to put in place effective AML procedures. As the Banking commission put it “the potential rewards for fleeting short-term success have sometimes been huge, but the penalties for failure, often manifest only later, have been much 69 smaller or negligible.” ‘De-risking’ by major banks - Larger banks are reportedly engaged in 'de-risking' PEP business, i.e. withdrawing services to high ML risk customers. In itself, withdrawing services on bulk to wide categories of accounts, rather than effectively assessing risk within the PEP customer base, is a symptom of the broader systemic failings outlined above, and is clearly an ineffective ‘outcome’ of the current UK AML regime. ‘De-risking’ threatens to drive financial services out of the regulated sectors. Land registry and trusts ownership secrecy - Although in October 2013, the UK has made an outstanding contribution to corporate transparency by committing to an open public registry of corporate beneficial ownership, the same rules will not apply to trust or land registry arrangements th (although TI-UK understands that the draft 4 EU Money Laundering Directive may change the position with regard to trusts). In a similar way to corporate secrecy, land registry secrecy of corporate owners of properties hampers the effectiveness of money laundering due diligence and investigations. Lack of a data sharing system for Income and Asset Disclosure (IAD) registers for PEPs - The regulated sectors and law enforcement need better access to Income and Asset Disclosure (IAD) 70 registers for PEPs. Such registers are produced by many nations but not in a uniform way and some are not available to the public. A recent OECD survey pointed to limited use of IAD registers for taking 71 forward criminal investigations. Poor indicators in use for successful application of AML and lack of reporting of refused business. There is no reporting of refused business as a result of AML procedures and limited alternative reporting from regulated sectors that could indicate whether the AML regime is being effective. While principally a regulatory failing, this lack of reporting frustrates the ability to understand the result of AML systems or monitor effectiveness and adapt systems to heighten effectiveness – both within private sector entities and across sectors.

http://www.bloomberg.com/news/2013-06-18/u-k-bankers-face-proposed-decade-s-delay-for-bonuses.html StAR Barriers to Asset Recovery: An Analysis of the Key Barriers and Recommendations for Action (Jun 2011), available at http://star.worldbank.org/star/publication/barriers-asset-recovery 71 OECD Asset Declarations for Public Officials - A Tool to Prevent Corruption (2011), available at http://www.oecd.org/investment/anti-bribery/47489446.pdf 70

TI-UK response to the National Risk Assessment of Money Laundering and Terrorist Financing

4. Recommendations Transparency - TI-UK would welcome the publication of the HM Treasury National Risk Assessment on Money Laundering and Terrorist Financing sector survey results conducted in 2014 alongside the response to this consultation. It is important for the public and policy stakeholders to understand the vulnerabilities posed by any regulatory shortcomings. Transparency over the results is an integral part to public accountability for the issue and is essential to support the drive towards better policy. TI-UK recommends that UK authorities take on the global leadership opportunity available in detecting, seizing and deterring the proceeds of corruption through: •

• • • •

Coordinate the UK’s law enforcement and international liaison activity in relation to grand corruption into one organisation, such as achieved in the US through a dedicated Department of Justice Kleptocracy Unit Considering the creation of a legal basis for restraining assets on an illicit enrichment offence and unexplained wealth, as Guernsey and 44 other nations have achieved Pursuing corruption cases even where the origin state is defensive against the corruption allegation, as France and Switzerland have achieved Enable quicker freezing of assets post-revolutionary environments, as Canada and Switzerland have achieved Radically improve regulatory monitoring, enforcement and meaningful sanctions of Money Laundering regulations 2007, across all relevant sectors, particularly in the property sector

TI-UK recommends that UK authorities take on a global leadership opportunity to improve detection and seizure of the proceeds of corruption by establishing more effective legal powers, money laundering enforcement and regulation, and greater transparency. To achieve the radical improvement of anti-money laundering that is needed, and to tackle the flows of funds from grand corruption that are likely to enter the UK undetected, TI-UK makes the following detailed recommendations:

Effective legal powers Recommendations to address the following shortcomings… • • • • • • • • • 4.1.

General reliance on a conviction in the origin state for seizure General non-investigation of the corrupt who are still in, or associated to power Lack of illicit enrichment offence A relatively slow sanctions regime No special powers for freezing assets in post-revolutionary or highly corrupt environments The ability of those suspected of grand corruption to exhaust the proceeds of corruption in legal fees defending a case until there is nothing left to recover Low risk appetite due to the risk of legal damages being brought against the police, SFO or CPS High legal barriers to a successful restraint order Very low Suspicious Activity Report (SAR) filing by gatekeeper sectors.

Consider creating an illicit enrichment offence - Substantial, suspicious and unexplained funds belonging to public office holders, far beyond their declared official income and assets, should be the basis for an 'corrupt enrichment' criminal offence in UK law, in line with article 20 of UNCAC. The jurisdiction of such an offence would be any suspicious transaction, relating to the public official’s assets, passing through the UK financial system. The offence would have an extra-territorial reach, in similar form to the Bribery Act, such that a foreign PEP using the UK to transfer funds far in excess of their IAD would generate suspicion that they had committed the offence. Such an offence would provide the basis to end the overreliance on convictions in the origin state and to empower the UK to take an assertive role in

TI-UK response to the National Risk Assessment of Money Laundering and Terrorist Financing

4.2.

4.3.

4.4.

4.5.

4.6. 4.7. 4.8. 4.9.

4.10.

fighting corruption as it flows through the UK financial system. As distinct from “illicit enrichment”, which has also been targeted at drugs offences, the corrupt enrichment offence would reverse the burden of proof, upon reasonable suspicion, specifically for those individuals who have chosen the responsibility and power of public office. At the same time, such an offence in the UK, may have the causal effect of encouraging foreign PEPs to have completed and filed accurate IADs, and may act as a deterrent to PEPs seeking to hide assets within the UK’s shores. Speed up the sanctions process - With regard to administrative sanctions, the UK should follow the lead of Switzerland and Canada and introduce legislation to enable the rapid freezing of assets in post-revolutionary situations or improve the speed of the EU sanctions process. Limit the use of frozen assets to fund legal costs of the defence - The risk that frozen assets will be depleted in the legal costs of the defence should be negated. TI-UK recommends that the use of frozen assets to fund the legal costs of the defence be limited to the cost of legal aid in the UK. Lower the bar to asset restraint - Private sector SARs should result in assets being frozen when a prosecutor judges that there is reasonable suspicion of criminality. Consideration should be given as to whether asset restraint orders in the UK should be authorised on the basis of reasonable suspicion, not the higher standard of reasonable cause. Reasonable cause is very difficult to establish in corruption investigations, when the only information to work from may be a private sector SAR. Extend the period to refuse consent for a suspicious transaction - The UK’s present regime gives the NCA a period of seven days within which to refuse its consent to a suspicious financial transaction. If it refuses its consent NCA has a period of 31 days (the moratorium period) to obtain a court order freezing the account. A period of 31 days is insufficient time in which to investigate complex corruption cases with international dimensions. TI-UK recommends that the UK provide for an extension of the moratorium period, with judicial oversight, when there is an investigative requirement to do so. Widen the pool of assets that can be frozen under POCA - The initial restraint of assets could be made easier if the cash forfeiture principles under POCA were applied to a wider asset pool for PEPs, including bank accounts. Consider ‘criminal networks’ designations - The UK should also consider developing a legal framework for designating corrupt officials and their networks as organised criminal groups, such as utilised to significant effect by the Swiss. Update POCA with Bribery Act offences - The government should publish a Statutory Instrument to update POCA Schedule 2 ‘criminal lifestyle’ offences so that any Bribery Act offences are included. Strengthen UK support for foreign investigations - Legislation should be introduced to permit the UK authorities to restrain assets in support of foreign civil forfeiture proceedings, which would require amendments to the Crime (International Cooperation) Act 2003 (CICA) and/or POCA. Protect institutions from damages claims on the basis of reporting suspicious activity Consideration should also be given to providing regulated entities with a statutory defence to civil proceedings from PEP customers where banks could be expected to justify in court their suspicions of money laundering.

TI-UK response to the National Risk Assessment of Money Laundering and Terrorist Financing

Effective enforcement Recommendations to address the following shortcomings… • • • • 4.11.

4.12.

4.13.

4.14. 4.15.

Relative lack of coordination of law enforcement Geographic limitations of policing investigations to DFID priority countries. Limited police, CPS and SFO resources for (expensive) investigations The failure to recover policing costs through recovered assets in politicised cases

Coordinate the UK corruption law enforcement and international liaison effort Consideration should be given as to whether an official enforcement unit, like the US Department of Justice’s Kleptocracy Unit, should be established with specific focus on investigating and prosecuting foreign corruption, and to which corruption-related SARs are filed. As identified in the 2013 UK government Serious and Organised Crime Strategy, the new NCA Economic Crime Command could provide this coherence and coordination role. Expanding on the lessons learned by the UK “taskforce” approach to Arab Forum and Ukraine asset recovery, the unit could pool expertise and coordinate the ongoing international liaison work that is currently being carried out by the Metropolitan Police Service, the City of London, the NCA, the Home Office and the CPS with regard to corruption investigations. A new unit, if supported by CPS lawyers, may also be able to make strategic decisions at an early stage as to whether to pursue criminal or civil forfeiture mechanisms, or both, and it may possibly enable restraint and asset freezing orders to be triggered more quickly. Widen the net for UK law enforcement investigations - The UK corruption law enforcement units in the Metropolitan Police Service and the City of London Police should ideally have an explicit global coverage, beyond DFID priority countries, and should be made permanent, with adequate levels of human and financial resources. Ensure the breadth of UK financial activity is covered by money laundering jurisdiction, including currency settlement - The Ministry of Justice should provide guidance on the financial sector jurisdiction of English courts and follow the US example to ensure that Bank of England currency settlement infrastructure and, as such, even sterling accounts held abroad would fall within that jurisdiction. Provide adequate resources - Resources need to be provided to law enforcement and prosecutors that is commensurate with the scale of the challenge Forge a new consensus on how to fund asset recovery investigations - Pro-active asset recovery investigations against grand corruption require funding. Relying on UK taxpayers and policing budgets alone, at current resource levels, the UK is not likely to be able to tackle the scale of corrupt funds flowing into the UK. The UK should help develop a new international consensus that allows for policing and legal costs to be recovered from seized assets. This would enable the UK to upscale its investigative effort and move beyond the geographical restrictions of DFID funding. The alternative is for only a small number of these expensive investigations to be funded in the UK.

TI-UK response to the National Risk Assessment of Money Laundering and Terrorist Financing

Effective regulation Recommendations to address the following shortcomings… • • • • • • • 4.16.

4.17.

4.18. 4.19.

4.20.

4.21. 4.22.

4.23. 4.24.

Widespread shortcomings of AML procedures and regulatory enforcement (known in banking, possibly worse in other sectors) Lack of personal responsibility for ML failings A disparate regulatory framework for AML in the UK No official consensus of the scale of money laundering and a general lack of data PEP risks undermining understanding of the problem Limitations of estate agents money laundering requirements The legal profession exemption from reporting suspicions Poor indicators in use for effectiveness of AML

Improve regulatory supervision and enforcement across all sectors - Regulatory monitoring, enforcement and meaningful sanctions of Money Laundering regulations 2007, across all relevant sectors, particularly in the property sector should be radically improved. While the shortcomings of the UK finance sector in managing money laundering risk have been surveyed by the UK financial regulator, there needs to be more surveys and understanding of the risks in other sectors by their respective regulators, thus ensuring that ‘gatekeeper’ sectors better manage AML risks. The UK financial regulator should follow up with tough sanctions in response to the recent regulatory findings of low standards in the UK financial sector around PEP AML procedures. Other regulators should follow the FCA's lead in an enhanced penalty regime for AML to provide an effective deterrence. Create personal responsibility for money laundering failings - Considerations should be given to how the Parliamentary Commission on Banking Recommendations on assigning personal responsibility on an executive leader within a company for regulatory failings can be applied to money laundering failings across all regulated sectors. Seek to rationalise the approach to AML supervision in the UK - HM Treasury should aim to reduce the number of supervisors down from 28, and aim to bring consistency to enforcement, monitoring, training and development. Tighten AML Guidance for PEPs - The Money Laundering Regulations 2007 and the Joint Money Laundering Steering Group (JMLSG) Guidance should make it unambiguous that a reporting institution should always have systems in place to detect and identify PEPs. Furthermore, the FCA and other enforcing bodies should ensure that each reporting institution maintains an up-to-date list of PEPs with which it has established a business relationship. This information should be shared with the regulator. Develop a response - to - revolution AML framework - HM Treasury should develop a response to a revolution AML framework that sets out the protocol to all 28 money laundering regulators about the need for enhanced Know Your Customer investigations if they suspect any connection between the former regime, due to the increased risk of corruption charges being brought. Close the loopholes in property - JMLSG Guidance should also be amended to require Estate Agents Businesses to conduct Customer Due Diligence on non-client property buyers, in addition to vendors. Close the loopholes in the legal profession - Reverse the effect of the (Bowman Vs Fels) Court of Appeal ruling in 2005 which afforded Solicitors Legal Professional Privilege from reporting money laundering suspicions under POCA in certain circumstances and dramatically reduced reporting from solicitors. Develop better indicators for effectiveness of AML procedures - Regulators should seek to understand the scale of refused business arising from AML obligations and how that client may be being serviced elsewhere in the international financial system. Link regulatory fines to restitution for victims - Ensure fines, compensation orders and settlement agreements are maximised as opportunity for restitution to victims. Financial institutions that support illicit corrupt funds through money laundering need to be held accountable with the same vigour as the corrupt official, according to the level of breach of money laundering regulations and restitution paid to origin nations.

TI-UK response to the National Risk Assessment of Money Laundering and Terrorist Financing

Greater Transparency Recommendations to address the following shortcomings… • • • •

4.25.

4.26.

4.27.

4.28.

4.29.

4.30. 4.31.

No official consensus of the scale of money laundering and a general lack of data PEP risks undermining understanding of the problem and lack of transparency Land registry ownership and trust secrecy Vulnerabilities in close connections to Overseas Territories and shell companies Lack of a data sharing system for Income and Asset Disclosure (IAD) registers for PEPs

Be transparent in the National Risk Assessment process - HM Treasury National Risk Assessment on Money Laundering and Terrorist Financing sector survey results conducted in 2014 alongside the response to this consultation should be available to the public. It is important for the public and policy stakeholders to understand the vulnerabilities posed by any regulatory shortcomings. Transparency over the results is an integral part to public accountability for the issue and is essential to support the drive towards better policy. Make property ownership through Trusts and corporate vehicles more transparent Trusts and similar organisations acquiring property in England and Wales should provide the names and addresses of the trustees for inclusion on the Land Registry. If a case is made for not including these details in the public part of a register, they should still be filed and be available to law enforcement agencies conducting criminal investigations. The identity of ultimate beneficial owners should also be available to law enforcement agencies conducting criminal investigations. Work with the G20 governments to collectively establish a new global standard for corporate transparency through public corporate registers to publish beneficial ownership - The UK should work with its international partners to end corporate secrecy by ensuring that their existing registers on companies contain beneficial ownership information about the true identity of the human being who owns and profits from any company, legal trust, or foundation. Reduce AML risk in the OTs - In respect of the smaller OT financial centres, where regulatory capacity is particularly weak and where the UK Government has responsibility for financial affairs, the UK Government should make a clear decision about either to wind down the financial centres or to support an increase in capacity for regulation, policy analysis, law enforcement and international cooperation. Until corporate beneficial ownership transparency is increased in the OTs, corporate vehicles based in the OTs should be treated as posing a relatively higher money laundering risk and guidance should be considered about what additional due diligence should be required. Provide better quality, consistent data on UK AML performance - The UK should, as part of the Open Government Partnership, provide annual performance figures for assets seized and repatriated in relation to corruption. Currently, government statements, official statistics and OECD surveys all indicate different results. Collate and publish corruption related SARs. Data should to be collated in relation to the number of corruption-related SARs, and the outcomes of these SARs. Develop a high quality UK interest and asset declarations register for public officials Building on the leadership the UK has shown in corporate beneficial ownership transparency, the UK should bring consistency to its IAD regime and publish the information as data, seeking to achieve a gold standard model. FIUs, and ideally financial institutions, should have access to IAD registers for public office holders that exist in many countries, and be able to link them to traditional AML data of PEP registers and beneficial ownership registers. Currently such information is limited and restricted in its use, and also managed differently throughout the world, often not produced as ‘data’ or not online at all. Where the information and IAD registers already exist, they need to be incorporated into FIU intelligence pictures as soon as possible. As much IAD information as possible should be made available to financial institutions for AML suspicious activity reporting, so they are able to understand if a transaction is suspicious on the basis of the PEP’s declared income and assets

TI-UK response to the National Risk Assessment of Money Laundering and Terrorist Financing

Annex I – International comparative analysis of AML and asset recovery powers Country Switzerland

International case study Exceptionally quick asset freezing and shifting the burden of proof onto the alleged wrongdoer in the case of grand corruption in a post-revolutionary environment. Switzerland has generally frozen assets relating to fallen dictatorships on the basis of Article 184 of its constitution (in order to safeguard the interests of Switzerland), and in the case of Mubarak assets did so hours after the regime collapsed in February 2011. In 2011, Switzerland passed legislation, nicknamed the “Lex Duvalier Act” after the former Haitian President, to enable freezing of corrupt assets if the origin state was unable to take 72 forward an MLA process. Under the legislation, assets of a PEP or their close associates may be frozen at Switzerland’s 73 own instigation when certain conditions are satisfied. In May 2013, this was followed by proposed legislation which seeks to regulate and codify the existing practice on asset recovery 74 in Switzerland. The new legislation allows Switzerland to instigate administrative freezing of PEP assets in the circumstances that the origin state government or its judiciary 75 have collapsed. Significantly, the bill allows for confiscation of those assets, if the origin state cannot meet due process standards, the wealth of the PEP increased extraordinarily in connection with their time in public office and the country was notorious for corruption whilst the PEP was in office. This presumption can be overturned if the accused can show that the assets were legitimately acquired. Switzerland also allows for the reversal of the burden of proof in relation to members of any organised criminal network, requiring those alleged wrongdoers to prove that they have acquired their assets legitimately. This legal provision was successfully and innovatively used in the case of General Sani Abacha, who was dictator of Nigeria from 1993 to 1998, where members of the Abacha family and close associates were classed as members of an organised criminal fraternity.

Why does it not happen in the UK? The UK (and the rest of the EU) took thirty-seven days to freeze assets relating to Mubarak, compared to Swiss action within hours after the regime collapsed in February 2011. The UK and EU rely on a lengthy process for agreeing designated sanctions in order to freeze assets following a regime change. The UK relies on a conviction in the origin country or in the UK for criminal asset recovery proceedings. In countries emerging from dictatorship, or where the judiciary or law enforcement lack the capacity or independence to carry out corruption investigations, convictions can prove elusive. The UK’s legal requirement to restrain suspected criminal assets is based on reasonable cause, rather than the lower bar of suspicion, and a defined link to a predicate offence. These hurdles can be very high when dealing with corruption. Unlike Switzerland, the UK asset recovery regime makes no distinction between the harm and difficulty of asset recovery relating to grand corruption and PEPs, and any other domestic criminal gain.

However, the issue for Switzerland going forward is whether countries like Egypt, Tunisia or Libya can be said to have failed state systems, and so even with its potential new proposed law in place, Switzerland may not be able to maintain the freeze on the assets they hold. Switzerland may once again need to rely on the ‘organised crime’ designation and the assistance of the origin states, which is likely to take 72

The MLA process is the channel by which nations make formal requests for law enforcement activity, to obtain orders or to collect evidence. (1) Mutual assistance proceedings concerning a PEP must have been commenced to show the willingness of the requesting state to collaborate; (2) The power of disposal of the assets rests with the PEP or close associates; (3) Mutual legal assistance proceedings in criminal matters must have proven unsuccessful due failures in state structures; and (4) There must be a need to safeguard Switzerland’s interests. 74 The official name is “The Federal Act on the Freezing and Restitution of Assets of Politically Exposed Persons obtained by Unlawful Means” 75 See more at http://www.internationallawoffice.com/newsletters/detail.aspx?g=3b70d1f4-3132-4801-a070-9c6486f5edd8. And P. 180, Emerging Trends in Asset Recovery, Basel Institute of Governance, 2013; Article entitled “The proposed Swiss comprehensive act on asset recovery” by Rita Adam and Valentin Zellweger. 73

TI-UK response to the National Risk Assessment of Money Laundering and Terrorist Financing

years and face numerous challenges.

Canada

Fast-tracked asset freezing and recognition of the special considerations required for grand corruption. In Canada, a similar law to the Swiss Lex Duvalier was introduced in 2011. The Foreign Assets of Corrupt Foreign Officials Act allows the Government of Canada to freeze assets where: 1. there is a written request to do so from the origin state 2. the person who owns the assets that will be frozen is a PEP 3. there is an uncertain political situation in the victim state and the making of an order to freeze the assets in question would be in the interest of international relations

France

USA

As in relation to the stronger Swiss legislation, the UK primarily relies on criminal investigations with international cooperation from their counterparts in the origin state to establish reasonable cause or uses – relatively slow – EU administrative sanctions to take hold.

However, the legislation does not deal with the confiscation of the assets and repatriation of them outside of the normal conviction then confiscation route (either domestic or foreign).

The UK makes no legislative distinction between money laundering and the special circumstances of asset recovery relating to PEPs and grand corruption, than any other domestic crime.

Asset recovery has been used against active and incumbent corrupt officials, despite diplomatic pressure and a defensive origin state.

The UK has not pursued cases where the origin state is defensive against the corruption allegation.

Transparency International France and their legal counsel, Sherpa, is supporting criminal investigations against stolen assets through the French courts. This was enabled through a 2010 legal ruling in France which accepted that nongovernmental organisations such as Transparency International can instigate anti-corruption investigation cases against alleged corruption as being a “partie civile” to the proceedings. Luxury houses in Paris, fleets of cars and bank accounts have all been restrained and sold in relation to Teodoro Nguema Obiang, son of the President of Equatorial Guinea and recently appointed “second vice president”. Despite active diplomatic pressure from Equatorial Guinea, corruption proceedings are progressing against his assets in France and in the US. Similar proceedings have been started based on allegations that Rifaat al-Assad – exiled uncle of Syrian president Bashar al-Assad – had illegally funded millions of dollars in property assets in France and the UK. None of the actions, including that against Mr Assad, were initiated by the French government – although Tracfin, the French FIU, is reported by the Financial Times to have supplied court investigators with evidence of alleged money 76 laundering in several African cases. Coordinated law enforcement and prosecution effort against foreign grand corruption, and effective use of the reach of the US financial system to assert jurisdiction over corruption taking place overseas.

The UK does not allow NGOs to instigate criminal proceedings on behalf of an origin state, or intervene as an interested party in criminal proceedings. Further, UK law does not allow origin states to formally intervene as interested parties to criminal proceedings (which is allowed in Switzerland and France).

The US Department of Justice has established a Kleptocracy 77 Asset Recovery Unit. Its aim is to pursue the assets of foreign corrupt officials, focusing on civil mechanisms to recover the proceeds of corruption.

In addition, the UK has been far more reliant on criminal routes for prosecution and asset recovery, with non-conviction based forfeiture routes under-utilised. Private civil proceedings have been utilised in the UK but the cases are few and far between compared to the estimated amount of corrupt flows in the UK. The UK’s law enforcement and international liaison activity in relation to kleptocracy is currently being carried out by the Metropolitan Police Service, the City of London, the NCA, the Home Office and the CPS. However, the recent innovation of a joint taskforce approach to Arab Spring and Ukraine asset recovery is believed to have helped focus this

Campaigners target suspicious assets of foreign leaders in France (6 Oct 2013) http://www.ft.com/cms/s/0/78467c94-2cd311e3-8281-00144feab7de.html 77 http://www.whitehouse.gov/blog/2013/11/04/combating-corruption-and-supporting-transition-countries-asset-recovery-efforts [accessed: 5 Dec 2013]

TI-UK response to the National Risk Assessment of Money Laundering and Terrorist Financing

In the US, civil forfeiture proceedings were successfully brought against assets located in Singapore and where the predicate offence took place in Bangladesh. The Department of Justice successfully argued that the transfer of US currency between financial institutions outside the United States necessarily transited through US correspondent banks. Supporting the establishment of jurisdiction was the fact that the foreign company alleged to have made the bribe was registered on the New York Stock Exchange. As such, the US established that they had jurisdiction on the basis that the US dollar-based transactions would have moved through the US currency settlement system. The funds recovered were eventually returned to Bangladesh.

Australia

Provides a legal basis for seizing funds belonging to criminals, where the convicted party cannot demonstrate a legal source of wealth to explain the assets. In October 2013, the Australian Government announced that it intended to introduce tougher and more effective “unexplained wealth” legislation. The proposals include removing the discretion of judges to refuse to grant unexplained wealth confiscation orders even when the case has been satisfactorily proved, and removing the right of defendants to pay for their legal expenses by using cash and property restrained during unexplained wealth proceedings. This new initiative is in response to an Australian Crime Commission report that concluded that organised crime is costing Australia 78 US$15 billion annually. It also follows on from legislation introduced by the State of Queensland which allows the courts to issue unexplained wealth orders on the basis of reasonable suspicion that the respondent’s assets are the proceeds of 79 unlawful conduct. However, Australia has focused these powers on drugs offences and not used them in grand corruption cases.

Guernsey

Authority to effectively maintain asset freezes despite the lack of conviction in the origin state. In Guernsey, the FIU retains the authority to refuse consent for transactions indefinitely where there are strong grounds for suspicion of criminality. These powers were used to powerful effect in relation to approximately €36 million (US$49 million) held there with BNP Paribas Bank through a corporate vehicle, Garnet Investments Limited, incorporated in the British Virgin Islands, and beneficially owned by Tomi Suharto, the son of former Indonesian President Suharto. The Government of Indonesia obtained a freezing injunction for a significant period of time but was unable to successfully obtain a court judgment in Indonesia, as directed by the Guernsey Court, which would be

effort. UK law enforcement and public prosecution have not yet argued that the jurisdiction of English courts extend to currency settlement taking place in UK financial institutions, i.e. foreign-held sterling accounts. While substantially less significant than the dollar, sterling one of the world’s reserve currencies, according to IMF data. Also, in interpreting the reach of the Bribery Act in the UK, the UK Ministry of Justice guidance stipulates that it does not necessarily extend to foreign companies registered on the London Stock Exchange. The UK has no offence of unexplained wealth or “illicit enrichment”. The UK does have the power to issue wide confiscation orders under the UK POCA where it can show the accused, postconviction, leads a ‘criminal lifestyle’ – but corruption is not listed as a ‘criminal lifestyle’ offence under Schedule 2 of POCA. The UK can also make use of powers within Part 5 of the UK POCA with money laundering offences where no predicate offence is required, though it is rarely used in corruption cases. In the UK, grand corruption defendants are able to draw down on frozen assets for legal fees, living and other expenses, where assets are secured in relation to corruption offences. The UK’s present regime gives the NCA a period of seven days within which to refuse its consent to a suspicious financial transaction. If it refuses its consent NCA has a period of 31 days (the moratorium period) to obtain a court order freezing the account. A period of 31 days is insufficient time in which to investigate complex corruption cases with international dimensions. Recognising the difficulties of prosecuting PEPs for corruption, the present regime of a maximum window of 31 days in which to

http://www.crimecommission.gov.au/publications/organised-crime-australia/2013-report/introduction#2 [accessed 5 Dec 2013] 79 https://www.legislation.qld.gov.au/LEGISLTN/ACTS/2013/13AC021.pdf [accessed 5 Dec 2013]

TI-UK response to the National Risk Assessment of Money Laundering and Terrorist Financing

enforced against the assets in Guernsey. Accordingly the freezing order was discharged by the Guernsey Court of Appeal in January 2009. However, the assets still remain in Guernsey. This is because Guernsey’s FIU has steadfastly refused to grant its consent to release the assets and has fought a judicial review application by Garnet’s lawyers to overturn the decision. The judicial review application was 80 rejected. Where there is a ‘no consent’ decision by the Guernsey FIU it is highly unlikely a bank will move any identified funds, and it effectively amounts to the assets being frozen.

commence an investigation and either launch proceedings domestically or trigger criminal proceedings abroad is plainly not fit for purpose and inadequate in this respect.

Annex II Transparency International UK (www.transparency.org.uk), the UK national chapter of TI, fights corruption by promoting change in values and attitudes at home and abroad, through programmes that draw on the UK’s unique position as a world political and business centre with close links to developing countries. TI-UK: • • • •

Raises awareness about corruption; Advocates legal and regulatory reform at national and international levels; Designs practical tools for institutions, individuals and companies wishing to combat corruption; and Acts as a leading centre of anti-corruption expertise in the UK.

TI-UK’s vision is for a world in which corruption is greatly reduced and the UK has zero tolerance for corruption both at home and abroad.

Contact: Nick Maxwell Research Manager Transparency International UK E: nick.maxwell@transparency.org.uk T: + 44 (0)20 7922 7976

The Chief Officer, Customs & Excise, Immigration & Nationality Service v Garnet Investments Limited – Court of Appeal (File No. 432) – 6 July 2011, Judgment 19/2011 http://www.gov.gg/CHttpHandler.ashx?id=80267&p=0 [accessed 5 Dec 2013]

TI-UK response to the National Risk Assessment of Money Laundering and Terrorist Financing

Glossary Anti-Money Laundering (AML) Anti-Bribery and Corruption (ABC) British Crown Dependency (CD) British Overseas Territory (OT) British Virgin Islands (BVI) Combatting the Financing of Terrorism (CFT) Crown Prosecution Service (CPS) Department for International Development (DFID) European Union (EU) Financial Action Task Force (FATF) Financial Conduct Authority (FCA) Financial Investigation Unit (FIU) Financial Services Authority (FSA) Income and Asset Disclosure (IAD) Joint Money Laundering Steering Group (JMLSG) International Monetary Fund (IMF) Money Laundering (ML) Money Laundering and Terrorist Financing (ML/TF) Mutual Legal Assistance (MLA) National Audit Office (NAO) National Crime Agency (NCA) Non-Conviction Based Asset Forfeiture (NCBAF) Organisation for Economic Cooperation and Development (OECD) Politically Exposed Person (PEP) Proceeds of Crime Act 2002 (POCA) Suspicious Activity Report (SAR) Serious Fraud Office (SFO) Worldbank Stolen Asset Recovery Initiative (STAR) Trust or Company Service Provider (TCSP) Transparency International UK (TI-UK) United Nations Convention against Corruption (UNCAC) United Nations Office for Drugs and Crime (UNODC)