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March 2005

Money Laundering Law


A Regulatory bulletin from DLA Piper
Money Laundering

EU lawyers voice concerns


over Third Money Laundering
Directive
According to an article published in The Thorp, a director for the BBA, questioned
Times on 22 November 2004, European how easy it would be for banks to comply
lawyers are becoming increasingly anxious with the obligation stating:

UK about the forthcoming Third EU Money


Laundering Directive (‘Third Directive’). The
Council of Bars and Law Societies of the
European Union is reported to have stated
‘…it is one thing to ask whether someone is
on a UN sanctions list but how do you
define close associate?’

News that it considers the Third Directive will


undermine the confidential relationship
between a lawyer and his client. It is also
feared that it will also seek to regulate the
The article also referred to a challenge by
the Belgian Bar in August 2004 to a
previous EU money laundering Directive, in
which it asked the Belgian constitutional
way the relationship is established and court whether the directive violated the
impose an obligation in certain principles of independence and
circumstances to terminate the relationship professional secrecy of lawyers. The article
and alert the authorities. stated that the Third Directive will require
those caught within its scope to notify the
Further, the article suggested that the Third
authorities where they suspect or have
Directive will infringe basic human rights
reasonable grounds for suspecting money
and impose ‘excessive burdens’ on the
laundering by their client. In this aspect,
professions and financial institutions to
the Third Directive does not differ from the
identify their clients. Banks will be required
existing UK regime set out in POCA. The
to establish and maintain global registers of
Third Directive will also bar a lawyer from
‘politically exposed persons’ (‘PEP’) with a
informing his client that he is being
view to monitoring or excluding their
investigated for money laundering and from
business. The definition of a PEP is broad,
acting without first conducting an extensive
encompassing close family members or
due diligence. The Council of Bars has
associates of individuals who are or have
strongly rejected the latter proposal, stating
been entrusted with prominent public
that ‘under no circumstances should the
functions. The article highlights the further
state dictate for whom a lawyer may or may
compliance costs for the financial sector in
not act’.
complying with the PEP rules. Jeremy

Customs success in drug


trafficking and money
laundering case
The Assets Recovery Agency’s Proceeds of convalescing, he booked into a top London
Crime update dated 9 December 2004 hotel and was put under surveillance by
reported that one of Jamaica’s most sought Customs officers throughout his stay.
after criminals was jailed at Blackfriars During this time, he met with associates to
Crown Court on 10 November 2004 for launder the proceeds of cocaine trafficking
laundering £1.7 million from the proceeds between Jamaica, the Netherlands and the
of drug trafficking, following an HM UK. He was arrested in February 2004
Customs & Excise investigation. Customs carrying over £69,000 in his pockets and in
Minister and Paymaster General to the a suitcase. The cash was seized under
Treasury, Dawn Primarolo, said: POCA and he and an associate were
arrested. Both men were charged with
‘The success of this investigation has dealt conspiracy offences under POCA. On 17
a major blow to drugs trafficking groups September, the defendant was bailed and
who target the UK. Customs has prevented attempted to flee the UK. He was
serious crimes from being financed. By discovered in the back of a van at the
tackling money laundering, we are cutting Channel Tunnel terminal in Folkestone. The
off the lifeblood of criminal networks.’ first defendant was jailed for seven years
six months and his accomplice for five
The defendant arrived in the UK on 12 years.
January 2004 for an operation. After

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A Regulatory bulletin from DLA Piper

SARs given low priority by Russia to


the Police join Financial
On 18 November 2004, the Law Society
Gazette reported that a review of asset
guidance to police forces to improve
awareness and use of potential money Action Task
recovery under the Proceeds of Crime Act laundering intelligence.
2002 (‘POCA’), conducted by the chief
inspectors for the Constabulary, the Crown According to the article, the deputy chief
Force
Prosecution Service and the Magistrates constable of Warwickshire Police, Roger
Court Service, revealed that police Aldridge, said: It was reported in an article in Moscow
authorities have given little weight to News on 27 December 2004, that the
‘POCA is a detailed piece of legislation Russian Federation would soon take part
suspicious activity reports (‘SARs’). The
which needs significant training to achieve in the activities of the Financial Action
report indicated that, although an extremely
full integration into mainstream policing. Task Force (‘FATF’). According to the
high level of SARs were made in 2003/04,
The Police Service is committed to using article, Russia’s Prime Minister Mikhail
only a small number of them were
the Act to its full capacity.’ Fradkov signed a decree on 23
considered to have had ‘obvious
investigative merit’. The review also The Gazette article also referred to the December which provided that the
suggested that processing SARs was seen amount of time, energy and expense Federal Service for Financial Monitoring,
as time consuming and resource-intensive. required by lawyers to produce what the together with the Russian Foreign
article described as ‘relatively meaningless Ministry and Finance Ministry, will
Whilst the review acknowledged that SARs reports’. The article referred to law firms participate in the work of the FATF.
were useful tools and that there were investing in bespoke client identification
‘pockets of excellence’ in the regime, it teams which carried out re-identification of Each year, members of the FATF pay a
conceded that complying with POCA was well known and long term clients. The contribution of between 13,000 and
laborious and expensive for financial sector article concluded by suggesting that the 15,000 to the FATF and Russia has
bodies, which also wanted reassurance Government should take heed of instructed its Finance Ministry to pay
from law enforcement agencies that they comments by the Law Society president their contribution by redistributing
were properly exploiting the reported who has called for a period of calm savings from the 2004 budget.
information. Accordingly, the chief analysis of the effects of the legislation.
In a follow up article on 12 January
inspectors have appealed to NCIS to issue
2005, Moscow News reported that, for
the first time, a Russian delegate
attended a FATF session as an observer.

HM Treasury clarifies The delegation was headed by Russian


Federation First Deputy Finance Minister
Viktor Zubkov. According to the article,
paragraph 2(2) of the Money the FATF European work group reported
that the efforts made by Russia’s

Laundering Regulations 2003 Financial Monitoring Committee, Central


Bank and the rest of the Russian
banking system to prevent legalisation of
On 23 November 2004, ‘The MLRs give effect to the Second Money
Laundering Directive. This Directive was
illegally earned capital deserved ‘top
marks’. During the session, the Russian
HM Treasury published silent on the activity of third party dispute delegation asked that the sanctions
resolvers such as adjudicators, arbitrators imposed on Ukraine in December 2004
a response to a and mediators. To the extent that such be lifted. A unanimous vote passed the
request for clarification people do not otherwise fall within recommendation, although Ukraine
regulation 2(2) of the MLRs, it was not our remains on the list of non-cooperative
of paragraph 2(2) of intention to catch them.’ countries and territories.
the Money Laundering However, the Treasury did stress that it was
The article reported that Russia could
not their function to interpret legislation,
Regulations 2003 rather this is the role of the courts.
stand a chance of becoming a full FATF
member as early as June 2005 but
(‘MLR’). Accordingly, the Treasury recommended
before doing so, it must resolve a
that legal advice be sought. In addition, the
number of domestic financial issues. A
Treasury suggested that a consultation by
team of FATF experts are planning to
The Royal Institute of Chartered Surveyors individuals with European counterparts
visit Russia in April 2005, in order to
had questioned whether paragraph 2(2) could prove beneficial.
consider the anti-money laundering
applied to chartered surveyors who acted to The Treasury has invited representatives of measures that have been adopted. In
resolve third party disputes. The Treasury the Royal Institute of Chartered Surveyors particular, it is envisaged that they will
responded on 16 November as follows: and the National Association of Estate spend time getting to know the
Agents to join the Money Laundering operations of the banks, insurance
Advisory Committee, a forum where key companies and various Government
organisations review the efficiency and agencies, such as the Prosecutor
effectiveness of the MLRs. General’s Office and Interior Ministry.

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Money Laundering

EU and International News

Swiss bankers criticise


anti-money laundering
efforts of the City of London
In an article on swissinfo.org published on Mr Mirabaud also described the exchange
15 November 2004, Pierre Mirabaud, of information between authorities in
President of the Swiss Bankers different countries as a ‘farce’. He said:
Association, described the City of London
as a ‘money laundering paradise’. The ‘Any investigations [into wrongdoing] by the
article reported Mr Mirabaud’s comments authorities are fruitless because the
to a Swiss newspaper, ‘Berner Zeitung’, in [British] banks do not really know their
which he attacked British trust law as the clients.’
culprit. He argues that by permitting
Mr Mirabaud claimed that the position in
persons administering a trust to remain
Switzerland, where Swiss banks know their
anonymous, the London banking
customers well, enabled Mr Mirabaud to
community was able to practise banking
vigorously defend his country’s banking
secrecy.
secrecy laws. By contrast, Mr Mirabaud
The British Bankers Association (‘BBA’) are attacked British banks for failing to comply
reported to have viewed Mr Mirabaud’s with the detailed ‘know-your-customer’
comments ‘with interest’. In defending the requirements, consequently hindering any
London banking sector, a spokesman for attempt by authorities to investigate illegal
the BBA said that ‘Banks have stringent transactions.
and enforceable anti-money laundering
procedures in place and regulators require
banks to undertake detailed “know-your-
customer” checks’.

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A Regulatory bulletin from DLA Piper

Joint Money Laundering


Steering Group issues
guidance on the Child Trust
Fund Scheme
On 18 November 2004, the Joint Money (i) A CTF account can only be opened customer of the relevant firm. Financial
Laundering Steering Group (‘JMLSG’) upon production of a voucher issued by institutions may choose to accept the
issued guidance on the money laundering the Inland Revenue or by the Inland production of the voucher as satisfactory
aspects of the Child Trust Fund scheme Revenue itself. evidence of the identity of the RC as well
(‘CTF’), which will begin in April 2005. The as the child for the following reasons:
(ii) A maximum of £1,200 can be paid into
scheme provides for:
the CTF in any given year. (A)The Inland Revenue conducts its own
(a) a Government payment of £250 from the (iii)Except in exceptional circumstances, anti-money laundering and fraud checks
Inland Revenue to all children born after the assets can only be withdrawn by the in relation to the voucher.
1 September 2002; child when they reach the age of 18. (B)The RC will always be the person
(b) an additional £250 payment for children, (iv)If the CTF account is not opened within deemed to have parental responsibility
whose families are on Child Tax Credit 12 months from the date of issue of the for the child and will usually be one of
with a household income below voucher, the Inland Revenue will open the parents of the child.
£13,480. the account on behalf of the child. (C)The CTF belongs to the child, who will
The Inland Revenue will have issued the The JMLSG stated that submission of the only be able to access the funds at 18.
first tranche of about 500,000 vouchers on voucher or receipt of instruction from the (D)Firms will be required to send account
17 January 2005. The voucher can then be Inland Revenue to open a CTF account will opening information and an annual
used by a person with parental be deemed as acceptable evidence of the statement of account to the RC.
responsibility (the Registered Contact or identity of the child. However, financial
‘RC’) to open an account for the child with organisations should carry out sufficient The JMLSG also commented that there was
an approved CTF product provider of their identity checks on a child once they seek to no need for any identity checks to be
choice. access the account at the age of 18. carried out on third parties making
payments into the CTF. However, financial
In assessing the potential money The JMLSG also considered that the RC institutions should consider whether a
laundering implications, the JMLSG may be an applicant for business under the suspicious activity report should be
consider that the CTF be classed as a Money Laundering Regulations 2003. To submitted, where attempts are made by a
particularly low risk product for the avoid any breach of the Regulations, it third party to deposit sums which are
following reasons: recommended that the identity of the RC significantly higher than the maximum
be verified unless he or she is an existing amount.

“The Inland Revenue will have issued the first


tranche of about 500,000 vouchers on 17
January 2005.”

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Money Laundering

Joint Money Laundering


Steering Group issues Guidance
Notes on ‘Equivalence status’
In December 2004, the JMLSG issued a guidance note entitled
‘Equivalence status of other countries or territories and those with
material deficiencies as at December 2004’.

The guidance note explains that under (FATF member), France (FATF member), Treasury do not consider fall within UK
article 3.9 of the Second EU Money Germany (FATF member), Greece, ‘equivalence status’, they are not necessarily
Laundering Directive (‘Second Directive’) Hungary, Ireland (FATF member), Italy countries whose standards of due diligence
and regulation 5(2) of the Money Laundering (FATF member), Latvia, Lithuania, are lower than the UK. The JMLSG
Regulations 2003 (‘MLR’), identification Luxembourg (FATF member), Malta, recommends that since standards vary
evidence is not required where the applicant Netherlands (FATF member), Poland, significantly, financial institutions should carry
for business is itself a credit or financial Portugal (FATF member), Slovakia, out their own assessment on:
institution that is subject to national legislation Slovenia, Spain (FATF member), Sweden
implementing the Second Directive, or based (FATF member) and UK (FATF member). (a) non-FATF countries; and
in a country whose law contains ‘equivalent (b) the Gulf Co-operation Council – This is an
EEA Member Countries — All EEA countries
requirements’ (Second Directive wording) or unusual entity in that it is itself a FATF
have undertaken to implement the EU Money
‘comparable provisions’ (MLR wording) to member whilst its own members (Bahrain,
Laundering Directives and some are
those contained in the Second Directive. Kuwait, Oman, Qatar, Saudi Arabia and the
members of FATF. As with EU Member States,
If a country meets this requirement, then it United Arab Emirates) are not. Whilst the
variances can be expected in the nature of
is known as having ‘equivalence status’ to the GCC’s members have undergone FATF-
the implementation in their local laws. The
UK. Similar exemptions for such countries are style mutual evaluations, they have not yet
current list is as follows:
also contained in the FSA Money Laundering enacted legislation containing equivalent
Sourcebook. • Iceland (FATF member), Liechtenstein, provisions to the Money Laundering
Norway (FATF member) and Switzerland Directives and should, therefore, be
However, the JMLSG notes that such status
(FATF member). assessed in the same way as for other
will only be available under this narrow
non-EU/non-FATF countries. The report
exemption from the basic identification UK Crown Dependencies — All UK
suggests that a risk-based approach is
obligations and cannot be used to avoid any Dependencies have undertaken to implement
necessary when carrying out this
wider customer identity checks as required to anti-money laundering legislation which is
assessment.
meet the obligations under POCA and the broadly equivalent to the EU Money
MLR. Further, the JMLSG also emphasises Laundering Directives. A number of Irrespective of whether a country has
that equivalence status only indicates that ID recommendations made by IMF evaluators in ‘equivalence status’ or not, the JMLSG
procedures are in existence. It does not 2003 are currently being implemented to proposes that firms ‘maintain an appropriate
provide a safe harbour from the need to have bring these territories in line with the FATF degree of ongoing vigilance concerning
appropriate customer due diligence (‘CDD’) revised recommendations. The current list is money laundering risks’. The risk profile which
and know your customer (‘KYC’) and risk as follows: the financial institution may use can be based
management measures in respect of all on the firm’s own experience or market
customers. • Isle of Man, Guernsey and Jersey. intelligence. However, firm’s should bear in
Non-EU FATF Member Countries — Whilst all mind that ‘the higher the risk, the greater the
The guidance identified the following countries due diligence measures’.
that HM Treasury determined as having FATF member countries undertake to
‘equivalence status’: implement the Forty Recommendations as
The guidance includes details of international
part of their membership obligations,
assessments which have been carried out on
EU Member States — Since all member states implementation is not mandatory. The JMLSG
countries and territories with ‘equivalence
of the EU are required to enact legislation in suggests that some of the newer FATF
status’ and stresses that particular attention
accordance with the EU Money Laundering members were admitted primarily because of
should be paid to assessments undertaken by
Directives, ‘equivalence status’ applies. In their strategic importance within a region and
bodies such as the FATF and IMF.
addition, some states are members of the whose anti-money laundering strategies are
Financial Action Task Force (‘FATF’), and of still in their infancy. The current list is as Finally, the JMLSG guidance focuses on Non-
those, most have committed themselves to follows: Cooperative Countries and Territories
implementing the Forty Recommendations, a (‘NCCTs’). It noted that since 2001, no new
more stringent standard than the Second • Argentina, Australia, Brazil, Canada, Hong
jurisdictions have been added to the NCCT list
Directive. The current list is as follows: Kong, Japan, Mexico, New Zealand,
and as at November 2004 there remain only
Russian Federation, Singapore, South
six countries on the list – Cook Islands,
• Austria (FATF member), Belgium (FATF Africa, Turkey and the USA.
Indonesia, Myanmar (Burma), Nauru, Nigeria
member), Cyprus, Czech Republic, The JMLSG report then highlights that whilst and the Philippines.
Denmark (FATF member), Estonia, Finland there are a number of countries which HM

6
A Regulatory bulletin from DLA Piper

Money laundering
scandal for the Government
On 4 November 2004, The Times reported ‘What we know is that the Government has the American casino operators. In a
that an email leaked to the Shadow Culture been offering concessions on money statement, the Department for Culture,
Secretary had caused great embarrassment laundering to the operators of those Media and Sport said:
for Tessa Jowell, the Culture Secretary. The casinos and the Secretary of State tried to
email, which was sent from Gideon Hoffman, cover it up.’ ‘There is no question of the Government
head of gaming policy at the Department for seeking exemptions on behalf of any
The Prime Minister dismissed the casino operators that would water down the
Culture, Media and Sport to representatives
suggestion as ‘ridiculous’, stating that he effectiveness of money laundering policy –
of a number of American casino operators,
did not accept that Michael Howard had crime prevention is one of the statutory
allegedly referred to a request for material
shown that there were ‘concessions offered objectives of the Gambling Bill.’
on the forthcoming Third EU Money
on money laundering to casino operators’.
Laundering Directive.
A spokesman for Ms Jowell denied that the
According to the article, the email was
email offered special favours or considered
raised by Michael Howard in Prime
relaxing the rules on money laundering for
Minister’s Questions, who said:

Serious Organised Crime and


Police Act 2005 set to change
anti-money laundering legislation
On 6 January 2005, Mondaq.com optional official forms. This not only he has been a victim of shoplifting by
published an article on the forthcoming takes up their time, but the time of the unknown persons.
Serious Organised Crime and Police Act National Criminal Intelligence Service
• Sections 327-332 of POCA provide that
2005 (‘SOCPA’) which highlights the (NCIS) when recording the information
an activity which would be illegal if
relevant changes which are to be made to on its database. According to the article,
undertaken in the UK would be deemed
the Proceeds of Crime Act 2002. SOCPA it takes the NCIS on average only two
criminal even though it was legal in the
will replace NCIS with the Serious minutes to scan and transfer the
country where it was carried out. The
Organised Crime Agency. According to the information received on the official
article gives the example of the
article, the new legislation will largely forms, compared with 45 minutes that
legitimate earnings of a Spanish
concentrate on changes in criminal law, for are needed to disseminate a letter. The
bullfighter, which would be regarded as
example increased police powers of stop new Act will seek to amend ss 334 and
criminal property in the UK, since
and search, provisions relating to racial and 339 of POCA to make the use of official
bullfighting is an illegal activity here.
religious hatred and new magistrate forms mandatory. It further intends to
These sections are to be amended to
powers to make financial reporting orders impose a fine for failure to use the forms
remove the need to make a report in
for up to five years. without reasonable excuse. Suspicious
these circumstances.
transaction reports will also need to
However, SOCPA will make various include, where known, details of the • Section 331 of POCA provides a
amendments to money laundering identity of the person suspected of solicitor with a legal privilege exemption
legislation, including amending virtually money laundering and the location of in certain circumstances, but not for his
every section of Part VII of POCA 2002. the suspect property. MLRO. The SOCPA will provide a
The main changes are as follows: parallel exemption for the MLRO.
• Section 330 of POCA, which requires a
• One of the many complaints from the person to report a suspicion even • A de minimis reporting threshold for
professions is that the money laundering though the identity of the suspect and banks and deposit takers, in relation to
requirements, in particular suspicious the location of the property are not accounts maintained by them, will be
activity reports, are too laborious. The known, will be amended to remove this introduced by way of a new s 339A.
article indicates that lawyers tend to obligation in those circumstances. The This will not, however, apply to lawyers
write long letters when reporting article gives the example of where a and other professionals undertaking
suspicious activity rather than use the shopkeeper client informs his lawyer that relevant business.

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This material was originally published by LexisNexis UK March 2005.
This newsletter is not intended to be relied upon as a definitive statement of the law and specific advice should always be
sought on any particular topic. The information stated is believed to be correct as at 16 March 2005

For further information please contact Daren Allen, Partner, London Office
Tel: 020 7796 6824 Fax: 020 7796 6839 Email: daren.allen@dlapiper.com

This newsletter was previously published in March 2005 under the company name DLA Piper Rudnick Gray Cary.

Regulated by the Law Society.

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