Journal of Financial Crime Ð Vol. 10 No.

4
Financial Regulation and Supervision after
11th September, 2001
Barry A. K. Rider
POSITIONING THE REGULATOR
In recent months those involved in the supervision of
®nancial activity have had to consider very carefully
exactly what their roles and responsibilities are in the
®ght against serious crime and terror.
1
The history of
regulation over those involved in ®nancial activity is
both interesting and instructive. While there has in
most societies always been a degree of reluctance on
the part of those establishing regulatory systems to
characterise their e€orts other than as attempts
to improve the eciency Ð whatever this may
mean Ð of the markets or the service in question,
the reality in the vast majority of cases, is that such
initiatives are scandal driven.
2
This is as true of the
quite impressive attempts that were made in 17th
century Britain
3
to outlaw `the pernicious Art of
Stock-Jobbing' and most of what went with it, as it
is of the early precursors of the state authorities
which now regulate and oversee the issue and
trading of securities in the USA.
4
Of course, the
two issues are interrelated, at least politically. The
background to the measures that were taken in
the City of London was a report commissioned by
the House of Commons in 1697
5
to inquire into the
trade of England and the Special Commissioners
reported that certain `stock market' scams were sig-
ni®cantly undermining the general commerce of
the country and the con®dence that its citizens had
in its trade. By the same token, in Canada and
some states in the USA, the `blue sky' frauds of the
late 19th and early 20th centuries were recognised
as undermining the development of the economy.
The profound implications of rampant fraud and
self-dealing were made only too obvious with the
crash and measures that were adopted in the `New
Deal'.
6
Having said all this, however, statements of
what securities and in particular banking regulators
were about,
7
until relatively recently, tended to
play down and even ignore their role at the sharp
end of Ð for want of a better word Ð policing
their markets and players. In large measure this has
also been re¯ected in legislative statements and even
statutory preambles. The primary objective of ®nan-
cial regulation is to foster the economy. Regulators
are there to nurture and develop sound markets,
institutions and systems. A too heavy-handed
approach in this regard is perceived as dangerous
and counter-productive.
Indeed, even in the City of London it is compara-
tively recent that those charged with the welfare of
the ®nancial markets accepted that there could be
any justi®cation for an `ocial' regulator armed
with legal powers, outside the comfortable world
of `self regulation'.
8
This attitude was not based on
ignorance of what was going on: indeed, a Royal
Commission under Lord Penzance in 1877 called
for legislation and the appointment of a public ocial
to deal with at least the grosser forms of fraud and
misconduct.
9
No, the City's attitude was rather
more based on the perception that policemen got in
the way of enterprise Ð they lacked sensitivity,
knowledge and, at least in the City of London,
were just not the right sort of `chaps'.
10
Even in
regard to matters such as insider dealing the City
reluctantly accepted the need for legislation in 1980
once it became clear that the self-regulatory bodies
could not achieve a level of `reaction' let alone e€ec-
tiveness, which was credible in the face of media
criticism.
11
While the regulation of the ®nancial
services industry in the UK has always been scandal
driven, it was the globalisation of not so much the
markets, but the players in London which spelt the
end of a system of control that was almost entirely
based on self-regulation and thus, self-interest. The
patent inability of essentially City `clubs' to have
any real control or sanction over intermediaries and
investors operating from overseas, in countries
which had little cultural commonality with those
who have traditionally run the City of London,
exposed the City institutions for what they were.
To some extent, perhaps, a determinant factor was
the desire of the City institutions to pass the buck
to others, and in particular those who are, because
of the public position and funding, so obviously
responsible for maintaining the public interest.
Indeed, such was the logic of these arguments, that
all Ð including even the government Ð rejected
calls for the development of civil enforcement
Page 336
Journal of Financial Crime
Vol. 10, No. 4, 2003, pp. 336±358
Henry Stewart Publications
ISSN 1359-0790
powers in regard to matters such as market abuse and
insider dealing, on the basis that as the criminal law
had now been invoked, it could only be public agen-
cies operating within the remit of their `public
authority' and utilising their traditional public law
powers that could be permitted to act.
12
The situation was little di€erent in a number of
other Commonwealth countries, although some
such as Canada, Australia and Singapore took a
more robust attitude and without the `traditions' of
the City of London were more receptive to the
experience of the various US jurisdictions. It is also
the case that during the 1970s having a securities
regulator became almost a status symbol and there
were examples of countries that boasted having
a securities commission without having anything
which resembled a securities market, or for that
matter a securities industry. Indeed, this was a great
period for the exporting of US laws, models and
even the odd academic expert. Whether any of this
made any di€erence to anyone Ð other than the
well-paid Harvard professors who undertook this
crusade Ð remains to be seen. Of course, things in
Europe have always been di€erent: for one thing,
they do not have the pragmatism of the common
law and traditions. Many stock markets in Europe,
particularly in the more Germanic regions, have
long had public ocials charged with responsibility
for at least observing the markets and their integrity.
Of course, in large measure this was a result of the fact
that the markets were themselves in some measure
the creation of statutes. Whereas in Britain, while
there are examples of very early public laws protect-
ing the integrity of markets for commodities,
13
there
was little attempt to extend these to ®nancial pro-
ducts and the London Stock Exchange until very
recently was at English law merely a `club'. Indeed,
there is still great resistance to the inevitable move
towards statutory regulation at European level
14
of
such matters as take-overs and mergers in Britain.
While in many countries securities regulators
derived an existence from the banking authorities
and thus, often the central bank itself, and this
remains true in many developing and smaller juris-
dictions, the notion that regulating the ®nancial
markets and the traditional banking sector involve
di€erent issues gradually established itself, often on
the back of US experience. Indeed, the result in
many countries which lack the sophistication, consti-
tutional structures and heritage of the USA, was a
degree of confusion and in some cases competition.
Securities regulators were and in most countries
remain the poor relations of the central bankers.
Rather this than the relationship of customs ocers
to `real' policemen Ð let alone agents! This has
resulted in some countries Ð particularly those
where the central bank remains dominant over all
®nancial policy, in a subordination of the regulatory
tier pertaining to securities. Things have changed in
recent years, however. Today, there are relatively
few central bankers that have any direct control
over or even interest in, the operations of the securi-
ties markets, other than at a macro and systemic level.
Indeed, in a good many countries the banking regu-
lators have been relocated outside the central bank. In
the UK, for example, the Bank of England was dis-
possessed of its regulatory and supervisory authority
over ®nancial institutions and this was given to a
single ®nancial supervisory agency, the Financial
Services Authority.
15
This model, while not an
entirely happy one, is being followed in many
other countries.
While it might be interesting and even amusing to
dwell on the cultural and other institutional aspects of
the relationship between various ®nancial sector
regulators, including those active in insurance,
futures and credit, this is rather outside the thrust of
this short paper. The comments that have been
made, however, should serve to point out that
outside the USA, many ®nancial services regulators
have developed from, or at least under, the watchful
eyes of the relevant banking regulator. Albeit that
their remit and status has often been inferior in
almost every respect to their colleagues in the
banking supervisory authorities. The poor relations
did in the main, however, take with them a lot of
the thinking and operational knowledge that has
been developed in banking control. For example,
despite many of these initiatives being born in the
wake of a scandal, the emphasis has rarely if ever
been on the control of abuse and the investigation
and sanctioning of misconduct. It has rather been
on the development of prudential procedures
designed to minimise the scope for risk. Indeed,
today most securities regulators have moved over,
in at least the management of their own surveillance
resources, to a risk-based approach to monitoring and
even intervention. The result, has been Ð and it must
be emphasised, that this concerns talking about
experience outside the USA Ð that enforcement
has taken a relatively low priority. Enforcement
resources, if they exist in an identi®able and dedicated
Page 337
Financial Regulation and Supervision after 11th September, 2001
form, are often extremely limited both in extent and
calibre. The e€ectiveness, measured in even the
most generous terms, of so many agencies around
the world in actually enforcing the law or some
lesser form of discipline on miscreants, let alone
sophisticated fraudsters, is pathetic.
While it can be said, and is often said, that as the
primary emphasis is rightly on the prudential preven-
tion of problems, it is misguided and even unfair to
judge the e€ectiveness of regulators on the basis of
how many `scalps' they have been able to deliver,
in the real world this is naõÈve. Agencies born in the
face of scandal, will naturally fall to be judged by
their perceived ability to deal with such problems
Ð no matter how much is said about their promo-
tional and facilitative roles. They are there because
the system wants someone to pass the buck to! The
mistake in many cases is that those appointed to
head such agencies or initiatives often adopt a high
pro®le and make unrealistic promises to those who
appoint them and the public. Lawyers, invariably
case conscious and case driven, will on the basis of
little relevant experience, undertake to `clean up' in
circumstances where no legal system has managed
to achieve convincing results. Addressing the
control of complicated ®nancial fraud and related
matters through the traditional criminal justice
system is fraught with problems. A leading criminal
law judge in Britain, Lord Justice Roskill, appointed
to look into the British system for controlling fraud,
stated in his ocial report, `the public no longer
believes the system (and he was talking about the
criminal justice system) is capable of bringing the
perpetrators of serious fraud, expeditiously and e€ec-
tively to book'. He added that the `overwhelming
weight of evidence brought before this committee
shows that the public is right . . . '.
16
While that
was in 1986, and there have been a great many initia-
tives at many levels in Britain since, the public still
thinks the system does not work and the evidence
still supports their view. The same would be true in
Australia, South Africa, France, Italy, Singapore
and many other countries. Of course, things are dif-
ferent in the USA Ð but it is dangerous, given the
history, constitution and ethos, to draw ready com-
parisons.
17
The success, at least in enforcement, of
regulators in the USA, has not been predicated on
the use of traditional criminal law weapons. In the
USA authorities whether at state or federal level
have developed and e€ectively utilised legal devices
and weapons which are only now being made
available in Europe and many other parts of the
world. In fact, the results judged in terms of the tradi-
tional criminal justice system are not much di€erent.
Given the poor results of enforcement actions
within the traditional criminal law, as opposed to
Ð for example, civil or administrative actions, it is
hardly surprising that there is a loss of esteem and
even frustration.
18
The author has had the privilege
over the years to assist a number of governments
around the world in establishing special agencies Ð
outside the traditional criminal justice system, to
speci®cally address the problem of controlling or at
least inhibiting ®nancial fraud. Whether these agen-
cies have the character of specialised prosecutorial
or investigative agencies, or both, they have shared
an elitism and dedication and operated at a privileged
level within the legal system. In some cases they
have operated with a surprising amount of
freedom and discretion. All these initiatives,
whether in Singapore, Hong Kong, Zimbabwe,
China, Ghana, the Philippines or Trinidad Ð to
mention but a few, were justi®ed on the intellectual
basis that the ordinary institutions of law enforce-
ment given their structures, lack of expertise and
resources and very mandate, could not be expected
to cope with complex ®nancial frauds. They were
properly reactive in character, judged on their
success across a much broader spectrum and oriented
to matters of wide public concern. At best the tradi-
tional criminal law is a sledgehammer, which is very
susceptible to crushing the wrong nut. The result,
however, has in no country of which the author
is aware, been entirely satisfactory. Elitism has
brought with it arrogance and this has led to compe-
tition and in not a few situations downright corrup-
tion and abuse. The specialised resources have
become jaded, frustrated and then dissipated. Political
mandates have become an embarrassment as the
results have proved less than convincing. While the
author remains convinced that to address complex
and special issues, dedicated and di€erent responses
are required and these may be best based on an
agency outside the general structures, it is absolutely
clear that there is no panacea.
In the circumstances, it is perhaps not surprising
that many securities regulators have shown little
interest in emphasising their enforcement role even
in regard to matters fairly within their statutory man-
dates, let alone in relation to broader matters such as
®nancial probity. The new Financial Services
Authority in the UK was not enthusiastic about the
Page 338
Rider
emphasis that the government placed on enforcement
and the new powers with which it was entrusted.
Indeed, the chairman of the Authority, Sir Howard
Davies, repeatedly emphasised that there were far
more important issues than catching insider dealers
and ®nancial crooks. In fact, before the 11th Septem-
ber, 2001, the perception both inside and outside the
Financial Services Authority was that the Authority's
statutory mandate to concern itself with the control
of ®nancial fraud, including money laundering, had
a very low priority. This perception was strength-
ened by virtually every action that the Authority
took, from recruitment to its administrative struc-
tures. To some extent it is hardly surprising that
the FSA demoted enforcement. Many authorities
around the world have been undermined because of
their inability to secure a reputation as competent
enforcers of their laws. While this may be a good
example of the `tail wagging the dog' it is not unrea-
sonable for those running such bodies to attempt to
set a realistic agenda and avoid the creation of fantas-
tic expectations. The graveyard of those who have
lacked Sir Howard's discretion is both distinguished
and well tended. It is also the case that the dominant
element within the senior management of the FSA is
now composed of either former ocials from the
Bank of England or persons `endorsed' by the
Bank's mandarin. The Bank of England has never
liked being seen as enforcement minded Ð it has a
culture that does not quite like lawyers Ð let alone
policemen, unless they are very much retired and
exceptionally well behaved. The mandarins who
remain closeted in the Bank or who walk the halls
of the Treasury, appear to almost resent the con-
straints of the law Ð at least when articulated by
persons with legal training. Indeed, the Financial
Law Panel which was established initially with the
support of the Bank of England, under the chairman-
ship of a most distinguished former Law Lord, to
address issues of legal complexity which might
involve risk to the City, was undermined and e€ec-
tively wound up by the Bank earlier this year.
Many consider this was a result of the Panel taking
a too independent line!
19
Although the situation may not be so quaint in
other systems, it is not uncommon to encounter
similar attitudes to enforcement and the discomfort
created by legalism, in countries as diverse as
Malaysia and Norway. It is really only in the USA
that enforcement has been taken seriously, and even
then there is, with respect, a great deal of variation
from one state to another, and from one SEC
chairman to another. The regulatory system in the
USA in regard to securities is unique. It could not
be replicated in Europe. In many respects it has pro-
vided an exceptionally high standard of protection
and service to US investors and those who have the
privilege of dealing in the USA. It is a system
which cherishes integrity and is mindful of the
importance of promoting and maintaining investor
con®dence in the eciency, fairness and stability of
the nation's capital markets. But even in the USA
the scandals persist Ð and in recent months, a series
of mega-scandals involving false accounting, manip-
ulation, insider abuse and common fraud have
shocked not only corporate America but also the
world. This saga, which is ongoing and which prob-
ably presents to those concerned with the integrity of
the markets one of the most signi®cant challenges,
will not be tackled here. Apart from the impact on
the markets of the frauds themselves, there is likely
to be long-term uncertainty as to the reliability of dis-
closure as a mechanism for providing decisional
information. The corruption of the auditing system
and the untrustworthiness of the system for recording
and presenting ®nancial information are issues of
profound importance Ð both inside and outside
the USA.
What the author wishes to address in this admit-
tedly somewhat self-indulgent paper, is how the
responsibilities of those involved in supervising the
®nancial sector, and this is taken in broad terms,
might be a€ected by the atrocities committed on
the 11th September, 2001 and the engagement in a
`War on Terror'. There are very real issues as to
whether agencies functioning at a supervisory and
or regulatory level, and the two are not necessarily
the same, within the ®nancial sector, should properly
assume or be given any speci®c role in the war. While
it is natural and not improper for all those who wit-
nessed the excesses of that awful attack to wish to be
counted, there is a very real problem if `too many
cooks get into the kitchen'. Furthermore, as the
recent ®nancial scandals just referred to clearly man-
ifest, there are other grave dangers facing the USA
and the rest of us, which may properly demand a
higher priority Ð at least on the part of specialised
®nancial regulators. What is morally certain,
however, is that as the War on Terror progresses,
increasing attention will be focused on the funding
of terrorist and subversive organisations. This is a
priority issue for the new Department of Home
Page 339
Financial Regulation and Supervision after 11th September, 2001
Land Security. While it remains to be seen just what
contribution ®nancial regulators can make in the pro-
vision of information or in providing access to
sources, let alone in re®ning information into intelli-
gence, it is clear that there is at least an expectation
that non-traditional law enforcement agencies,
including specialised regulators, will be brought
increasingly into the net. Therefore, the issues will
be put in context here.
THE SETTING
For the last 20 or so years one of the principal strate-
gies in ®ghting serious crime, particularly criminal
activity that is motivated by economic gain, has
been to attack, through a number of legal devices,
the proceeds of crime. Associated with this strategy
is the concern to impede the laundering of wealth
Ð which places a hurdle in front of those seeking
to attribute wealth to a particular criminal act or
course of crime. At the same time, far more attention
has been given, for a variety of reasons, to the ®nan-
cial aspects of crime and in particular the develop-
ment of ®nancial intelligence. The horri®c attack
on the USA on the 11th September, 2001 justi®ed
and mandated an extreme response. In part that
response Ð the so-called `War on Terrorism' has
involved far more attention being given by tradi-
tional and non-traditional law enforcement agencies
to the funding of terrorist organisations. It was
perhaps understandable that the now considerable
experience that has been developed in a number of
countries around the world in attempting to interdict
the assets of organised crime should be deployed
against the threat of international terrorism. Indeed,
if the `War on Drugs' has been fought, at least in
part, through the banking system, why not the
`War on Terror'?
There are several problems with this approach.
First, the success that law enforcement agencies
have had around the world in `taking the pro®t out
of crime' is very limited and does not commend
itself as a particularly ecient strategy in the ®ght
against terrorists. Second, there are very important
di€erences between property in the hands of criminal
organisations and those who can be considered, at
least in some jurisdictions, as terrorists. While the
US and UK authorities have had some success in
freezing funds associated with the Taliban and
groups identi®ed in previous criminal investigations
as being `involved' in supporting terrorist outrages,
it remains to be seen whether sucient resources
will be committed over a period, to enable this strat-
egy to reap the bene®ts that President George Bush,
among others, contemplates.
Disrupting the funding of terrorist organisations is
not a new strategy. Indeed, the expertise, such as it is,
that has been deployed in ®ghting organised crime,
was ®rst developed in the 1960s by the intelligence
and security community to disrupt the activities of
subversive organisations. To some extent, it was the
freeing up of these resources and their deployment
in traditional law enforcement that led to the dra-
matic realisation that organised crime does present
such a threat to security and stability. The UK gov-
ernment, until relatively recently, since the early
1980s achieved some degree of success in disrupting
the funding of terrorist organisations in Northern
Ireland. The German and Italian authorities have
also adopted a similar strategy in regard to their
own problems. Other jurisdictions, including Hong
Kong and South Africa, have developed ®nancial
intelligence to assist them in ensuring relative stability
during periods of transition. The United Nations and
other inter-governmental organisations have also
been concerned with the funding of terror. The
International Convention for the Suppression of
Financing Terrorism
20
was opened for signature at
the UN, in New York, on 10th January, 2000. Few
countries considered this a priority
21
until Mr
Bush's `crusade'. Having said this, the UK govern-
ment must be commended, as the Terrorism Act
2000 goes somewhat further than the requirements
of the UN Convention, and the Anti-Terrorism
Crime and Security Act 2001 goes much further!
Acceptingthat since the 11thSeptember, 2001much
has changed, it is important to look at experience over
many years in pursuing the proceeds of crime and
disrupting criminal and subversive enterprises. This
examination may well mean taking the view that as
with the `War on Drugs' the costs of terror will still
be being counted for some years to come.
ECONOMICALLY MOTIVATED CRIME
The acquisition of, and control over, wealth is the
motivation for most serious crimes involving preme-
ditation. This is all the more so when the criminal
activity resembles an enterprise which inevitably
requires capital to operate and with which to lubri-
cate its aspirations. Money, or rather wealth, in its
disposable form, is therefore not only the goal of
Page 340
Rider
criminal enterprises, but also the lifeblood of the
enterprise. Therefore until the pro®ts of crime are
taken away from subversive and criminal factions,
there is little chance of e€ectively discouraging crim-
inal and abusive conduct which produces great
wealth or, through its pro®ts, allows power and pres-
tige to be acquired. As soon as the state devises
methods for the tracing and seizure of such funds,
there is an obvious and compelling incentive for the
criminal to hide the source of his ill-gotten gains Ð
in other words to engage in money laundering.
Like most social, let alone economic, evils, money
laundering is nothing new. It is as old as is the need to
hide one's wealth from prying eyes and jealous hands,
and concern about the uses and misuses of hidden
money is not just an issue in this century. Of
course, the modern money launderer will no doubt
adopt rather more sophisticated techniques than the
gem carriers of India or the Knights Templar, but
his objectives and essential modus operandi will be
the same. The objectives will be to obscure the
source and, thus, the nature of the wealth in question
and the modus operandi will inevitably involve resort
to transactions, real or imagined, which will be
designed to confuse the onlooker and confound the
inquirer. In recent years the organisation and man-
agement of extremely pro®table criminal enterprises
have given greater emphasis to strategies designed to
ensure crime does not pay.
When the time comes to look back at the last two
decades of the 20th century, a future historian would
be forgiven for thinking that people were almost
obsessed with organised crime, corruption and
money laundering. Of course, when one considers
the ignominious fall from favour of so many world
leaders, in circumstances where serious corruption
was at least alleged, if not self-evident, the expo-
sure of rampant ®nancial malpractice in inter-
governmental organisations, the penetration of
entire economic and political structures by what,
for want of a better notion, is described as organised
crime, then perhaps that historian's impression might
not be too far from the truth. Although it is possible
to ®nd the odd comment in international meetings,
about the serious implications of economic crime
and the like, before the 1980s, these are few and far
between.
22
Most related to complaints from develop-
ing countries about the unwillingness of developed
countries to assist in the enforcement of exchange
control laws. In fact, it was not until November
1980 that the Commonwealth, an organisation or
rather association of states, whose justi®cation has
increasingly been based on its ability to recognise
and address problems related to small and relatively
fragile economies, began to concern itself, at
governmental level, with the implications of what
appeared to be a growth in serious economic
abuse.
23
In those days, there was little talk, even in
such organisations as ICPO-Interpol, about the
threat of organised crime. Terrorism, whether by
individuals or by state agencies, was then considered
to be a matter almost beyond the remit of traditional
law enforcement agencies. It was much later that
most came to recognise that organised crime and
terrorist organisations might well be one and the
same.
Some have argued that organised crime is a
problem of the last quarter of the 20th century and
in the case of most states is a new phenomenon. Of
course, so much depends upon what is meant by
organised crime. Groups of individuals formed and
managed to perpetrate acts against the law are
nothing new. Nor is it novel that the primary moti-
vation of such enterprises is economic gain Ð
spurred on by plain old-fashioned greed and corrup-
tion. What has changed is the criminals' ability to
operate beyond the reach of the domestic legal
system and, therefore, be able to conduct an enter-
prise in crime that is not so amenable to the tradi-
tional criminal justice system and its agents. Of
course, in truth, thinking criminals have always
sought to place themselves beyond the reach of the
law and it was not just a matter of having a faster
horse! Corruption of ocials and the patronage of
powerful individuals whose interests, for whatever
reason, might be at variance with those of the state,
are tried and tested tools. It has always been recog-
nised that even if as a matter of theory, jurisdiction
was unfettered, the practicalities are such as to
render enforcement parochial. Thus, when Henry II
of England was asked, towards the end of the 12th
century, how far his writ ran, he responded Ð `as
far as my arrows reach'. While developments in bal-
listic technology might render this a relatively useful
approach to dealing with the international criminal,
in the vast majority of cases the criminal law on its
application or at least administration, will be con®ned
within domestic borders. Developments in technol-
ogy, communications, travel and the liberalisation
of movement, whether of persons, things or
wealth, have all combined to give the criminal enter-
prise of today the same ability as any other business to
Page 341
Financial Regulation and Supervision after 11th September, 2001
move from one jurisdiction to another, or involve in
a single act two or more di€erent jurisdictions.
In addition to these factors, which criminals have
exploited no less imaginatively than legitimate busi-
nessmen, there is another and perhaps crucial consid-
eration. This is the pro®tability of smuggling, and in
particular the illicit trade in drugs, psychotropic sub-
stances and other narcotics. The enterprise of smug-
gling is a natural and predictable consequence of the
imposition of restrictions or other costs, on the
supply of a commodity for which there is a greater
market. History records that highly developed illicit
operations developed not just to evade the imposition
of taxes, but also to avoid tari€s and other market
controls. Indeed, by creating situations where other-
wise law-abiding members of society see advantage
in resorting to secret and illicit suppliers of goods or
services, the existence and long-term viability of
criminal and subversive structures will continue to
be fostered.
The horrendous trade that has developed in immi-
grant `workers' and `refugees', has also enabled orga-
nised crime to retain in¯uence and control over these
poor men and women that it has placed in, or assisted
in ®nding work for. Although the illicit trade in
weapons and cultural and heritage property is vast,
it is the illicit market in drugs that has given organised
crime its almost incomprehensible resources and
capital. Unlike arms and works of art, the illicit
drug trade has a commodity which can be relatively
easily smuggled and for which there is a more or less
uniform, discreet and insatiable market. In the early
days of what might be termed the modern trade,
those areas of the world which were in a position
to supply the raw material were not particularly
amenable to external supervision, let alone control.
To what extent some of the states that became
`victims' of this cancerous trade almost facilitated
the existence and growth of the criminal enterprises
that subsequently took advantage of these opportu-
nities, is a matter for debate. It is true, or at least rea-
sonably well documented, that some criminal groups
that had been almost suppressed prior to and during
the Second World War were `allowed' to revive
and even strengthen themselves as a bulwark
against the threat of communism. It is said that such
a strategy was defensible on the basis that these orga-
nisations tended to have local concerns and were not
at the time a viable threat to other societies. An alle-
gation of naivety is always easier to assert with the
privilege of hindsight, and perhaps the `planners'
really did believe that the Sicilian gangs thought
drugs were immoral! On the other hand, the consis-
tent inability of those that inform and advise the
`planners' to predict even quite fundamental
changes must not be forgotten. The developments,
already referred to, in technology and mobility,
were much more profound and quicker than
perhaps were anticipated. Furthermore, even the
most alarmist predictions of the growth of the illicit
market and trade in drugs and narcotics proved to
be conservative. Drugs became, during the 1970s,
just enough of a pro®table and easy trade for even
traditional and `conservative' organised crime
groups to ignore. Within a decade, even terrorist
groups, which conventional wisdom considered
unwilling to risk the taint of drugs, entered into
the market, and by so doing became virtually
indistinguishable from `ordinary' organised crime.
WHY LAUNDER?
The reasons why an individual, not to mention an
organisation, would wish to hide the source of
money, or transmit it in a manner which obscures
its ownership or character, are legion. While a great
deal of attention has been given to the vast pro®ts
that are being generated by the illicit trade in narco-
tics, it is dangerously misconceived to assume that the
processes involved in money laundering cannot be,
and are not, deployed just as e€ectively to wash and
covertly transfer funds produced by other types of
crime, or even activities which would not be gener-
ally considered criminal, but to which a certain
amount of opprobrium might attach. There are
pressing needs for `secret money' not only in the
underworld of organised and syndicated crime, but
to service intelligence and security networks and to
facilitate if not `ordinary' commercial and banking
transactions, at least activities which are not necessa-
rily abusive. There are needs for `unaccountable
funds' in many situations and the processes which
are involved in washing money can be and are e-
ciently employed to create hidden reserves or secret
money, and are then utilised to service and transmit
such according to the requirements of those who
desire them.
It must also be remembered that the purposes for
which money is required, will also in¯uence, if not
dictate, the transactions which are used to hide its
true character and the way in which it is permitted
to move.
24
For example, those in facilitating the
Page 342
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¯ow of capital from developing nations, in violation
of currency and ®scal controls, may be able to operate
with impunity and no embarrassment in other juris-
dictions Ð especially those receiving the money in
question. Therefore, there will be little need to
ensure that the money surfaces covertly and there
will be no requirement that the money should
appear to have a legitimate origin. Indeed, when
the money is escaping from a country which is
seeking to expropriate wealth, whether pursuant to
a programme of so called `in-digitisation' or other-
wise, those involved in such ®nancial operations
may even be held by those whom they service and
those outside the country in question in high
esteem. Furthermore, it must also be remembered
that although an economic embargo may well be
considered an appropriate device to employ against
a country that is thought to be in breach of its inter-
national obligations, the perception in that country
may be very di€erent. State endorsed, and even
employed, `sanction busters' of Mr Ian Smith's
Rhodesia, or `Apartheid South Africa', let alone
Saddam Hussein's Iraq, employ all the techniques of
the money launderer.
However, where the funds are the result of crim-
inal activity it will be necessary to ensure that each
material element in the laundering process is covert
and the money must appear, when it ®nally
emerges from the pipeline, seemingly clean. The
purpose to which such funds are to be applied will
also, to some degree, in¯uence the processes involved.
If money is to be reinvested in other criminal or sub-
versive operations it will be important that the trans-
actions which establish it, are not referable to other
risk activity, but the money need not appear to
those who receive it to be from a legitimate source.
Where, however, the money is being used to pene-
trate an institution or organisation, then it will have
not only to be unconnected to the activity which
generated it, but also be apparently acceptable to
those in control of the relevant body. It should be
obvious that the somewhat simplistic notions of
money laundering that have been preferred in a
number of recent reports and publications pre-
suppose a clarity and simplicity of purpose that
rarely exist.
While many appear to have assumed, often
without much thought, that terrorist organisations
will inevitably adopt the modus operandi of organised
crime in laundering their funds so as to create secret
money, there are important di€erences between
terrorists and conventional criminals.
25
It has
already been emphasised here that the laundering
process will be determined by the needs of those
seeking to hide or disassociate themselves from the
wealth in question. Of course, many terrorist organi-
sations are almost indistinguishable from organised
crime and in recent years there has been a tendency
to label terrorists as almost a sub-species of organised
crime. Terrorists have stooped to ordinary crime to
raise funds and secure their objectives and, of
course, most terror networks would have the charac-
teristics of a `continuing criminal enterprise'.
However, while the objectives of most terrorists
can be stigmatised as criminal, they are generally
not acquisitive Ð at least in the proprietary sense.
Furthermore, a signi®cant proportion of terrorist
funding may not necessarily be derived from speci®c
criminal activity. Donations and contributions froma
diverse spectrum of supporters may to a greater or
lesser extent provide a signi®cant proportion of a par-
ticular group's funds. While the giving of property
for the purpose of committing serious criminal acts
might e€ectively `criminalise' the property in ques-
tion, it is not in origin necessarily illicit and thus,
tainted. It will often be quite clean in the sense that
the concept is used in the context of money launder-
ing control. As has been seen, the creation of secret
money is not of itself objectionable, let alone crim-
inal. The situation is not too dissimilar to the position
of ¯ight capital. The very act of transmitting the
wealth in violation of exchange control or in
evading some other form of ®scal or tax control,
arguably `criminalises' wealth, which would other-
wise be perfectly legitimate. There is also the
problem of those who support terrorist organisations
as seemingly bona ®de political groups, without any
desire to promote violence and perhaps in ignorance
as to what their contributions will be used for. Reli-
gious charities,
26
not only within Islam, have been
drawn into funding organisations which manifestly
do not practise what they preach!
Where terrorist organisations secure their funding
from criminal activity, whether it be tracking in
drugs or running extortion rackets, they will have
the same needs, in regard to the proceeds of their
crime, as do traditional organised crime groups.
They will wish to disassociate their wealth from
crime and all that might befall them as ordinary crim-
inals. It might well be necessary, depending on the
nature of their business, to facilitate the reinvestment
of their illicit wealth back into their continuing
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Financial Regulation and Supervision after 11th September, 2001
criminal enterprises. Terrorist organisations have
similar needs to ordinary criminals in securing the
instruments of their crime. However, their need for
security and secrecy is probably in most cases some-
what more compelling Ð given the stakes are some-
what higher. Perhaps to a greater extent than most
forms of organised crime, terrorists with a political
objective will require funds for a wider agenda.
They will wish to maintain individuals and perhaps
their families and networks, even when such are not
directly pertinent to the prosecution of terror. They
will also need to create secret money that can be
easily accessed by operational units. Consequently,
it would be rash to suppose that the expertise, such
as it is, that has been developed in pursuing the pro-
ceeds of drug tracking and serious fraud, is necessa-
rily applicable or even relevant to pursuing and
interdicting the funds of terrorist organisations.
Indeed, as will be seen later, terrorist organisations
will often seek to operate in large measure outside
the formal ®nancial and banking systems Ð
through informal and underground systems.
Some countries have courted money and wealth
on the basis that their legal systems will throw over
its owners and their transactions, a cloak of secrecy
thicker and rather more impenetrable than the tradi-
tional rules relating to professional con®dentiality.
27
In some instances, an assurance of absolute secrecy
has been marketed as a privilege that can be bought
for either a relatively small registration fee or for
the cost of opening a deposit. The original justi®ca-
tions for laws that extend the more traditional privi-
lege between a banker and his customer were no
doubt acceptable. It is hard to ®nd fault with any
attempt to protect those who are being slaughtered
by an oppressive and evil regime. However, other
countries have not been slow to perceive the bene®ts
of becoming a depository for not only fugitive and
¯ight capital, but also dirty money. Countries in
and around Africa, Latin America and increasingly
South East Asia and the Paci®c have been prepared
to extend the privilege of secrecy not only to their
oppressed but also to their very rich neighbours. It
is easy to criticise the naivety and worse of such coun-
tries, but prostitution says rather more about the state
of society and its values than about the morality of
the prostitute. There are countries which have
become so isolated from conventional sources of
development ®nance that their leaders, even assum-
ing them to be men of honour and integrity, have
little alternative to seeking funds from those who
require discretion. The laundering of money, in
varying states of cleanliness, through national treasu-
ries and government-sponsored projects is nothing
new. Some, such as the government of the Seychelles,
would appear to have made a decision to do rather
more than `stand on street corners'. Others have
imposed additional legal devices that e€ectively
block all inquiries from overseas, or for that matter
even domestic regulators and agencies. While the
provision of tax ecient services is unobjectionable
28
and there is justi®cation for many of the facilities
o€ered on an `o€shore' basis, there can be no doubt
that too many of these jurisdictions have become
complicit, or at least involved, in money laundering
activities. In some, ministers and senior ocials
have been corrupted, with serious consequences for
the integrity of their governments. While these pro-
blems were recognised by the late 1970s
29
and dis-
cussed in many international meetings during the
1980s,
30
it has been only recently that signi®cant
pressure has been brought to bear upon these states
to `clean up their acts'.
31
Of course, many have made very determined and
genuine e€orts themselves to improve their laws and
their administration, in an attempt to discourage bad
business and dirty money.
32
Others have, however,
not been so willing or perhaps able to take responsi-
bility. The suggestion that such states should be `cold
shouldered' by the international ®nancial community
is not new,
33
albeit now being much more seriously
considered by international organisations.
34
The
problem with such a policy is that it is susceptible
to political considerations which can render the
process apparently partisan.
35
Furthermore, it
remains to be seen whether it is practical to place a
jurisdiction in a state of purdah. Developments in
technology require rather more for an e€ective
blockade than a few `gun boats'. It must also be
remembered that it is not just Caribbean and South
Sea Islands that o€er the services that those so con-
cerned with these issues consider objectionable.
36
In
the modern world physical location is becoming
increasingly irrelevant.
The pressure that has been consistently applied to
those jurisdictions o€ering `o€shore' facilities has
been signi®cantly increased since the 11th September,
2001. Before the outrage, it was rumoured that the
Bush administration was nowhere near as sanguine
as the Clinton government in supporting the
OECD's initiative against those jurisdictions that
are considered to engage in `harmful tax practices'.
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However, 11th September changed this Ð dramati-
cally. The tragedy swept away any sympathy for
secrecy and coyness in ®nancial transparency, and
the collapse of Enron exorcised even the `ghost' of
apology. The potential impact of the new US legisla-
tion on the future of ®nancial and commercial activ-
ity could be profound. While the name of the new
US statute may be somewhat contrived Ð its reach
and impact may be rather more subtle. The
`Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and
Obstruct Terrorism (USA PATRIOT Act of
2001)' while wholly understandable in its concerns
and acceptable in its objectives, has the potential for
changing in a most signi®cant manner the way in
which the world conducts business. The provisions
contained in Title III enhancing the obligations on
those who handle other people's wealth in the USA
are more or less in line with what will soon be the
`standard' in Europe. The di€erence, as always, is
that in the USA the rules will be enforced! Whereas
in Britain organisations such as the Financial Services
Authority speak in terms of `setting standards', the
US agencies articulate their objectives rather more
robustly! Of great signi®cance is the extension of
the regime to foreign ®nancial institutions with
assets in the USA, as a pre-condition for doing any
business in the USA. Previously most of these busi-
nesses were not directly under the yoke of US law.
The statute also goes far further than even the
OECD was contemplating in its o€ensive against
jurisdictions that had `unfriendly' (that is to the
developed nations) tax systems. All correspondent
accounts for `foreign shell banks' are outlawed. Addi-
tional `due diligence' and enhanced `know your cus-
tomer' procedures will be required for US private
banking and correspondent banking accounts that
involve foreign persons, foreign o€shore banks and,
perhaps most signi®cantly, correspondent banking
accounts of foreign banks in jurisdictions designated
as `non-cooperative'
37
by inter-governmental organi-
sations in which the US government participates.
Thus, those countries on both the FATF and
OECD black lists will be included in these new
provisions. This has serious implications for a
number of jurisdictions such as Israel and the
Philippines whose failure to enact and implement
appropriate law is not entirely the result of apathy
or irresponsibility.
The Act also empowers the US Treasury to initiate
measures that will require far greater inquiry and
surveillance over accounts from suspect foreign juris-
dictions and by foreigners. The application of the
general US law relating to money laundering is also
greatly increased by providing that the US courts
will have jurisdiction if any part of a money launder-
ing transaction occurs in the USA or if the foreign
person is a ®nancial institution with a bank account
at a ®nancial institution in the USA. While certain
circuits in the USA have been sympathetic to apply-
ing the US law on a more or less extra-territorial
basis, this new statute puts the issue beyond doubt.
The Act also requires foreign institutions to cooperate
and facilitate cooperation in investigations and enfor-
cement actions. It is also worthy of note, given the
debate that is taking place in many jurisdictions
about the control of corruption, that the statute
makes it clear that laundering the proceeds of
foreign corrupt practices is within the reach of the
US law.
The PATRIOT Act will have a considerable
impact on the level and depth of compliance that
will be required not only by those operating in the
USA, but by any institution or intermediary that
deals with the USA or e€ectively transacts its business
in US currency. Consequently, the US requirements
will become the international norm, like it or not.
The extent of the present US government's change
of attitude on such matters as ®nancial privacy and
the `legitimacy' of o€shore `tax ecient' activities
has been profound after the atrocities of the 11th
September. While in many areas of the legal system
people are used to legislation being little more than
a reaction to an event, such as a scandal which has
outraged public sentiment, the magnitude of the
impact on people's lives of some of the laws that
are now being enacted in the wake of the attack on
the USA has perhaps not been appreciated. The
danger is that a good deal of nonsensical law, that
may even produce counter-productive results, may
be swept into the statute book, on the crest of a
wave of genuine concern to deal with a dangerous
and despicable group of people. The cost to everyone
of the outrage in the USA may be far greater than
many suppose.
The impact of the new US legislation and the
measures that will follow Ð at least in the developed
economies, will have a serious impact on those
jurisdictions that have been regarded, appropriately
or otherwise, as `non-cooperative'. Indeed, their
®nancial institutions may well ®nd themselves
practically excluded from the international markets.
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Financial Regulation and Supervision after 11th September, 2001
US intermediaries and other international players
may simply conclude that the costs of compliance
and regulatory risks are just too great. The interna-
tional economic, political and social implications of
excluding from the international banking and ®nan-
cial system those who do not `measure up' may not
have been adequately considered in the rush to
address the ®ght against terrorist property. When
many Western and socially responsible governments,
including the author's own, are concerned to address
problems of social exclusion resulting, in part, from
lack of access to banking and related services, it
seems strange that there should be any contemplation
of the de facto exclusion of whole continents. Of
course, the issues are complex and the appropriateness
of particular initiatives di€ers from country to
country and society to society. What is clear,
however, is that there is a very real danger of us
doing far greater long-term and systemic damage
to the ®nancial and corporate world than bin Laden
would ever have dreamed possible.
THE LAUNDERING CYCLE
So far there has not been an attempt here to set out
what money laundering involves. Money launder-
ing, secret money and dirty money are often
spoken about in the same breath, without attempting
to establish the interface between the process and the
product. De®nitions of money laundering range
from the authoritative language of statutes to the
punchy comments of the judges. For present pur-
poses, and at the risk of adding yet another to the
lists, it amounts to a process which obscures the
origin of money and its source. Of course, this is a
wide approach, which would encompass transactions
designed to hide money as well as wash dirty money
into clean. It is the processes of transfer and mis-
representation which constitute the modus operandi
of washing and secreting wealth. Unfortunately,
because of the attention that has been given, under-
standably, to the ®ght against drug cartels, the topic
of money laundering has become linked to, if not
captured by, the debate on tracing and con®scature
of the pro®ts from the illicit narcotics trade. Conse-
quently, most discussions of money laundering
focus almost exclusively on this, and ignore the
wider issues. The author has deliberately attempted
to avoid placing emphasis on the drug-related
aspects of the subject, although from the
standpoint of statutory law and in particular
systems for international cooperation, it is in this
area that most, if not all, signi®cant steps have been
taken.
Discussion of the processes involved in money
laundering has been limited and essentially derivative
outside the USA. Few have recognised that even the
now traditional process of laundering involves a series
of actions and not a seamless process. Perhaps this is
understandable given experience in Britain with
regard to other areas of asset recovery and tracing.
While establishing the derivation of property pur-
suant to a tracing claim is nothing exceptional, such
cases rarely involve the structuring of transactions
solely for the purpose of avoiding investigation.
Obviously, there are cases in which considerable
care has been taken to frustrate inquiry, particularly
where the funds in question have been created or
diverted by systematic fraud. However, in Britain,
at least until comparatively recently, the need to
examine deliberate and sophisticated attempts to
obscure ownership and control were rarely encoun-
tered by lawyers or for that matter by policemen.
Thus, there is still a tendency towards a somewhat
simplistic notion of the laundering process, even in
the case of narcotics tracking. Laundering will
involve a series of stages and di€erent legal enforce-
ment considerations will naturally be applicable to
each.
Many forms of crime and misappropriation will
produce quantities of cash in relatively low denomi-
nations. This will need to be consolidated into a form
of wealth which can be more easily transported, par-
ticularly out of the jurisdiction. The methods of
achieving this are limited only by the ingenuity of
the launderer. Of course, high turnover and relatively
low investment enterprises, which can be used to
facilitate such a process, will be especially attractive,
particularly if they are outside the conventional
banking system. Those involved in consolidating
cash at this stage of the laundering cycle will be
most concerned to avoid the creation of any external
record which could be used to initiate an audit or
paper trail leading to subsequent stages or layers of
the operation.
Once the money has been converted into a form
which can be transferred or smuggled, it will often
be moved o€ shore. This has a number of practical
advantages. First, it will often place the funds
beyond the legal reach of the authorities in the juris-
diction where the activity giving rise to the pro®ts
occurred. Even if the relevant laws are capable of
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application on an extra-territorial basis, and very few
are, by involving another jurisdiction signi®cant
practical barriers are placed in the path of investiga-
tors in obtaining and securing evidence that would
be admissible before a court. As has already been
mentioned, certain jurisdictions are willing to o€er
banking and other facilities on the basis that secrecy
will be assured. Sadly, there are countries that have
been prepared to facilitate the receipt of money no
matter what its source. Once the money has been
taken o€ shore it can then enter either directly, or
more likely indirectly, into the conventional
banking system. Obviously, the more discreet this
process is, the better for the launderer. Hence the
attraction of jurisdictions either that o€er secrecy or
in which the level of corruption is sucient to
ensure e€ective non-cooperation with foreign
agencies.
Once the money has entered the conventional
banking system it can move through usual channels.
The launderer's objective will be to create a web of
transaction, often involving a multitude of parties,
with various legal statuses in as many di€erent juris-
dictions as possible, through which the money will
be washed on a wave of spurious or misleading trans-
actions. The purpose of this is to confuse even the
most dedicated and well-resourced investigator and
to defeat any attempt to reconstruct a money trail.
Given the ease with which companies and other
legal entities may be created in countries throughout
the world, the launderer's only constraint is likely to
be ®nancial or the time at his disposal. On the other
hand, it must be remembered that the laundering of
money is a cost and both he and his principals will
only wish to expend what is necessary and prudent
to ensure the relevant funds remain beyond the
reach of law enforcement agencies or others inter-
ested in locating them. Obviously, the amount of
e€ort and expense that will be required for launder-
ing, for example, the pro®ts of a major drugs opera-
tion, would be rather more than that required for
frustrating a regulatory authority, investigating a
case of suspected insider dealing. It must also be
remembered that while the money is in the pipeline
it is unlikely to be fully usable. Consequently, most
launderers are not only mindful of the costs involved
in the actual process, but the length of time that will
be involved in washing the money. Given the impor-
tance of ensuring the unreliability or preferably the
unavailability of records upon which an audit trail
can be based, there is an increasing tendency for
those involved in money laundering to resort to the
old practice of cash transfers and bulk movement of
currency. Containerisation has provided the laun-
derer with a relatively cheap and statistically reliable
means of moving large amounts of money around
the world without having to risk the creation of con-
ventional records. Thus, the circumstances will par-
tially in¯uence the extent of the laundering process
and its sophistication. Laundering operations will
range from the simplest manipulation of accounts
to structures involving hundreds of companies,
with thousands of bank accounts. However, it must
always be remembered that the larger the organisa-
tion that is employed to launder the money the
greater the costs and the higher the risk of detection
or of something going wrong. In this context it
should not be forgotten that developments in
information and transaction technology have been
of considerable assistance to the launderer.
The transactions which are used to obscure the
source of the relevant funds will be structured in
such a manner as to render it almost impossible for
admissible evidence to be obtained, which would
allow a court to establish the derivation of the
money. Law enforcement agencies often refer to
this process as layering, but this rather implies that
with diligence the true facts may be uncovered
through a progressive investigation. While there
have been cases where dedicated, extremely lucky
and well-resourced investigators have been able to
peel o€ a series of layers to reveal what in fact took
place, in the case of the more sophisticated structure,
the concept of layering is too simplistic. Certain
operations are structured in a manner that resembles
a mosaic or kaleidoscope rather than a layer-cake.
Transactions will not be progressive, but parallel,
establishing mutual obligations which can be
married or crossed, often on a contingent basis, and
which would not be substantiated to the satisfaction
of a court applying conventional legal rules. It is,
however, true, that in so far as the notion of layering
is often used to conjure up a picture of a stone gradu-
ally dropping to the bottom of a pond, the longer
money remains in the system the more dicult it is
to follow and identify it. Furthermore such an
analogy makes the important point that the money
in ¯ight will be most noticeable when it ®rst `splashes'
into the pool. It is at this point of entry into the
conventional banking system that regulations
designed to create an `audit trail' are likely to be
most e€ective.
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Financial Regulation and Supervision after 11th September, 2001
In recent years there has been much discussion
about the impact of technology on the processes of
money laundering. There can be little doubt that
criminal organisations have been and are as well
placed as anyone to take full advantage of develop-
ments in technology and in particular communica-
tions technology. The advent of cellular telephones
which have the capacity to reach around the world
a€ord to criminal organisations a communications
system that few could have dreamed would exist
today, a decade ago. Added to this, the development
of electronic systems which facilitate and greatly
speed up transactions, the ever-increasing signi®cance
of the Internet, and the meaninglessness of trans-
actions in the realm of cyber-space, all serve to
exacerbate the profound problems confronted by
those seeking to establish the providence of wealth.
Once the money has been agitated, to the satisfac-
tion of the launderer, it will be necessary to place it in
an `end deposit'. Of course, the nature of this `end
deposit' will depend upon a variety of factors.
However, in many cases it will be desirable to
return the money to the jurisdiction in which it was
®rst generated.
38
Those responsible for making such
pro®ts will often wish to enjoy at least part of the
fruits of their endeavour, and where there is a conti-
nuing enterprise to fund the washing funds will be
crucial. Therefore, the launderer may well be
required to ensure that at least a proportion of the
money is repatriated to the country of origin. Thus,
it will be necessary for him to create a transaction,
or more likely a series of transactions, which will
bring the `clean' money back home. This can be
achieved in a number of ways, but it will be desirable
to achieve the repatriation in a manner which can be
explained and which will justify the surfacing of the
wealth in the hands, or under the control, of the
relevant principal.
A technique which has been employed to some
e€ect, is the incorporation of essentially shell compa-
nies, which can then `sell' their securities to `overseas
investors'. The `overseas investors' will be the money
laundering puppets. The purchase of such securities,
which will be properly documented, will provide a
vehicle through which the cleansed money can ¯ow
back into the control of those who established the
issue. It is important to recognise the use that such
companies may be put to in the context of money
laundering operations. There have been cases where
the existence of operations such as this has been
mistaken for high-pressure selling frauds or `boiler
room' scams. Although the modus operandi may be
somewhat similar, especially at the early stages, the
purpose and implications of the operation are very
di€erent.
It must be appreciated that money laundering
involves a series of stages and each stage will have
its own characteristics. Those charged with the detec-
tion and investigation of such matters need to be
alerted to the implications of a process which will
have been carefully designed and structured with
the objective of minimising exposure and, thus, the
risk of interference. Sadly, legislators have often
failed to appreciate the complexity of money laun-
dering Ð in terms both of its character and of its
objectives. They have taken for granted a somewhat
stylised model, which rarely conforms to reality. The
de®ciencies of essentially Western-crafted legislation
are perhaps best shown in this regard in the context
of underground banking systems.
GOING UNDERGROUND
Underground banking systems have developed in
some societies to a level where they rival in terms
of eciency and capability the conventional banking
system. While such systems may have developed
within ethnic societies because of distrust for the
host country's institutions, many have a history that
is rather more complex and re¯ects rather more indi-
genous social and cultural factors. The importance of
underground banking systems on money laundering
operations has become more widely appreciated in
recent years, and given the dispersal of certain
ethnic communities, there is today little doubt that
such systems exist on an international basis and play
a not insigni®cant role in the laundering of dirty
money. Given the involvement of certain ethnic
groups in highly pro®table crimes, such as drug traf-
®cking, the signi®cance of these traditional banking
systems and more recent adaptations and imitations
should not be underestimated.
Further, as governments are increasingly recognis-
ing, given the distorting e€ect that the underground
banking system can have on money ¯ows, it cannot
be ignored by those who operate wholly within the
conventional banking system. Most underground
systems will also, at some stage, have to interface
with conventional ®nancial or banking institutions.
There are innumerable types of underground
banking ranging from highly sophisticated structures
operated by overseas Chinese groups to relatively
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informal barter and smuggling-based operations in
Africa. Most systems do not involve the movement
of cash and depend for their ecacy on tokens. The
Chinese chit or chop system, the Pakistani Hundi
system, and the Indian Hawallah operate primarily
within de®ned racial groups, often with some addi-
tional bond of a tribal or geographical nature. They
rarely involve the physical movement of cash, or
for that matter anything other than tokens which
are regarded within the special structure of the
system as the equivalent in value to the relevant
cash sums. The Hawallah system is rather more a
system of compensation through related transactions,
but given the facility for aggregation, actual pay-
ments between those `funding' the systems are kept
to the minimum. The eciency of a paperless and
practically record-less banking system which is
capable of transferring substantial amounts of
wealth is obviously an attraction for those involved
in money laundering. Money launderers have emu-
lated the underground systems to some extent, and
have shown an increasing willingness to make use
of existing systems on a commercial basis. Laws and
enforcement policies which have been fashioned to
address money laundering through conventional
banking systems are of little practical relevance in
the case of such underground systems.
Interest in the underground banking systems, par-
ticularly operative in the sub-continent and Middle
East, has blossomed after the 11th September.
While the evidence is in part patchy, it is tolerably
clear that al-Qaeda and its associated networks uti-
lised various forms of underground banking to
move and store wealth. What is of particular interest
is the way in which in particular the operations more
closely associated with bin Laden were able to inter-
face these traditional and informal systems into the
conventional ®nancial world, largely through the
use of nominee and front companies registered in
certain `o€shore' jurisdictions. It is also clear that reli-
gious foundations and even registered charities were
utilised not only to collect funds from supporters,
but also to facilitate integration. Perhaps one of the
most disturbing aspects of these revelations was the
apparent and pervasive ignorance of law enforcement
and intelligence agencies as to the nature, extent and
operations of these underground networks. Major
intelligence agencies were forced to admit that this
was almost an entirely uncharted sea and there was
a scrabble to `recruit' almost any expertise that was
thought to be available and relevant. Perhaps even
more disturbingly, recognition is dawning that
perhaps these networks cannot be penetrated to the
extent necessary to provide the level of intelligence
that is required, at least for predictive intelligence
and proactive action.
PURSUING THE PROCEEDS OF CRIME
Hiding money is one thing, but as has already been
indicated, attempting to disassociate wealth from its
actual source smacks of something rather more
sinister. While those that have obtained their wealth
through perhaps rather disreputable methods no
doubt prefer their neighbours and admirers to
remain in ignorance Ð unexplained wealth may
draw suspicion and unwanted interest from both
sides of the law Ð until very recently there was
little risk to those assets as a consequence of legal pro-
cedures, other than those associated with taxation.
Although it is possible to ®nd in many ancient
systems of law provisions which allow the state or
ruler to forfeit the instruments of crime, and even
the proceeds of crime, and in extreme cases all the
criminal's property, there are few contemporary
examples of such laws enduring. It is much more
recently that governments have realised that where
criminal conduct is motivated by economic gain, it
makes a great deal of sense to attack the pro®ts of
crime: to hit the criminal in his pocket! Furthermore,
where the criminal conduct involves a continuing
criminal enterprise, taking away or otherwise inter-
dicting the proceeds of crime might well prevent
the reinvestment of this wealth back into the criminal
operation, thus causing serious liquidity problems.
US agencies have been particularly attracted by the
logic of this approach, the more so because, in the
main, those assets that are seized remain within the
possession and use of law enforcement. Furthermore,
the law as it has developed in the USA, particularly in
regard to civil enforcement actions in rem,
39
has
proved to be relatively e€ective. Indeed, given the
manifest failure, viewed from the USA, of various
programmes based on drug supply and demand
reduction, attacking the assets of the drug barons
has appeared increasingly attractive. The signi®cance
of this strategy has been elevated by obtaining the
support of other jurisdictions, and in particular
inter-governmental organisations, to almost that of
a crusade. A series of international conventions and
agreements
40
have directly or indirectly obliged
countries to enact legislation, which enables their
Page 349
Financial Regulation and Supervision after 11th September, 2001
authorities to seize and then, on conviction for a
drug-related o€ence, con®scate property which
represents the proceeds of that crime. Most states
have extended these laws to cover property which
can be shown to be directly, or even indirectly, the
proceeds of such a crime, even though it took place
in another jurisdiction. More recently, this approach
has been sensibly extended so as to encompass the
proceeds of all serious crime, whether drugs-related
or not. These provisions are also reinforced by laws
which facilitate ®nancial investigations and mutual
legal cooperation. Indeed, discussion of such laws
has dominated international meetings for the last
decade and there is every sign that this will continue
well into the new millennium.
In the case of crime that is motivated by economic
gain it does make sense for the legal system to focus
attention on the `pro®t' that the criminal hopes to
make from his illicit conduct. It is recognised today
that far more crimes than those that might be
described as `economic crimes' are motivated by
greed and the prospect of ®nancial gain. For
example, the motivation driving most drug-
tracking operations will be the prospect of ®nancial
rewards disproportionate to the risks involved.
Organised crime, given its character and often its
structures, will be particularly focused on the ability
to generate income. Its purpose is to `wring exorbi-
tant pro®ts from . . . society, by whatever means,
legal or illegal, fair or foul . . . '
41
It also needs
money as well as the prospect of disproportionate
rewards to retain and foster its operational ecacy
and the loyalty of its members. Because economic
and commercial crime constitute relatively high
reward and low risk activities, organised crime
groups have become increasingly attracted to this
sort of activity. Interdicting the proceeds of crime
can also provide a useful mechanism for undermining
the ability of criminals to invest in other criminal
activities or their own enterprises. Although there is
little evidence, other than on an anecdotal basis, as
to the e€ect of such strategies, it stands to reason
that inhibiting the ¯ow of funds into such activities
must have a disrupting e€ect on the enterprise. This
is particularly so when liquidity is at a premium, as
it is in drug-related crime, where a high proportion
of transactions are spot and in cash and yet retention
of large amounts of cash is both impractical and high
risk for the criminal.
Given the justi®able concern in the USA and other
Western states about the implications of the illicit
trade in narcotics, and the elevation of their ®ght
against organised crime to a matter of national secur-
ity, it is not surprising that there is no shortage of leg-
islation seeking to inhibit the laundering of the
proceeds of crime. Of course, much of this is
related to laws which seek to con®scate and forfeit
wealth that can be shown to be derived, directly or
indirectly, from serious criminal activity. Indeed, as
has already been pointed out, the existence of such
provisions a€ords criminals with an incentive to
resort to what is often a relatively expensive and
time-consuming risk-laundering process. There are
other devices within the legal system to deprive crim-
inals of the bene®ts of their illicit enterprise, ranging
from taxation to the imposition of ®nes. It is,
however, the fear, rarely the reality, of con®scation
under these relatively new laws that is thought to
have increased the quantity of money laundering
activity. Whether this perception is true or not is
questionable. It might well be as simplistic and
naive as so many other perceptions in this area of
law enforcement.
This is not the place to discuss in detail the
many national, regional and international initiatives
against the pro®ts of crime.
42
Suce it to record that
there can be few countries that today have not
enacted laws, or which are not in the course of enact-
ing laws, which provide for tracing, seizure and con-
®scature of at least the proceeds of drug-related
crime, if not other forms of serious crime, and which
do not at least to some extent criminalise attempts
to launder the proceeds of such criminal activity.
It has already been pointed out that until recently
relatively few countries had laws speci®cally addres-
sing the funding of terror and terrorist property.
Indeed, the UK, given the problems that it has
faced in Northern Ireland, was at the time of the
outrage in New York one of the few countries to
have comprehensive legislation and dedicated law
enforcement and intelligence resources. Since 11th
September, 2001, many countries have taken steps
to bring into their laws the provisions of the Interna-
tional Convention for the Suppression of the Finan-
cing of Terrorism, and give e€ect to the various
initiatives from a host of inter-governmental and
non-governmental organisations.
43
A profound weakness of the strategy of attacking
criminal enterprises through the con®scature and
forfeiture of ill-gotten wealth, is that the law has
proved to be exceedingly dicult to apply. Outside
the USA, the value of property and money actually
Page 350
Rider
con®scated is very small when compared with even
conservative estimates as to the amount of wealth
that is likely to be ¯owing through the criminal pipe-
line. Of course, estimates or rather guesstimates as to
what this ®gure might be vary greatly depending
upon the perspective of those concerned. There are
no really reliable ®gures and although various
attempts have been made to quantify the amount of
dirty money that may at any one point in time be
¯owing through the pipeline, at the end of the day,
it comes down to speculation and informed guess-
work. Of course, the situation is complicated by the
presence in the systems of money and wealth
which, although not directly the product of crime,
is for some reason or another susceptible to the
same processes of laundering.
In 1995 a former senior ocial in the Legal
Directorate of the British intelligence and security
service was reported in a newspaper as expressing
the view that £200bn a year of narcotics related
money passes through the City of London.
44
Whether such an astronomical amount is anywhere
near the truth remains to be seen. While some have
`con®rmed' the accuracy of this guesstimate, others
have been somewhat more conservative. The truth
is that so little work has been done on this question
in Britain, or for that matter anywhere outside the
USA, no one really knows the extent of the
problem. Ms Elisabeth Bresee, then Assistant Secre-
tary (Enforcement) in the US Department of the
Treasury, in giving evidence to the Sub-Committees
on Financial Institutions and General Oversight and
Investigations of the House of Representatives'
Committee on Banking and Financial Services was
asked to quantify the amount of money being
laundered through the USA.
45
She stated:
`partial ®gures can give one some idea of the
problem. The Oce of National Drug Control
Policy estimates that approximately $60 billion is
now expended in the purchase of illegal narcotics
each year. If 80 per cent of that represents pro®t,
the sales generate $48 billion to be laundered each
year, simply on account of narcotics sales,
without taking into account all of the other
crimes whose proceeds require laundering. And
even a fraction of that number, reinvested year
after year, generates a sizeable and frightening
war chest of criminal capital.'
Ms Bresee then pointed out, that if one sought to
obtain a picture of the total amount of wealth
being laundered in the USA, then one had to add
the pro®ts from crimes committed outside the USA
that were laundered through the USA, or by utilising
US currency or US institutions, and also the repatria-
tion, either permanently or as part of the laundering
cycle, of wealth generated by US criminals at some-
time in the past, that had been held outside the USA.
When one takes all this into account, perhaps the
comment reported in the British press in 1995 was
not as preposterous as some have made out.
What is manifest and indisputable is that the
amount of money that would, in theory, be suscepti-
ble to the application of legal forfeiture laws is vast. In
Britain, however, the Third Report of the Home
Oce Working Group on Con®scation
46
stated
that between 1987 and 1997 the authorities in
England and Wales have been able to con®scate
only £37,261,600 of drugs-related wealth. Under
legislation designed to take the pro®t out of all
serious crime, whether drugs-related or not, the
amount, since the law came into force in 1989 is
just £4,484,659. If even a conservative estimate of
the amount of wealth liable to con®scation during
this period were compared with these ®gures, the
results obtained would, if the matter were not so
serious, be laughable. The Performance and Innova-
tion Unit of the UK Cabinet Oce in its report,
Recovering the Proceeds of Crime, published in June
2000, indicated that the results since 1997 have been
no less disappointing. Indeed, the report states that
the law is simply not working. Perhaps even more
surprisingly, the results under the various measures
passed to deal with terrorism in Northern Ireland
have been equally uninspiring. The Special Branch
of Scotland Yard, which has national responsibility
for policing this legislation, has failed to con®scate
even one pound from Irish terrorists! It remains
to be seen whether the new legislation that is
currently before Parliament, completely overhauling
the British law on the proceeds of crime and in
particular providing for civil recovery by a new
Assets Recovery Agency, will produce more accepta-
ble results.
47
Of course, there are mitigating factors:
the law is relatively new; ®nancial investigations are
always dicult, time consuming and often complex;
it is only recently that law enforcement agencies
have been able and willing to commit the necessary
resources to this strategy; and the courts and prosecu-
tors have yet to become entirely comfortable with
this body of the law. On the other hand, the world
Page 351
Financial Regulation and Supervision after 11th September, 2001
community is heralding the strategy as the way
ahead, and Britain is not in any way coy about
`advising' if not `encouraging' other states to follow
it down this path. In evaluating the ecacy of this
strategy, however, it is most important to remember
that the criminal law is only one weapon and much
can be achieved, as it has in Britain, under tax law
and the civil law.
48
It might be argued that the very presence of con®s-
cature and anti-money laundering laws discourages
criminal organisations from placing their wealth in
the relevant jurisdiction, either as part of the launder-
ing process or by way of investment. The presence of
such laws is an unnecessary risk and the regulatory
obligations that the laws impose on those who
handle other people's wealth imposes an additional
cost on the criminal doing business in the jurisdiction.
While it is true that money laundering as any eco-
nomic activity is susceptible to being in¯uenced by
cost considerations, it is not necessarily the case that
even a high level of control, and e€ective control at
that, will render the jurisdiction unattractive to the
criminal enterprise. The organisation will require a
place in which to hold its wealth which is secure
and well respected. The `end-deposit' country must
be reputable so that the organisation's laundered
and now `clean' money can be deployed as it sees
®t with the minimum of suspicion.
It has already been pointed out that it is somewhat
naive to evaluate the ecacy of the various laws
allowing the state to con®scate the proceeds of
crime simply by adding up the amounts of money
that have in fact been successfully seized. The same
is equally true, if not more so, in contemplating the
ecacy of the anti-money laundering laws. Convic-
tions for the speci®c o€ence of money laundering,
outside North America, have been few indeed! In
Britain convictions for this o€ence can be counted
on the ®ngers of one hand and there has never been
a conviction under the money laundering regulations
which impose regulatory and compliance obligation
on intermediaries. The experience of other countries
is not dissimilar. In the circumstances and given the
high pro®le that this area of the criminal justice
system has, it is not surprising that thought is being
given in many countries to ways in which the law
may be better enforced.
A serious issue in the minds of many is the price
that the ®nancial and banking system is required to
pay for the strategy of taking the pro®t out of
crime. It is not an exaggeration to claim that the
impact of anti-money laundering law on the ways
in which business is carried out in the British ®nancial
sector, is greater than that of legislation, such as the
Financial Services Act 1986, which is directly aimed
at the conduct of ®nancial business.
49
The costs
involved in establishing, maintaining and demon-
strating compliance are considerable by any standard.
It is also clear that in many jurisdictions even dedi-
cated attention to compliance will only serve in miti-
gation should an o€ence actually occur. The total cost
of compliance, training and supervision in regard to
the control of money laundering in Britain can
only be a very rough guesstimate, like so much in
this discussion. It has been put at £600 million a
year. Of course, there are those who would wish to
add on the cost of `loss of opportunity'. Whether
they have in mind the business that they cannot
undertake because their resources are otherwise
employed in compliance, or the loss of `good'
money laundering business remains to be seen.
What is clear is that policing the anti-money launder-
ing laws and their regulations represents a consider-
able in-house cost within the ®nancial services and
banking industry. There is also the important issue,
which has yet to be fully grasped in many countries,
of the impact of anti-money laundering laws on other
areas of legal responsibility. For example, little
thought has been given to the relationship, if any,
of the obligation cast upon ®nancial intermediaries
to know more about their clients and the responsibil-
ity on certain intermediaries to ensure that their
advice and management is suitable to the circum-
stances of their clients.
50
In other words, does the
`know your customer' rule impact on the duty of
care and suitability of advice? Furthermore, while
most legal systems protect intermediaries from
direct legal liability to their customers when they
report their suspicions to the authorities, few
protect against defamation suits or collateral and
transactional liability to third parties. There is also,
at least in some common law jurisdictions, a possibi-
lity of a con¯ict between the law pertaining to the
protection of ®duciary interests and the o€ence of
disclosing that an anti-money laundering investiga-
tion is imminent.
51
All these, and many other
issues, represent a real risk to those who handle
other people's wealth, which needs to be placed in
the balance when evaluating the `cost-bene®t' of
the strategy so enthusiastically adopted by all Ð
and imposed on those who want to join the West's
global economy.
52
Page 352
Rider
The present author would not wish to create the
impression that he considers that focusing upon the
assets of criminal organisations has not played, and
will not continue to play, a signi®cant role in the
control of organised and serious crime. Indeed, he
was one of the ®rst to advocate such a strategy and
has been a staunch supporter of it over the years.
53
However, he is convinced that it is no panacea.
There is a real danger that the understandable desire
on the part of leaders and politicians to come up
with a `solution' to the problem of organised crime
has rendered them too willing to seize upon what is
no doubt a good weapon, when used with others,
but in no way a solution. To some extent those
responsible for the management of law enforcement
have also found it convenient to espouse this strategy
when confronted by the problems of serious ®nan-
cially oriented crime.
54
The attention of the media
and the political implications of the nature of the
problem have underlined the need for prompt
action which can be at least represented as directly
attacking the primary threat. Furthermore, news-
papers tend to report the value of seizures and do
not often follow the story through until con®scature
of the proceeds of the crime on subsequent con-
viction. Thus, in the mind of the public the law
does appear to be far more e€ective than in fact
it is judged purely in terms of the amount of
money that has been taken out of the criminal
pipeline.
55
If there is to be a signi®cant attack on those who
corrupt, exploit and subvert, rather more radical stra-
tegies will be required than those that have been
adopted, or perhaps have dared to have been contem-
plated in the past. It appears increasingly obvious that
any strategy based on the ability of a prosecutor to
prove, to the satisfaction of the court, that wealth
represents the proceeds of a crime or even a pattern
of criminal activity, can be expected to have only
minimal impact on the totality of criminal and sub-
versive assets. Although it may be possible to facili-
tate law enforcement by providing more and more
resources, fostering meaningful international coop-
eration, improving training and even by lowering
thresholds of proof, the need to establish a nexus
between wealth and speci®c crime will result in the
vast majority of criminal assets remaining well
beyond the reach of the law. While the costs to
criminals of using their ill-gotten gains may also be
increased through taxation, regulatory laws and
requirements, and even by law enforcement adopting
a strategy of disruption, the impact is likely still to fall
far short of that required.
Consequently, the author is convinced that
governments will need to devise a much more
radical approach to this problem. The notion of
taxing unaccountable wealth is not novel. Further-
more, there are many examples around the world
of laws which attach certain presumptions to the
holding of wealth that cannot be satisfactorily
explained. Thus, in Hong Kong,
56
if a public
servant is in possession of wealth beyond his salary
there is a legal obligation on him to explain its
source. The possession of unaccountable wealth is
presumptive of corruption. In Britain, the prosecu-
tion may request, on a second conviction for a
serious o€ence within a period of six years, that the
court regards that any property in the possession of
the defendant, that has been acquired during the last
six years and the source of which he cannot properly
explain, be presumed to be the proceeds of his crim-
inal lifestyle.
57
The provisions in the Proceeds of
Crime Bill 2001 will take this further. However,
this author remains convinced that over the next
decade more and more legal systems will move
over to imposing obligations on those in possession
of signi®cant amounts of wealth the source of
which cannot be publicly justi®ed. These obligations
may range across the spectrum, from mere transpar-
ency to e€ective con®scature. It will be for the society
in question to determine the appropriate balance.
What this new strategy will require, however, is a
very di€erent approach by law enforcement where
the skills of the tax investigator and ®nancial intelli-
gence ocer will be paced at a premium. The chal-
lenge for the future is to ensure that the steps taken
to promote probity and stability do not sti¯e the
very enterprise which drives economies or do not
trespass too much on the very ideals which remain
so precious to civilisation.
58
A related issue is that of the extent to which it is
recognised that the objective in dealing with serious
crime and even terrorism is not to place behind bars
the `minnows', but to disrupt the enterprise. While
it is becoming far more common for senior police
ocers, although still not many politicians, to
admit that the primary strategy today is one of dis-
ruption, the implications of this are rarely considered.
Policing is essentially reactive, and even when proac-
tive action is contemplated, there must be the com-
mission of a crime, or at least the reasonable
suspicion of one Ð and one that might be proved,
Page 353
Financial Regulation and Supervision after 11th September, 2001
according to exacting standards of justice, in the
courts. Consequently, disruption of enterprises,
whether organised crime or subversive, requires
skills and perhaps resources not always easily identi-
®ed within traditional policing agencies. In particu-
lar, the kind of intelligence that is required for
e€ective disruption is rarely available in police agen-
cies. Hence, the tendency to develop dedicated and
special resources, often outside the traditional law
enforcement environment. This has already been
seen in regard to other areas of activity that present
practical and resource problems for ordinary police
structures. Even if such activity remains properly
within the law, civil as well as criminal, there are
profound issues of accountability.
While it is probably the case that ®nancial regula-
tors' main contribution in the War will be to ensure
that the `gate keepers' to the ®nancial sector remain
alert and diligent in ensuring, as far as is reasonable,
that only those who are properly identi®ed and
who are `accountable' are permitted to do business,
it is possible that rather more will be expected of
some. The very process of monitoring compliance
on a prudential basis may well bring the regulator
into possession of relevant information. Its own sur-
veillance procedures may also throw up data, and,
of course, it is not beyond the realms of possibility
that information will be passed directly to regulators.
The issues raised by the receipt of such information
have already to some extent been addressed over
the years in the context of combating serious crime
and in particular organised crime. However, as has
been seen in the context of subversive and terrorist
organisations and their networks, the problems may
be di€erent and rather less easy to deal with. While
there can be little objection in law or from the stand-
point of human rights in passing information on to
appropriate law enforcement and other agencies in
regard to suspected crime, wealth that may possibly
be associated with terrorist networks may not be so
easily characterised. Indeed, under the laws of most
jurisdictions, the wealth is only `criminalised' by the
purpose for which it has been given or received.
Furthermore, given the very nature of subversion
there are issues which would not normally be
encountered in regard to ordinary criminal activity.
For example, the `legitimation' of terrorist organisa-
tions pursuant to a peace process, such as has recently
been witnessed in Northern Ireland and Sri Lanka,
59
throws up serious problems for those in possession of
these organisations' funds. Does the character of
wealth belonging to a proscribed terrorist organisa-
tion change when the organisation does a deal with
a government with which it has been at odds?
These issues as very real, yet remain unresolved.
The emphasis that law enforcement agencies, and
in particular specialised agencies within the security
apparatus of the state, will increasingly place on dis-
ruption of criminal and subversive organisations
also places agencies that provide relevant information
and perhaps even assistance in some diculty. For
example, what is the position of an ocial in a regu-
latory authority who is requested by an agent of say
MI5 or the CIA to intervene, within his legal powers,
to assist in the disruption of a ®nancial transaction.
While the intervention may be pursuant to legal
powers, it would not necessarily be for the purpose
that those powers were provided to him. While it
may well be that the suspect would be unlikely to
invoke the law, others who have been disadvantaged
or exposed on the transaction may well be only too
eager to litigate. Again these are real and pressing
issues.
In a number of situations information in the posses-
sion of regulatory authority or obtained pursuant to
speci®c investigative powers can be used only for
the proper purposes or interests that the authority is
charged with pursuing or protecting. This might
well create problems for ®nancial regulators.
60
It
has certainly done so in the past in regard to organised
crime. For example, when serving as an ocial of an
agency associated with the British government the
author found himself subject to criticism and then
disciplinary action, for passing information on an o€-
shore banking fraud and money laundering operation
to the competent and interested authority in the
USA. Indeed, this led to his being a defendant in a
civil action brought by the fraudster. While the
action was ®nally struck out, after the plainti€ had
been convicted of fraud in another country, the not
inconsiderable costs involved in defending this
action have never been recovered. On another occa-
sion the author was criticised for passing information
obtained by a Canadian securities regulator, with its
knowledge and approval, to the British Panel on
Take-overs and Mergers, because this body was not
a statutory body, albeit responsible for `policing'
the Code on Take-overs and Mergers. Similar
problems were encountered on a number of occasions
during the author's career.
While regulators may and often will wish to coop-
erate with their own authorities and those of other
Page 354
Rider
states, it is not always clear that they can and what the
consequences might be for them, if they do. The
burden that is now placed on those who handle
other people's money to cooperate with the authori-
ties and in e€ect `vet' the integrity of their clients has
already been examined above. Financial inter-
mediaries have been, to some degree, turned into
`reluctant policemen' in the forefront of the war on
drugs and now terror. There are decisions of the
English courts which oblige accountants, lawyers
and ®nancial intermediaries to take armative steps
to `blow the whistle' on their clients if they have sus-
picions as to their integrity and wish to avoid crush-
ing civil liability themselves to possible victims of
their clients' suspected frauds. This has been strength-
ened and reinforced by statutory provisions. The
problem with this strategy is that it is by no means
clear that adequate thought has been given to the
position of the individual of whom the law expects
so much. The same is true in regard to ocials who
may increasingly ®nd themselves in situations
where they face real legal and other risks.
Another perhaps even more sensitive issue is the
extent to which it is permissible, appropriate and
even practical for intelligence organisations to work
closely with ®nancial regulators. One of the reasons
often given by banking regulators as to why it
might be inappropriate for them to be seen to be
too closely involved with law enforcement agencies,
is that this might inhibit the vital relationship of
mutual trust and con®dence between regulators and
their regulatory community. In the protection of
the banking system and the stability of individual
banks, information must be able to pass, in con®-
dence, without the fear that it might subsequently
be used by other agencies in a prosecution or enforce-
ment action. Candour is an important and valuable
constituent in the relationship between regulators
and those subject to their authority. The extent to
which intelligence gathering organisations operate
within the regulated ®nancial sector is a matter for
speculation. It is common knowledge that both
domestic and international intelligence agencies
have penetrated the ®nancial sector and placed
persons in regulatory authorities. It is also the case
that some regulators have established arrangements,
even in some cases articulated memoranda of
understanding, with appropriate agencies.
61
This is
not in itself objectionable, provided what is
done remains accountable, legal and roles do not
become confused. Of course, where international
cooperation is involved the issues become rather
more complicated.
The various international initiatives designed to
inhibit money laundering require countries to estab-
lish Financial Intelligence Units. The primary
purpose of these units is to manage the mechanisms
that the relevant jurisdiction has for the reporting
of suspicious transactions or transactions of a certain
character or size. Some units have a wider role and
some operate rather more within the context of law
enforcement than an intelligence structure. In a
number of countries, the ®nancial regulators are
closely involved in these units and in a good many
the unit is housed in or is, indeed, part of the ®nancial
regulator. The Financial Crimes Enforcement
Network (FinCEN) in the USA represents one of
the most sophisticated Financial Intelligence Units
and is jealous of its role and independence. The
more established and better resourced units collabo-
rate through the Egmont Group, which is an associa-
tion of agencies, recognised as national ®nancial
intelligence units. Concern has been expressed in
some quarters as to the criteria for membership of
this group and the fact that some countries are e€ec-
tively excluded. Of course, it is not unreasonable for
agencies, such as FinCEN, to be concerned that the
integrity of intelligence passed within the group
must be beyond question. However, rather like the
issues raised in regard to the PATRIOT Act, not all
states will be in a position to establish a unit which
would meet the requirements of the Egmont Group
as currently constituted. The concern that certain
states should not be left outside the wall has led to
various inter-governmental organisations exploring
as to how best they might be able to assist in the
development of viable ®nancial intelligence facilities
in some of the smaller, developing and transitional
economies. It appears almost certain that the agenda
in international cooperation in the ®ght against
serious crime and terror will increasingly be set by
groups such as the Egmont Group operating
outside the traditional system for mutual assistance
in criminal matters.
In this paper the human rights issues that will
increasingly be thrown up by intelligence-led
responses to the threat of serious crime and in particu-
lar terror have not been laboured. Agencies within
the USA are used to having to address such issues,
but those outside the USA have little experience.
As more agencies become involved in pursuing
targets within their own mandates and utilising
Page 355
Financial Regulation and Supervision after 11th September, 2001
their own legal and other weapons, profound pro-
blems are likely to arise in regard to the management
of the case. Not only issues relating to the rights of an
individual will arise, but also questions as to the
management of evidence and the priority accorded
to speci®c actions. In Britain the problems thrown
up by parallel proceedings against the same indivi-
duals on the same evidence arising out of the same
facts, in cases such as the BCCI, have caused very
real problems. These are exacerbated when the
proceedings involve foreign jurisdictions.
What is clear is that after 11th September, 2001 all
those involved in ensuring the integrity of the ®nan-
cial markets and those who deal on them, whether
they wish to or not, will become increasingly
drawn in to new and developing intelligence net-
works and other such initiatives.
62
The implications
of this are not well appreciated. The danger that
what may be justi®able actions in the context of the
War on Terror give rise to other problems is a real
issue. If the e€ect of the PATRIOT Act and the
vast increase in security-related activity is that US
®nancial institutions or those who wish to continue
to deal with US markets cannot a€ord to handle busi-
ness from developing and transitional economies, it
may well be that bin Laden has achieved a telling
victory. The costs involved, for US institutions, in
complying with the requirements of the new obliga-
tions of due diligence and transactional veri®cation,
may well be such as to place the Western banking
and ®nancial systems beyond the reach of the Third
World. If this is so, then there might well be a devel-
opment of parallel and even underground banking
systems, which will have serious implications for
the global economy and its stability. Achieving a
balance is not going to be easy Ð but if wrongly
handled, the consequences might be more serious
than ever imagined.
REFERENCES
(1) This issue has been given added emphasis by a welter of
serious frauds and abuses threatening the very reliability of
®nancial disclosure and the integrity of `corporate
America'; see Rider, B. (2002) `The Price of Integrity', Inter-
national and Comparative Corporate Law Journal, Vol. 4, No.
2, p. iii and `Do US Corporate Reforms Go Deep
Enough?', Wall Street Journal, 30th July, 2002 AS.
(2) See generally Banner, S. (1998) Anglo American Securities
Regulation, Cambridge University Press; Morgan, E. V.
and Thomas, W. A. (1962) The Stock Exchange, Elek;
Rider, B., Abrams, C. and Ashe, M. (1997) Guide to Finan-
cial Services Regulation, 3rd edn, CCH, Chs 1 and 2.
(3) See the statute of 1697, `To Restrain the Number and Ill
Practice of Brokers and Stockjobbers'.
(4) See Loss, L. and Seligman, J. (1998) Securities Regulation, 3rd
edn, Aspen Law and Business, New York.
(5) See House of Commons Journals, 25th November, 1696.
(6) Dean Joel Seligman of Washington University Law School
has described the recent scandals and the response of the US
Administration and Congress as a `watershed' in market
regulation comparable with that of the `New Deal', see
Wall Street Journal, 30th July, 2002 AS.
(7) See generally Rider, B. (ed), British Securities Law Reporter,
Sweet and Maxwell, Vol. 1, Pt. 1, looseleaf service.
(8) See Rider, B. and French, H. L. (1979) The Regulation of
Insider Trading, Macmillan, Basingstoke, UK, Ch. 6;
Rider, B. (ed) (1979) The Regulation of the British Securities
Industry, Oyez, Ch. 1.
(9) See Gilligan, G. (1999) Regulating the Financial Services Sector,
Kluwer Law International, The Hague, p. 137 et seq.
(10) Rider, B. (1988) `Policing the City Ð Combating Fraud
and Other Abuses in the Corporate Securities Industry',
Current Legal Problems, Vol. 41, p. 47.
(11) See generally, Rider, B. (1983) Insider Trading, Jordans;
Rider, B. and Ashe, M. (1993) Insider Crime, Jordans;
Rider, B. and Ashe, M. (eds), (1995) The Fiduciary, The
Insider and the Con¯ict, Sweet and Maxwell; Rider, B., Alex-
ander, K. and Linklater, L. (2002) Market Abuse and Insider
Dealing, Butterworths; in particular Rider, B. (1999) `The
Control of Insider Trading Ð Smoke and Mirrors', Interna-
tional and Comparative Corporate Law Journal, Vol. 1, p. 271.
(12) See Rider, B. (1995) `Civilising the Law Ð The Use of Civil
and Administrative Proceedings to Enforce Financial Ser-
vices Law', Journal of Financial Crime, Vol. 3, No. 1, p. 11;
Rider, B. (1999) `The Price of Probity', Journal of Financial
Crime, Vol. 7, No. 2, p. 105; Fitzsimmons, P. (1997) `Con-
trolling Insider Trading Ð The ``Civil'' Approach in New
Zealand', Journal of Money Laundering Control, Vol. 4, No.
3, p. 309. For the new UK law see Rider, B., Alexander,
K. and Linklater, L. (2002) Market Abuse and Insider
Dealing, Butterworths.
(13) See Rider et al., ref. 2 above, Ch.1.
(14) The Thirteenth Draft Directive of the European Union,
Financial Services and Markets Act 2000.
(15) See generally A. Alcock (2000), The Financial Services and
Markets Act 2000, Jordans.
(16) Report of the Fraud Trial Committee (1986) HMSO, para. 1.
(17) See Rider, B. (1996) `Blindman's Blu€ Ð A Model for
Securities Regulation?' in J. Norton and M. Andenas
(eds), Emerging Financial Markets, Kluwer.
(18) See Rider, B. (1989) `Insider Trading Ð A Crime of Our
Time?' in D. A. Kingsford-Smith (ed), Current Developments
in Banking and Finance, Stevens; Rider, B. (1991) `Policing
Insider Dealing in Britain' in K. Hopt and E. Wymeersch
(eds), European Insider Dealing, Butterworths; Rider, B.
(2002) `Probing Probity: A Discourse on the Dark Side of
Development' in S. Schlemmer-Schulte and K. Y. Tung
(2001) Liber Amicorum Ibrahim Shihata, Kluwer.
(19) See Rider, B. (2002) `No Boat Rocking!', Journal of Financial
Crime, Vol. 9, No. 4, p. 295.
(20) Convention 54/109, 19th December, 1999.
(21) Before 11th September, 2001 the only signatories were the
UK, Botswana, Sri Lanka and Uzbekistan!
(22) For example, Communique of the Commonwealth Law
Ministers' Meeting, Winnipeg, Canada, 1977 and the
ICPO±Interpol General Assembly, Accra, Ghana, 1976.
(23) For example, Communique of the Commonwealth Law Minis-
ters' Meeting, Barbados, May 1980. See also Rider, B.
(1980) The Promotion and Development of International
Co-operation to Combat Commercial and Economic Crime,
Memoranda, Meeting of Commonwealth Law Ministers,
Barbados, Commonwealth Secretariat London; Rider, B.
Page 356
Rider
(1985) `Combating International Commercial Crime Ð a
Commonwealth Perspective', Lloyds Maritime and Com-
mercial Law Quarterly, p. 217 and Shipman, A. and Rider,
B. (1987) `Organised Crime International', Security and
Defence Reference Book, Cornhill Publications, p. 9.
(24) See generally Rider, B. and Nakajima, C. (1999) Money
Laundering, Looseleaf Service, Sweet and Maxwell, Ch. 1.
(25) See in particular, The FATF Report on Money Laundering
Typologies 2001±2002.
(26) See for example UN General Assembly Resolution 51/210,
17th December, 1996, referring to charities being used as
trusts for terrorist activities and in particular fundraising.
(27) See Rider, B. (1996) `The Practical and Legal Aspects of
Interdicting the Flow of Dirty Money', Journal of Financial
Crime, Vol. 3, No. 4, p. 236, and generally Blum, R.
(1984) O€shore Haven Banks, Trusts and Companies: The
Business of Crime in the Euromarket, Praeger.
(28) See Grundy, M. (1993) `Tax Havens', O€shore Business
Centres: A World Survey, Sweet and Maxwell. In Inland
Revenue v Duke of Westminster (1936) HL(E) 1, Lord
Tamlin observed, `Every man is entitled, if he can, to
order his a€airs so that the tax attaching under the appropri-
ate Acts is less than it otherwise would be. If he succeeds in
ordering them so as to secure this result, then, however,
unappreciative the Commissioner of Inland Revenue or
his fellow taxpayers may be of his ingenuity, he cannot be
compelled to pay in increased tax.'
(29) See Rider, ref. 23 above.
(30) See for example, Rider, B. (1983) Commercial Crime
Co-operation in the Commonwealth, Proceedings and Papers
of the 7th Commonwealth Law Conference, Hong Kong,
18th±23rd September, 1983.
(31) Note for example the Notice to ®nancial institutions issued
by the UK Treasury warning about the de®ciencies in the
anti-money laundering system in Antigua, 19th April,
1999. Commenting on the notice the Economic Secretary
at the Treasury, Ms Patricia Hewitt MP stated, `The UK is
determined to take a global approach to combat money
laundering. As part of the G7 initiative on ®nancial crime,
we have signalled our willingness to identify jurisdictions
which fail to meet minimum standards. In doing so, we
also help protect UK ®nancial institutions from corruption
by criminal money, as well as helping to address the
insidious in¯uence of global organised crime'. Reference
should also be made to Financial Havens, Banking Secrecy
and Money Laundering, UNDCP Report May 1998.
(32) See generally Edwards, A. (1998) Review of Financial Regula-
tion in the Crown Dependencies, UK Home Oce; UNDCP
(1998) Financial Havens, Banking Secrecy and Money Launder-
ing, UN, and by way of example, Harris, D. and Hellman, S.
(1997) `Cayman Islands; Anti-Money Laundering Legisla-
tion Ð the Proceeds of Criminal Conduct Law 1996',
Journal of Money Laundering Control, Vol. 1, No. 1, p. 104
and Alberga, M. L. (1998) `Cayman Islands: Privacy Ð A
Balancing Act in Changing Times', Journal of Financial
Crime, Vol. 6, No. 2, p. 176.
(33) See for example the statement of Mr Saul Froomkin QC,
Attorney General of Bermuda at the White House
Conference for a Drug Free America, 3rd March, 1988,
Washington, DC.
(34) See FATF, Review to Identify Non-Cooperative Countries and
Territories: Increasing the Worldwide E€ectiveness of Anti-
Money Laundering Measures, 22nd June, 2001. The `blacklist-
ing' of jurisdictions by the OECD on the basis of their
having internationally `harmful tax regimes' is at least con-
ceptually a di€erent initiative from that of the FATF in
regard to money laundering. But see also, Council of
Europe (1999) International Co-operation in the Fight Against
Corruption and O€shore Financial Centres: Obstacles and Solu-
tions, and in particular OECD Steering Group on Corporate
Governance (2001) Report on the Misuse of Corporate Vehicles
for Illicit Purposes, OECD.
(35) See generally Alexander, K. (1998) `Tracking in
Con®scated Cuban Property: Lender Liability Under the
Helms-Burton Act', Journal of Financial Crime, Vol. 5, No.
3, p. 207.
(36) See for another perspective Findlay, M. (1998) `Crime as a
Force in Globalisation', Journal of Financial Crime, Vol. 6,
No. 2, p. 103.
(37) See Non Cooperative Countries and Terrorists, FATF website
www1.oecd.org/fatf /
(38) But see in the case of corrupt payments Banking on
Corruption: The Legal Responsibilities of Those Who Handle
the Proceeds of Corruption (2000) Lord Steel and Lord Scott,
Chairmen, Expert Working Group, The Society for
Advanced Legal Studies, London.
(39) See for example, Baldwin, F. (1997) `All Funds and
International Seizure Cooperation of the USA and UK',
Journal of Financial Crime, Vol. 5, No. 2, p. 111.
(40) See Rider and Nakajima, ref. 24 above, paras 80-000-82-850;
Gilmore, W. C. (1995) Dirty Money, Council of Europe, Ch.
III; Basic Documents on International E€orts to Combat Money
Laundering (1991) Commonwealth Secretariat; and generally
Bernascerni, P. (ed) (1996) Money Laundering and Banking
Secrecy, Kluwer.
(41) Statement of Conference of State Attorneys-General on Organised
Crime, USA 1966, and see Rider, B. (1993) `The Financial
World at Risk; the Dangers of Organised Crime, Money
Laundering and Corruption', Managerial Auditing Journal,
Vol. 3, No. 5, p. 3.
(42) See generally Rider and Nakajima, ref. 24 above, and Ashe,
M. and Rider, B. (1998) International Tracing of Assets, Sweet
and Maxwell, Vol. 1.
(43) UN Security Council Resolution 1373, September 2001,
Special Recommendations on Terrorist Financing, FATF, 31st
October, 2001, G-7 Finance Ministers' Statement of Terrorist
Financing, 25th September, 2001, The Paris Declaration of
the European Union, 8th February, 2002, and Wolfsberg
Group's Additional Recommendations on Terrorist Funds,
January 2002.
(44) Adams, J. (1995) `200bn in Drugs Cash Heads for London
Markets', Sunday Times, 19th November, and see generally
Rider, B. (1994) `Organised Crime in the United Kingdom:
A Personal Perspective', Memorandum 15, Organised
Crime, Minutes of Evidence and Memoranda, Home A€airs
Committee 16th November, House of Commons, HMSO.
(45) 15th April, 1999, and see Rider, B. (1999) `What do We
Mean By ``Dirty'' Money?' Money Laundering Monitor, June.
(46) (1998) Home Oce UK, 3rd report, pp. 12 and 13. See also
Rider, B. (1999) `Taking the Gloves O€', Journal of Money
Laundering Control, Vol. 2, No. 3, p. 196.
(47) See Home Oce (2001) The Proceeds of Crime Bill 2001 and
The Proceeds of Crime, Consultation on Draft Legislation,
p. 5066.
(48) See in a di€erent, although related context, Rider, B. (1995)
`Civilising the Law Ð the Use of Civil and Administrative
Proceedings to Explore Financial Services Law', Journal of
Financial Crime, Vol. 3, No. 1, pp. 11±34.
(49) See Clark, N. (1996) `The Impact of Recent Money Laun-
dering Legislation on Financial Intermediaries', in B.
Rider and T. M. Ashe (eds), Money Laundering Control,
Sweet and Maxwell, Roundhall; also Rider, B., Abrams,
C. and Ashe, M. (1997) Guide to Financial Regulation (3rd
edn) CCH, Bicester, p. 268; and Bosworth-Davies, R. and
Page 357
Financial Regulation and Supervision after 11th September, 2001
Saltmarsh, G. (1994) Money Laundering, Chapman and Hall,
Ch. 3.
(50) See Rider, B. (1999) `The Limits of the Law: An Analysis of
the Interrelationship of the Criminal and Civil Law in the
Control of Money Laundering', Journal of Money Laundering
Control, Vol. 2, No. 3, p. 209.
(51) See Governor and Co of the Bank of Scotland v A Ltd [2001] 3
All ER 58 and Nakajima, C. (1999) Con¯icts of Interest and
Duty, Kluwer, Ch. 8.
(52) It is not without signi®cance that in the UK the Financial
Services Authority must ensure that the regulatory obliga-
tions that it imposes on the ®nancial sector are `proportion-
ate to the bene®ts, considered in general terms which are
expected to result from the imposition of that burden or
restriction', s. 2(3)(c), Financial Services and Markets Act
2000. Under s. 119, the Authority must prepare and
publish `a cost bene®t analysis', s. 121(2)(a).
(53) See Rider, ref. 7 above, and Combating Organised Crime,
Memorandum by B. Rider to Meeting of Commonwealth
Law Ministers, Zimbabwe, 26th July±1st August, 1986,
Com Sec, London, and Maritime Fraud Ð the Feasibility of
Improving the Administration and Legal Procedures of Prosecuting
Authorities in Cases of Maritime Fraud; Report by UNCTAD
Secretariat, 12th August, 1985, Geneva.
(54) See for example Rider, B. (1998) `Policing the City Ð
Combating Fraud and Other Abuses in the Corporate Secu-
rities Industry', Current Legal Problems, Vol. 41, p. 47, and
Rider, B. and Ashe, M. (1993) Insider Crime, Jordans, p. 86
et seq.
(55) For a similar discussion in regard to insider dealing and
securities fraud see Rider, B. (2001) `The Control of
Insider Trading Ð Smoke and Mirrors', in E. Ledeman
and R. Shapira (eds), Law Information and Technology,
Kluwer.
(56) See for example s. 10 of the Prevention of Bribery
Ordinance Cap 201.
(57) Proceeds of Crime Act 1995.
(58) The private sector is well aware of the need to at least be seen
to be properly concerned about these issues Ð see for
example, The Global Anti Money Laundering Guidelines for
Private Banking Ð the Wolfsberg AML Principles, October
2000.
(59) Rider, B. (2002) `Laundering Terrorists!', Journal of Money
Laundering Control, Vol. 5, No. 3, p. 255.
(60) This is not a new problem, by any means, see for example,
Rider, B. (1980) The Role of ICPO±Interpol in Combating
International Economic and Commercial Crime, Common-
wealth Secretariat.
(61) Rider, B. (1990) `Policing the International Financial
Markets: An English Perspective', Brooklyn Journal of Inter-
national Law, Vol. 16, No. 3, p. 181, and Hay, R. (2002)
`Information Exchange and O€shore Financial Centres',
Journal of Financial Regulation and Compliance, Vol. 10, No.
2, p. 141.
(62) See for example (2002) `The Comprehensive Regional
Information Management Exchange System', The Police
Chief, May, p. 14.
Professor Barry A. K. Rider, LL.B (Lond); MA
(Cantab); PhD (Cantab); PhD (Lond); Hon. LL.D
(Penn State); Hon. LL.D (Freestate), Barrister
(England and Wales); Fellow of the Society for
Advanced Legal Studies.
# Barry A. K. Rider
Financial investigation powers
strengthened in Northern Ireland
ArevisedCode of Practice for Financial Investigation
Powers has been published in Northern Ireland
which allows the commencement of new powers
under the Financial Investigations (NI) Order
2001. Both took e€ect from 24th February, 2003.
The new Code updates the existing Code of
Practice for Financial Investigators published in
1997, and the main amendments concern:
the extension of the availability of certain
®nancial investigation powers, previously avail-
able only to ®nancial investigators under the
Proceeds of Crime (NI) Order 1996, to police
and Customs and Excise;
the requirement for solicitors to con®rm in
speci®c circumstances whether a named
person has been a client for certain types of
transaction;
the power for a ®nancial investigator to take
possession of documents produced under a
court order.
The newmeasures are designed to help expose and
combat money laundering activity, and the North-
ern Ireland Government has stressed the special
responsibility faced by the ®nancial, legal and
accountancy professions and organisations. The
powers introduced by the 2001 Order will comple-
ment those available to ®nancial investigators
under the Proceeds of Crime Act 2002.
Page 358
Rider