Money Laundering

Money Laundering

Money laundering is an unlawful act of hiding the source of money acquired unlawfully by transmitting it through intricate sequences of commercial transactions and banking transmissions. Often, the money launderer engages in hidden deals with the motive of making personal gain or benefitting others. Proving that a money laundering crime has been carried out requires enough evidence that the alleged offender has disguised, concealed, or changed criminal property, or entered into an agreement, which he or she enhanced the acquisition, keeping, or using illegal and criminal property on behalf of other people. The study pays considerable attention to the money laundering practices in the UK, and examines how leading banks such as BCCI among others became victim of the illegal act. The UK should review its structures and embrace effective mechanisms of combating money laundering to save financial institutions and the country from harboring crime and criminals.

Money laundering us a serious threat in the UK, one that some observers think does not get enough attention. The National Crime Agency (NCA) informs that the banks in the UK launder hundreds of billions of pounds yearly. Most of the illegitimate funds are utilized to acquire luxury items such as property and jewelry, or to set up private businesses. Many corporations and banks do not often look into the origin of such money, and regulators fail to adequately punish them for not preventing such misdeeds. Despite the rhetoric in the UK about wanting to be a global leader in terms of integrity, the region has not prosecuted any single firm for money laundering practices. Today, only Financial Conduct Authority (FCA) fines are imposed on the local banks in the UK without paying attention on prosecuting the wrongdoers. Lloyds, for example, paid a fine of 23.5 billion pounds in 2008 for money money-laundering related crimes. RBS is another example that paid up to 24 billion pounds to settle its case in 2008, and to suppress investigations by the U.S. Department of Justice for misappropriating mortgage money and securities. The reluctance to prosecute wrongdoers will affect the application of AML laws, and the practice would persist. 

The UK recognizes money laundering as an illegal practice that is forbidden by law. The Proceeds of Crime Act 2002 (POCA) and the Terrorism Act 2000 (TA 2000) are the major legislations that regulate money laundering in the UK. The primary objective of the MRL 2017 (Money Laundering, Terrorist Financing and Transfer of Funds Regulation 2017) that was introduced in June 2017 is to make sure that the anti-money laundering regime in the UK puts into practice the EU Fourth Money Laundering Directive and is in directive with the recommendations and standards of the Financial Action Task Force.

Impact of AML Laws on Banks over the Past 30 Years

BCCI

BCCI’s unique criminal approach, an intricate business spider-web with the founder of BCCI, Agha Abedi and his deputy, Swaleh Naqvi, was a critical aspect of its stunning growth, and a cause of its failure. The plan was prepared by Abedi and executed by Naqvi for the purposes of evading control and regulation by the government. Unlike other ordinary banks, BCCI was from its earliest times composed of multiple layers of operations, linked to one another through many holding firms, subsidiaries, partners, and other affiliates. By segmenting the regulatory reviews, organizational structure, and corporate audits, the BCCI family of entities formed by Abedi had the opportunity to avoid legal overview on the movement of goods and capital as a matter of everyday practices. In forming BCCI as an avenue that is free of government audit and control, Abedi formed in the financial institution an ideal structure for promoting illegal operations by others, including such activities by officers if many of the states whose regulations BCCI was violating. The claims against BCCI included fraud by the bank leaders and staff and customers taking part in money laundering practices worth billions of dollars. The monies channeled through the bank facilitated bribery, prostitution, terrorism, and the production and sale of nuclear technologies. The laundered monies also facilitated illicit immigration, smuggling, and illegal acquisition of real estates and banks.

The money launderers applied appropriate mechanisms to execute the deals that become public after intense overview of the company’s operations. Among the mechanisms BCCI used to commit crimes were its practice of bank secrecy and application of confidential havens. The bank used nominees and offered bribes to influential individuals and governments to safeguard its interests. BCCI enticed the governments of Third World Countries to favors to political leaders, and deposited large amounts of money to facilitate their operations in return for favors.

Money Laundering in Other Banks

The ineffectiveness of the UK AML laws is evident in the way money laundering was rampant in other leading financial institutions in the country. The Financial Conduct of Authority (FCA), for example, launched a probe into the anti-money laundering system used by HSBC in 2018, and the group’s management said it is cooperating with the banking regulator through the process. HSBC is not new to money laundering allegations because it had paid 1.9 billion pounds fine over AML-related issues in 2012. The company faced allegations of allowing its channels to be utilized to launder money from Mexico and other banks with the motive of promoting drug smuggling. HSBC was accused again in 2017 of facilitating money laundering processes to safeguard the interests of the Gupta family that resides in South Africa. The wealthy Gupta family denied any interactions with HSBC that were corrupt and unlawful and the case is still in court. Another money laundering scandal that drew people’s attention involved the Danske Bank that has its headquarters in Copenhagen, Denmark. The Financial Supervisory Authority of Estonia and the Financial Supervisory Authority of Denmark performed a series of financial supervisions on Danske after reports emerged that the leading bank in Denmark facilitated suspicious flow of monies from various European and Asian nations. Estonia contributed the largest amount of fraudulent funds followed by Russia. Other countries such as the UK, Cyprus, and China also send large volumes of money to Danske for processing before redistributing them to their real owners and beneficiaries. The money laundering scandal at Danske started in 2017 and was resolved by 2018, a time when many nations have several legislations to curb such unlawful practices. The incidences at HSBC and Danske affirm that the UK AML laws are still ineffective and require adequate restructuring to combat money laundering that is rooted in several financial institutions.

Factors that Contributed to the Money Laundering Practices – Criticism on UK Government

The leading UK bank regulators failed to offer adequate overview of BCCI and some of the UK banks that practiced money laundering, which offered great avenues to indulge in the unlawful act. One of the factors that contribute to the cases of money laundering in the country is improper oversight by the state agencies mandated with preventing the act. The persistence implies that the government does not follow up to ensure that malpractices do not occur, and that all financial institutions adhere to the set rules and regulations. The government officers in charge of preventing money laundering should examine areas that require improvement and apply relevant strategies.

Bank of England (BoE)

The BoE’s oversight of BCCI was completely inadequate to safeguard BCCI’s creditors and depositors, and the BoE withheld valuable information about the institution’s fraud from public awareness for nearly fifteen months before suggesting for bank’s closure. BoE had developed interest in monitoring BCCI from the late 1970s, and adopted measures to slow the corporation’s expansion in the UK. BoE became aware of BCCI’s indulgence in drug money laundering and terror acts between 1988 and 1989, and became more watchful of the company’s activities, but did not give adequate supervision in reacting to the information. Officers from Price Waterhouse informed BoE of fishy deals at BCCI, including improper banking practices, proof of fraud, and considerable losses of loan, which together had formed a big discrepancy in BCCI’s accounts and books. BoE’s suggestion was not to close the facility, but to find suitable ways of helping the bank out of its tribulations. The suggestion by BoE meant, among other strategies, concealing the serious situation of BCCI’s constraints from its millions of depositors and creditors. BoE convinced Price Waterhouse into safeguarding the records by BCCI, which convinced stakeholders into believing that things were not as severe. BoE suggested as a way of saving BCCI in 1991 that the embattled company restructures as three entities based in Hong Kong, Abu Dhabi, and London, which further evoked questions as to whether the oversight body is dedicated to eradicate the supporters of money laundering. The decision by BoE to allow BCCI to transfer its headquarters to Abu Dhabi strained investigations into the case because the British authorities were deprived of all the critical documents and valuable information. The government of Abu Dhabi continues to withhold the information, which tampers with any effort to inquire into the matter.

Following the discovery of the money laundering practices at BCCI, the subcommittee looking into the case offered a summary of legislative recommendations that would prevent future incidences from occurring. The team suggested that the U.S. forms a more coordinated and aggressive structure to curb global financial crimes, and to stay away from foreign confidentiality and privacy regulations that protect wrongdoers. The subcommittee recommended Justice Department Reviews its practices and regulations that led to its inefficiencies in investigating and prosecuting the suspects in the BCCI’s case, and barred its ability to work with other groups looking into the conduct of BCCI performed by the Senate, the New York District, and the Federal Reserve. The subcommittee further recommended the formation of a committee of law enforcement officers whose work is to perform supervision, prevent, and react to failures of business operations. The Americans managed to strengthen its oversight bodies to restrain money laundering in the banking sector, and also encouraged the Justice Department to embrace appraisal methods that would help it understand its strengths and weaknesses.

Prudential Regulation Authority (PRA)

The incidences at BCCI and the ongoing money laundering practices at the local banks in the UK show that the Prudential Regulation Authority (PRA) is far from achieving its mission and vision. The PRA sets regulations and supervises the financial sector, and works to eradicate any practice that would create unfairness or violation of the set rules and regulations. The violations that occur in the UK show that PRA has loopholes that could affect the functioning of the regulatory body if nothing happens to salvage the situation.

Financial Conduct of Authority (FCA)

The major scandal involving some of the leading financial institutions in the UK further reveals the ineffectiveness of the Financial Conduct of Authority (FCA) that is mandated with the task of regulating banking practices. The FCA regulates the financial services sector, and its functions include safeguarding purchasers, keeping the sector safe and stable, and encouraging proper competition between the financial companies. The Financial institution was formed in 2013 following the establishment of the Financial Services Act (2012), but it is contrary that it is during its formation that the HSBC engaged in a major money laundering scandal. The activities of the FCA did not stop other incidences such as those committed by Danske from happening, which further cast doubts on the independent and non-governmental organization’s ability to promote transparent services and safeguard consumers from fraudulent dealers and practices. The increasing incidences suggest that FAC is not utilizing its power to create and execute the rules which govern the country’s financial sector, and lacks the capability to investigate individuals and companies involved in money laundering. The violations suggest that FCA should review its practices and improve how it conducts supervisory function with banks and other financial institutions, and transform how it promotes customer safety and prevents risks in the sector.

Data Collection

Prosecutions on money laundering are rare in the UK rare and instead violators pay FCA fines that have fluctuated over the years. BCCI, for example, paid about 11 billion pounds in the 1980s for engaging in money laundering deals. Nauru is another victim that paid close to 50 billion pounds for indulging in money laundering in the early 1990s. Standard Chartered paid more than 200 million pounds in 2012 and more than 220 million pounds in 2014 for being part of a money laundering syndicate. Wachovia became a suspect in 2012 and parted with close to 112 million pounds in fine after being found guilty of aiding drug dealers.

Study on Money Laundering Banking Cases

Money laundering has generated legal battles between various parties. A good example is that of BCCI versus Ali where the latter blamed BCCI for not offering the full package for making them redundant following the company’s collapse. The House of Lords ruled in favor of BCCI by arguing that the agreement was not in place before the incident that led to the bank’s collapse. The case showed how money laundering cause unbearable problems, some that have long term effects.

Recommendations

The UK and operators in the country’s financial sector should borrow and apply the recommendations by the Financial Action Task Force (FATF) that functions as an independent non-governmental group that forms and promotes policies to safeguard international financial systems against terror financing, money laundering, and financing of smuggling of weapons of mass destruction. The FATF Recommendations are acknowledged as the international counter-terror financing and anti-money laundering standard, which make them more appealing and applicable in the financial sector. Operators in the UK should embrace effective ways of assessing risks and employing suitable risk-based approaches. Identifying, assessing, and knowing the terrorist financing and money laundering risks for the nation, and should take appropriate actions, including creating a structure or authority to implement measures to evaluate risks and to use resources aimed at mitigating risks. It may be necessary to equip financial institutions and non-financial businesses with the ability to recognize, examine, and embrace effective measures to address their terrorist financing and money laundering threats.

The government should place emphasis on the existing policies and try to develop new regulations that achieve national cooperation and coordination in terms of handling money laundering practices. The country should strive to develop AML laws informed by the threats recognized, which should be reviewed often, and should put a credible authority to coordinate all mechanisms that manage and review the policies. The UK should ensure that the officials in the financial intelligence unit, the policy creators, supervisors, law enforcement groups and other relevant qualified teams, at the operational and the legislative levels, have essential mechanisms and equipment in place to enable them to work together, and where necessary, share and coordinate data locally with each other regarding the formation and execution of rules and regulations to prevent money laundering, terror acts, and passage of deadly weapons.

The UK can embrace other effective mechanisms that would help to lower cases of money laundering in the country.  The officers can popularize know your customer (KYC) as an approach of preventing dealings with clients whose information is not clear to the bank. Corporations can apply artificial intelligence (AI) that removes the burden of manually identifying customers from the members of staff. Corporations can install programs that allow face recognition that is more precise and convenient. Applying the concepts of customer due diligence (CDD) may help financial regulators and institutions to combat possible cases of money laundering or other dealings that are contrary to the law. CDD permits company to gather relevant information about a customer, including facts that should enable the firm to evaluate the magnitude to which the client exposes it to a range of threats. Applying such methods of preventing possible cases of money laundering will transform the UK into a nation where the financial institutions serve all stakeholders with transparency and in accordance with the law.

Conclusion

The study suggests that the UK should review its institutions and policies aimed at curbing money laundering practices that are rampant in the country. The UK has a number of legislations that prevent money laundering practices in financial institutions, but still the illegal practice is still rampant in many banks in the country. The incident at BCCI showed that the country is not adequately prepared to deal with the illicit practice, and the dealings with regulators such as BoE indicate that a complete overhaul is required to overcome the loopholes that could put the financial service sector in jeopardy. PRA and FCA should review their weaknesses and restructure necessary areas to prevent future incidences. The government should adopt more suitable approaches and policies to stop the practice where local banks facilitate crimes with the motive of benefiting few individuals and groups.