Money laundering is a term most are familiar with, but very few understand the real-world forms and applications that it takes. It is a crime that does real damage, pervading the global economy, with huge amounts of criminal money being laundered each year.
In this article we will explain exactly what money laundering is, the threats it poses and what anti-money laundering responsibilities companies and individuals are subject to.
Global money laundering
Money laundering is a truly global problem. As part of their efforts to confuse any investigating authorities, money laundering schemes often involve cross-border transactions; not only does this segment the paper trail across different banking systems but creates jurisdictional difficulties if they are ever investigated.
The top 5 countries by estimated value of money laundered per year are:
- USA - £216.5 billion
- UK - £88 billion
- France - £54.5 billion
- Germany - £51.3 billion
- Canada - £25.61 billion
The United Nations Office on Drugs and Crime estimate up to 5% of global GDP is made up of laundered money. This is well over £1 trillion.
Given the scale of laundered money, and that it flows towards established Western economies, it would be impossible for it to not move through major banks. Authorities are increasingly investigating and fining these institutions.
Deutsche Bank, the largest German banking institution with a banking network that spans 56 countries, was fined $425 million by US authorities and £163 million by UK authorities, for an alleged role in a money laundering scheme that moved at least £10 billion out of Russia.
Danske Bank, Denmark’s largest bank with over 5 million customers, was found to have helped funnel €200 billion via an Estonian branch between 2007 -2015. This involved transactions from over 15,000 non-resident customers, many from high-risk countries.
Money laundering, in its simplest terms, is the act of turning ‘dirty’ cash or assets into ‘clean’ money that can be legitimately spent without alerting the authorities. This is done by obfuscating the original, criminal source of the ill-gotten gains by moving it through at least one legitimate business or process. In reality, money laundering schemes tend to be complex and multi-layered, often moving the funds across international borders to make tracking its origins as complex as possible.
Why launder money?
Contrary to the commonly quoted proverb, in many instances, crime does seem to pay. Successful criminals can earn large sums of money from their illegal dealings. Payment for these tends to be in the form of physical cash or high-value, usually portable items, such as luxury watches or jewellery. These can be used within the ‘criminal sphere’ without much of a problem, but these ill-gotten gains do not translate to legitimate wealth. For example, it would be unlikely that an individual would be able to purchase a mansion with cases full of small denomination bank notes and a few bags of diamonds; and if they were able to, it would most likely pique the interest of the authorities.
They also face the problem of having to hide and store large sums of dirty cash and assets. Not only could these be easily linked to them but would be seized by authorities as part of a criminal investigation. As well as the authorities, they would have to worry about their fellow criminals attempting to steal it from them.
Turning these ill-gotten gains into ‘digital’ money in a bank account or assets such as property eliminates these problems. However, they are unable to simply deposit these into the bank. Thus, the need for money laundering.
Money laundering and the UK
The UK ranks second in the world for the amount of money laundered per year, with an estimated amount of £88 billion of dirty money being laundered annually. The NCA estimates that this costs the UK over £100 billion annually and that 4,542 known criminal gangs are operating in the UK. Despite the UK coming second to the USA in terms of the amount of money laundered annually, London is generally regarded as being the global capital of money laundering.
Unsurprisingly, it is not just domestic criminality that contributes to this crisis. The UK is host to some of the largest and most sophisticated money laundering schemes in the world.
So, why is the UK so attractive to money launderers? As one of the world’s major economies and having one of the most important financial and professional services sectors globally, people would be forgiven for thinking that there would be robust laws and processes to defend against dirty money. This assumption, however, is one of the main reasons that the UK is so popular for money laundering.
The criminal's end goal is to mask dirty money and make it appear as legitimate capital; the UK's wealth and prominence as a global provider of high-end financial and legal services lends these cleaned funds increased legitimacy. Also, the relative economic and political stability of being a global major power means that it is a safe place to store wealth.
The UK is a very open business market that encourages a fast-paced and dynamic operating environment. It is one of the most important, if not the most important, centres for financial, legal and professional services globally; with London being the obvious hub. To achieve and maintain this, the UK government has historically focused on a policy of deregulating and not impeding business. This started in full force during the 80s and there has not been any significant change until recently.
It is incredibly easy to incorporate a company in the UK. It just takes filling in a short form at Companies House and paying a small fee. This makes it incredibly easy for money launders to quickly create as many fake companies as they need for the specific scheme they are running.
There is no identification or address verification needed, so businesses set up by money launders can have a fake name or the name of a separate party to further hide the source and destination of dirty money. There are also instances of a seemingly residential property being the registered address of thousands of companies. This is largely done to hide the true nature of the company.
This lack of regulation is further compounded by Companies House not having the statutory power to investigate these companies or remove them from the register.
British Overseas Territories also play a major role in domestic and international money laundering. Once important resupply ports on key trade routes, these tend to be small and isolated islands. As technology and international trade advanced in the 20th century, these places had to seek a new function. They found this in being a hub for corporate secrecy and shell companies.
Despite enjoying close links to the UK banking system, there was almost no regulation allowing them to become a haven for money launders and legitimate businesses trying to hide their dealings, whilst maintaining the legitimacy of the UK banking system. Most international money laundering schemes, and many domestic ones, will usually route money through several accounts and shell companies located across these territories.
It is even possible to own property anonymously in the UK. This usually takes the form of the purchase and land title being in the name of a shell company, often located offshore. This makes it incredibly easy for criminals to purchase UK property with money from ill-gotten gains; in fact, it is estimated that more than £1 billion of property was purchased with dirty money from Russia alone and there are over 84,000 properties owned anonymously in the UK.
Such vast quantities of dirty money being moved by such complex schemes is impossible without professional facilitators. Lawyers and accountants are instrumental in the incorporation and construction of sophisticated money laundering structures, banks are involved in moving the funds and real estate agents help in the purchasing of property.
These are not just low-level, wilfully criminal professionals operating out of a hidden away office, some of the largest and most prestigious firms help in the process of money laundering. It was found that at least 86 UK banks have been involved in various money laundering pathways. It is important to stress that this involvement is not always criminal; it can be done by neglecting anti-money laundering checks and procedures, genuine ignorance of the source of the money or even completely legal (due to lack of legislation and regulation).
This is just a summary of some of the issues that have led to the prevalence of money laundering and dirty money in the UK. But goes some way to show the success of money launders and that all businesses must be aware of the scale risk of being involved, however unwittingly, in a money laundering transaction.
Recently the UK has made changes to combat money laundering. Given the scale of the problem, it was decided that it will be a joint process between the public and private sectors. This puts real responsibility and real consequences on the directors of businesses and any employee that might be involved.
How money is laundered?
There are hundreds of different schemes and methods with which to launder money, but they follow the generally same three steps.
- Placement
- Layering
- Integration
Across the process of laundering money, each step may have a different scheme associated with it.
Placement
This is the act of getting physical ill-gotten gains into a financial system of a legal economy and converting them to ‘digital’ money.
This stage sees maybe the most variation of techniques.
- Laundering money through a cash-heavy business
This is one of the oldest techniques for laundering cash. Criminals will either own or partner with a business that operates with cash. Popular ventures include car washes, laundromats, nail salons, takeaways, and bars.
These businesses usually maintain a legitimate front but dirty cash is mixed in with regular earnings and declared as clean being then being deposited in a bank account. This scheme relies on the fact that it is difficult to track the actual coming and goings of such businesses.
Generally, they will launder money in one of two ways. The first is to create fake invoices to add to the legitimate ones; for example, a carwash washes 20 cars a day but invoices are created for 50 and the additional value in dirty cash is then deposited in the company’s bank account. The second is to file invoices for a higher value than is charged; for example, a carwash charges customers £5 but puts an invoice through the till for £30. Then £25 of dirty cash is deposited in the company’s bank account.
- Laundering through the sale of assets purchased with dirty cash
Criminals will buy high-value items with dirty cash and quickly sell them, frequently to a legitimate purchaser, in return for clean cash.
- Smurfing
This is the act of splitting up deposits of dirty money into many small transactions and depositing them in different sources and then filtering them into one of several central bank accounts. There will usually be a threshold amount for a deposit that financial institutions will need to report or run through anti-money laundering checks and criminals will split their dirty money into amounts just less than this.
Smurfing, as part of a placement scheme, usually has to involve multiple people and as it grows frequently these will be outside of the criminal’s organisation. Smurfing is a popular technique with street-level drug dealers. A drug dealer will, as a threat or bribery, give cash to their clients and have them deposit them into their bank accounts and then transfer the funds. Criminals will also set up bank accounts in the name of others but have sole access to them, so they can manage the process themselves.
- Laundering via a casino
Criminals will go to a casino and exchange a large amount of money for casino chips. They then proceed to gamble enough to avoid suspicion and then cash out. This way they swap the dirty money for clean bills or a transfer directly to their account.
- Currency Exchange
As currency exchanges usually deal with cash they are a useful form of money laundering. Criminals will exchange pounds for a different currency and then swap it back at a different exchange.
- Moving money abroad
Criminals will physically move the dirty cash abroad to countries where depositing it will not cause any issues. This can be done by flying to that country with cash hidden in the suitcase or simply shipping it and having someone deposit it.
Layering
Once the dirty money has entered a legal banking system, the next stage is layering. This process is to further hide the source of the money, to make it as difficult as possible for any investigating authorities and involves moving the money around as much as possible. There are several techniques used in layering and frequently numerous different ones will be used in a scheme.
- Round tripping
This technique involves moving the money between different accounts in different names, between shell companies and usually across borders, especially to countries with low regulatory enforcement. The more complex the network of transfer, the harder it is to trace the original source of the money. By crossing borders and bank systems, it adds jurisdictional challenges to any investigation.
- Laundering by cryptocurrency
Cryptocurrency sees very little regulation which is further compounded by exchanges frequently being based in countries with low enforcement of what regulations there are. Criminals can digitally purchase cryptocurrency and sell it back at a different exchange, it is also possible to use a cryptocurrency to purchase a different type at a different exchange. This further masks the original source of the money.
- Laundering by stocks
Purchasing and quickly selling on stocks is a popular method of laundering. Not only does this help hide the source of the money, but by leaving the banking system, it adds a level of complexity to any investigation.
- Laundering by digital gambling
Whilst physical casinos are used in placement, online casinos are used in layering. This generally involves bets which are between individuals. For example, criminals will engage in a game of online poker where everyone involved is in the scheme and playing with money to be laundered. The money will all be sat in different accounts and will effectively be randomly redistributed via the poker game. When the game is finished the money can be moved onto the next phase of the layering scheme.
After the layering process, the money has effectively been cleaned. It can now be used as if it were legitimate money.
Actions being taken
Whilst the UK is known for its lack of regulations when it comes to financial processes, serious actions have started to take place to combat money laundering.
The key organisations involved in this are:
- HMRC – His Majesty’s Revenue and Customs
- NCA
- FCA – Financial Conduct Authority
- OPBAS – Office for Professional Body Anti-Money Laundering Supervision
- Various professional bodies that govern the conduct of businesses operating in their sector
It is important to note that under the UK Money Laundering Regulations, individual professionals are also responsible for tackling money laundering and will be held legally responsible for any involvement, be it complicit or negligent.
As can be seen from the list above, many different bodies are involved in tackling money laundering. Previously this had been a weakness of the UK system as lack of communication between the bodies led to schemes failing to be recognized or policed properly. There has been a concerted effort to improve this and investigations are generally contributed to by several or all.
HMRC have recently invested over £100 million in the Connect Computer System. This software analyses transactional records to discover money laundering structures and also compares individuals' tax statements as compared to actual income and assets. It has recovered more than £3 billion since its introduction in 2010.
The UK government has also introduced and continued to develop tougher legislation around money laundering:
- The Proceeds of Crime Act 2002 (POCA) – These are some of the principal laws used in prosecuting money laundering. It aimed to formalise the criminality of money laundering and aid in the investigation into and recovery of dirty money and assets. Importantly, it makes it an offence for an individual operating in a regulated sector to fail to report suspicious activity
- The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR) – The other principal laws used to prosecute money laundering. This introduced changes to clients' due diligence and requires professionals in regulated industries to take a risk-based approach to anti-money laundering. This was updated in 2020.
- The Criminal Finances Act 2017 (CFA) – This grants additional powers to authorities in the investigation of financial crimes and corruption (including money laundering) and to recover ill-gotten gains.
- The Terrorism Act 2000 (TACT) – As well as introducing legislation in the investigation and prevention of terrorism this added additional powers to authorities in combating the financing of terrorism.
- The Sanctions and Anti-Money Laundering Act 2018 (SAMLA) – This allows the UK government the ability to introduce a wide range of sanctions, including financial sanctions against nations, organisations and individuals.
- The Terrorist Asset-Freezing etc Act 2010 (TAFA) – This grants HM Treasury the ability to freeze the assets of any individual suspected to be involved in terrorism.
- Unexplained Wealth Orders (UWO) – Introduced as part of CFA. This allows authorities to seize assets suspected of being earned via criminal means without having to prove this is the case. It is up to the defendant to prove that they have been earned legitimately.
What obligations do businesses have?
The UK’s strategy for fighting money laundering is that it is a joint venture between the public and private sectors, as such businesses and responsible individuals have strongly legally backed obligations. Failure to meet these can result in professional disqualification, fines, or a custodial sentence.
Under UK law it is assumed that a professional has the knowledge, competence, and processes in place to recognise suspicious activity. Should a professional facilitator aid in money laundering, even if they are completely unaware, they are open to prosecution. Not knowing is not a defence.
For example, if an accountant has a client, eg. a café, that is turning over more than an equivalent business would be expected to, they should look further into it as a potential money laundering operation.
UK firms are required to take a risk-based approach to potential money laundering as well as use their professional knowledge to identify unusual activities. Should a customer or potential customer be flagged as a money laundering risk firms should decline to do business with them and submit a Suspicious Activity Report (SAR) to the NCA. If the is direct evidence of a crime a report should also be made to the police.
A SAR flags suspicious activity to the NCA and is non-prosecutable. This means it will not be used as a piece of evidence if a criminal case is brought forward and the submitter can remain completely anonymous. It serves to help the NCA build a larger picture of potential money laundering within the UK market and aid in future investigations.
Each business operating under the MLR is required to have processes in place further to the required risk-based approach. Appropriate ID and anti-money laundering checks must be run on customers and appropriate software to perform these must be available and a Money Laundering Reporting Officer (MLRO) must be appointed.
An MLRO is responsible for designing anti-money laundering processes and policies within the company, record keeping pertaining to these, assessing potential money laundering risks, filing reports, reporting any suspicious activity and ensuring appropriate due diligence is in place. A company is required to provide their MLRO with any information they need in aiding these duties and an annual review should, and in some cases must, be performed and presented to the board. An MLRO should have sufficient seniority and powers within an organization to be able to implement any necessary changes and the board is required to act upon and facilitate their recommendations.
Adopt a risk-based approach
As previously stated, companies must follow a risk-based approach to their anti-money laundering operations. The risk assessment must be on a company-wide level as well as for individual customers. Further information can be found in the National Risk Assessment of Money Laundering and Terrorist Financing 2020 (NRA).
A company-wide risk assessment should:
- Identify money laundering risks the company faces from its clients, services, nature of transactions, geographic placement and industry
- Consider the likelihood and impact of each risk
- Implement appropriate policies, procedures and controls in relation to these risks
A customer risk assessment should:
- Consider, confirm and verify the customer’s identity and ultimate beneficiary of a transaction
- Check against Politically Exposed Persons (PEPs) and sanctions lists
- Consider the nature of the transaction
- Consider the country of origin of funds
- Obtain and consider additional information regarding the customer’s circumstances and business and if the proposed transaction is in keeping with the expected nature and level
- Consider if a transaction involves any other high-risk factors (more below)
High-risk factors
High-risk factors that should be considered include:
- Clients seeking secrecy or otherwise concealing their identity or the ultimate beneficiary (these should be freely given and easy to obtain)
- Clients with a criminal history
- Client businesses with a large structure or level of complexity
- New clients outside the usual customer base. Be it professional or geographic
- New clients that have been introduced by a third party
- Cash-based businesses
- Businesses operating in high-risk sectors as described in the NRA. Eg. arms, property where the original source of funds is not easily discernible, transport and logistics, legal, art dealers and finance
- High net worth clients
- Clients or any transactions from high-risk countries (the UK’s list of high-risk countries can be found in Schedule 3ZA of the MLR)
Money laundering is a serious risk to all UK businesses as well as the economy as a whole. It is a common crime and can be highly sophisticated and complex in nature. Businesses and professionals must do all they can to ensure that they are not helping to facilitate this crime, not only to protect the economy but also themselves from potential prosecution.
Any individual in a position at risk of involvement in money laundering must ensure that they are meeting their legal and professional duties.
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