Chapter One
The Background and Nature of Financial Crime
1. What is the offence of money laundering?
Ans: ML is the process utilised by criminals to disguise the origin of the
proceeds of crime (such as money made from trafficking drugs) by converting
them into ‘clean’ money (ie, funds which no longer appear to have an illegal
origin).
Criminals involved in ML include drug dealers, burglars, fraudsters,
people traffickers, smugglers, terrorists, tax evaders and illegal arms
dealers. Involvement in ML is not restricted to criminals, but may include
professionals such as bankers, lawyers, accountants and financial advisers if
they are performing an activity involving the proceeds of crime or enabling
others to commit financial crimes.
In short, money laundering is a derivative crime in that the monies being
laundered are derived from another criminal activity. The initial criminal
activity is known as the ‘predicate offence’.
2. What is a predicate offence?
Ans: The United Nations (UN) defines a predicate offence as one whose
proceeds may become the subject of a money laundering offence. In
other words, it is the underlying criminal conduct (e.g., fraud or drug
trafficking) that generates proceeds of crime to be laundered.
International conventions and standards, such as those set by the Financial
Action Task Force (FATF) require countries to apply the crime of money
laundering to all serious offences with a view to including the widest possible
range of predicate offences.
• all criminal offences
• a threshold linked to a category of serious offences
• the penalty of imprisonment applicable to the predicate offence
(threshold approach)
• a defined list of predicate offences, or
• a combination of these approaches.
The 6th edition of the EU anti-money laundering regulations (6AMLD) defines
the term ‘money laundering offence’ and standardises the definition of predicate
offences. Cyber and environmental crimes have been added to the list of 22 predicate
offences.
3. What is bribery?
Ans: The definition under the UK Bribery Act 2010 is slightly different and
notes the purpose of a bribe as: ‘...to induce a person to perform
improperly a relevant function or activity’ or ‘...to reward a person for the
improper performance of such a function or activity’
Whether the offer or receipt is intended for an employee’s family or friends, or
whether bribery takes place through third parties, it is still considered to be a
bribe. Bribery can take many forms and can be of any size.
4. What is the difference between tax evasion and tax avoidance?
Ans: Tax evasion is defined as the illegal practice where a person,
organisation or corporation intentionally avoids paying their true tax
liability. Anyone caught evading tax is typically, subject to criminal
charges and substantial penalties. Money laundering is a form of tax
evasion since criminals wilfully evade paying taxes on illegal income.
Tax evasion typically entails deliberate misrepresentation of the true state of
wealth and income and is illegal.
Under Part 3 of the UK Criminal Finance Act, it is a criminal offence to
facilitate tax evasion or fail to prevent the facilitation of tax evasion in
the UK, or any foreign jurisdiction. The UK offence applies to any firm
involved in the criminal facilitation of UK tax evasion, irrespective of
where they are based in the world.
Tax avoidance, on the other hand, is the legitimate reduction of taxes
using methods included in tax law and by exploiting legal loopholes. A
tax loophole can be defined as a technicality allowing someone to avoid
the scope of a law or restriction without directly violating the law.
5. What are the objectives of the Financial Action Task Force (FATF)?
Ans: The objectives of the FATF as detailed in its document Financial Action
Task Force Mandate are: ‘...to set standards and to promote effective
implementation of legal, regulatory and operational measures for
combating money laundering, terrorist financing and other related
threats to the integrity of the international financial system’.
initially, starting with the single mandate to combat money laundering (1989),
the mandate of the organisation has expanded over the years to cover
combating terrorist financing (2001), preventing of proliferation
financing (2008) and sanctions breaches, tax evasion and related issues
(2012). Although initially incorporated for a limited period of time, as of
2020, the FATF’s mandate has been changed to be open-ended. Since
2022, the ministers of the FATF meet every two years to discuss
strategic issues and progress.
The FATF Recommendations set out the essential measures that countries
should have in place to:
• identify the risks, and develop policies and domestic
coordination
• pursue money laundering, terrorist financing and the financing
of proliferation
• apply preventative measures for the financial sector and other
designated sectors
• establish powers and responsibilities for the competent
authorities (eg, investigative, law enforcement and supervisory
authorities) and other institutional measures
• enhance the transparency and availability of beneficial
ownership information of legal persons and arrangements, and
• facilitate international cooperation.
More than 190 jurisdictions around the world have committed to the FATF
Recommendations through a global network of nine regional organisations,
known as FATF Style Regional Bodies (FSRBs). FATF Recommendations are
derived from international treaties and conventions, they are ‘soft law’ and not
in themselves treaty obligations. Countries voluntarily sign up to implement
the FATF standards and submit to mutual evaluation. The findings of these
evaluations are published, but the FATF cannot itself impose any sanctions for
failing to comply.
6. What are the European Securities and Markets Authority (ESMA)?
Ans: The European Commission (EC) is the executive branch of the EU
responsible for proposing legislation, enforcing EU laws and directing
the EU’s administrative operations. In the aftermath of, and as a
response to, the financial crisis of 2007, the EU proposed the creation of
the European Supervisory Authorities (ESAs) and the European
Systemic Risk Board (ESRB) in 2009. The European System of Financial
Supervision (ESFS), as it came to be called, is the framework for financial
supervision in the EU
There are three ESAs:
1. The European Banking Authority (EBA) in Paris.
2. The European Securities and Markets Authority (ESMA) in Paris.
3. The European Insurance and Occupational Pensions Authority
(EIOPA) in Frankfurt
o The European Banking Authority (EBA) is an independent EU
authority which works to ensure effective and consistent
prudential regulation and supervision across the European
banking sector. Its overall objectives are to maintain financial
stability in the EU and to safeguard the integrity, efficiency and
orderly functioning of the banking sector.
o The European Securities and Markets Authority (ESMA) is
an independent EU authority which aims to safeguard the
stability of the EU financial system by ensuring the integrity,
transparency, efficiency and orderly functioning of securities
markets, as well as enhancing investor protection. It fosters
supervisory convergence among national securities regulators
(such as the FCA) and across financial sectors, working closely
with the other ESAs.
o The European Insurance and Occupational Pensions
Authority’s (EIOPA’s) core responsibilities are to support the
stability of the financial system, transparency of markets and
financial products as the protection of policyholders, pension
scheme members and beneficiaries. EIOPA is commissioned to
monitor and identify trends, potential risks and vulnerabilities
stemming from the micro-prudential level, across borders and
across sectors.
They also work together through the Joint Committee Anti-
Money Laundering to:
• develop a common understanding of the risk-based approach
(RBA) to AML/CFT and how it should be applied
• produce guidelines on:
• AML/CFT risk-based supervision, and
• risk factors and simplified and enhanced customer due
diligence (CDD).
The AML/CFT legislation is incorporated in the Money
Laundering Directives. All financial institutions established in the
EU fall under the rules and regulations of the three authorities.
This also applies to EU branches of financial institutions
incorporated outside the EU.
7. What are the functions of Office of Foreign Assets Control (OFAC)?
Ans: The OFAC of the US Department of the Treasury acts under
presidential national emergency powers, as well as the authority granted
to it by specific legislation, basically to impose controls on transactions
and freeze assets under US jurisdiction.
The Office of Foreign Assets Control (OFAC) administers and enforces
these sanctions. Many of these sanctions are based on UNSC resolutions
(binding on all countries) and other international mandates. Implementation of
these sanctions also involves close cooperation of the US with other allied
governments. The organisation is also responsible for administering the
specially designated nationals (SDNs) list.
The SDN list is a publication of OFAC which lists individuals and
organisations with whom US citizens and permanent residents are
prohibited from transacting and doing business. This SDN list differs
from the list maintained pursuant to Section 314(a) of the USA PATRIOT
Act, which contains information regarding individuals and organisations
engaged in terrorist or money laundering activities.
All US persons including US citizens and permanent resident aliens, all
persons and entities within the US and all US-incorporated entities and their
foreign branches must comply with OFAC regulations, regardless of where
they are located.
8. What is the intention of the Financial Conduct Authority’s (FCA’s) Financial
Crime Guide?
Ans: The FCA’s Financial Crime Guide: A firm’s guide to countering
financial crime risk (FCG) is intended to provide practical assistance
and information for firms of all sizes and across all FCA-supervised
sectors on actions firms can take to counter the risk that they might be
used to further financial crime. The contents, instead of being prescriptive,
have been drawn primarily from FCA-thematic reviews, with some additional
material included to reflect other aspects of the FCA’s financial crime remit.
The examples in the thematic reviews included in the Guide are regarded as
the best practices for the industry. However, firms have the flexibility to comply
with their financial crime obligations in ways other than following the good
practice set out in the Guide, providing the desired results are achieved.
The Guide gives examples of good and poor practice of:
• governance
• structure
• risk assessment
• policies and procedures
• recruitment, vetting, training, awareness and remuneration, and
• quality of oversight
The FCA was established on 1 April 2013 and its statutory aim is to
ensure that relevant markets work well. It is responsible for the conduct
supervision of financial services firms and prudential supervision of firms not
supervised by its counterpart, the Prudential Regulatory Authority (PRA). The
FCA is accountable to HM Treasury and Parliament.
9. How is Joint Money Laundering Steering Group (JMLSG) guidance used by
the FCA?
Ans: The JMLSG consists of the leading UK trade associations in the
financial services sector.
The JMLSG published industry guidance papers defining best practice and
practical advice related to the interpretation of the UK MLRs. The guidance
which has been provided to the UK financial sector since 1990, is periodically
reviewed and, if necessary, changes and additions are made. The JMLSG
guidance provides UK financial services firms with a degree of
discretion as to how to implement AML/CFT legislation and regulation,
including any procedures that need to be put in place.
The JMLSG guidance is used by the FCA to assess whether the conduct
of a firm constitutes a breach of AML/CFT requirements. It is recognised
and approved by HM Treasury and needs to be taken into consideration
by UK courts in legal proceedings.
10. What is ‘civil recovery’?
Ans: The FATF defines non-conviction-based confiscation as
‘confiscation through judicial procedures related to a criminal offence
for which a criminal conviction is not required’. Recommendation 38
obliges countries that civil (non-conviction based) liability should be
sought where criminal liability is unavailable. Recommendation 4 of the
FATF requires countries to consider adopting measures that should allow
proceeds of crimes to be confiscated without requiring a criminal conviction.
• ‘Civil recovery is a form of non-conviction-based asset forfeiture which
allows for the recovery in civil proceedings before the High Court of
property which is, or represents, property obtained through unlawful
conduct. Importantly, the proceedings are against the property itself
rather than against an individual.
• These proceedings are civil litigation, and the civil standard of proof (the
balance of probabilities) applies. As the action is against the property and not
the person, the person who holds the assets which are the subject of the
order might not be the person who carried out the unlawful conduct, and a
civil recovery order is not a conviction or a sentence’
Civil recoveries are also possible in other countries including the US
under different laws including the Civil Asset Forfeiture Reform Act 2000
and the USA Patriot Act 2001.
11. What is the purpose of freezing orders?
Ans: A freezing order is an injunction which restricts a respondent from
disposing of, or dealing with, their own assets. The purpose of a
freezing order is to prevent a defendant from moving, hiding, or
otherwise concealing any of their assets from beyond the jurisdiction of
a court which might frustrate any potential judgment.
A freezing injunction can apply to a wide range of assets such as land,
vehicles, shares, bonds and other financial instruments as well as
money held in bank accounts. Assets can also include those that are
held beneficially for another party, e.g., assets held by a bank or on trust
by a third party.
The courts normally require certain conditions to be fulfilled before a freezing
order is issued, such as:
1. The plaintiff has a strong case.
2. The plaintiff can present enough evidence regarding the existence
and location of assets that will be affected by the injunction, if made.
3. There is a risk of dissipation of the assets before a judgment can be
enforced.
4. The freezing order is ‘just and convenient’.
Freezing orders are considered by some as harsh on defendants
because the order is often granted at the pre-trial stage in ex prate
hearings. However, on balance the concept is designed to prevent injustice
being done to a successful claimant by preserving assets and funds from
being disposed of or dissipated before a judgment is satisfied.
12. What is an unexplained wealth order?
Ans: Unexplained wealth orders (UWO) are introduced as part of the
UK’s Criminal Finance’s Act 2017. They permit the confiscation of
criminal property without having to prove a crime was committed.
Instead, a court must be convinced that on balance of probabilities it is more
likely than not that unlawful conduct has occurred which has led to obtaining
the property. They are targeted at individuals with a link to serious crime, as
well as those who hold public office outside Europe.
. If granted, an UWO will require the individual to explain their interest in
assets covered by the order and how it was obtained. Although the
terms of each order can vary depending on the circumstances, the
purpose is always for the recipient to explain how they were able to
obtain the property or wealth subject to the order. Contrary to many other
parts of the law, it is not up to the applicant to prove guilt, rather it is up to the
recipient to prove their innocence.
To date only very few UWOs have been issued in the UK, with varying
success. In March 2022, as part of the Economic Crime Plan, UWO
reform has been introduced to make them easier to obtain, enforce, and
monitored.
