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									Out & Out Answers Limited
Helping you and your firm achieve risk based Anti-Money Laundering compliance Frog Soup was originally published in “The Score”, Winter 2005 edition
Introduction

Mark Outhwaite highlights some recent developments in the arcane world of money laundering which suggest that the risks run by those businesses and individuals subject to the Proceeds of Crime Act (2002) [PoCA] and UK Money Laundering Regulations (2003) [ML Regulations] have increased sharply as a result of recent action by law enforcement and continuing change in the law relating to anti- money laundering.

Frog Soup Anyone?
Professional advisers and all students of business are taught to monitor changes in the business environment. They are further taught that most business can spot rapid change and they react accordingly. However if the change in an environment is more gradual, businesses and their owners can often miss long term trends tha t and, if these risks are not managed effectively, this can lead to the failure of a firm or business. By way of example, a frog placed in hot water will get out as fast as possible, however if the same frog is placed in water under which heat is gradua lly introduced and then turned up, it will not attempt to get out of the soup because it has not worked out what is going on. For many firms and businesses, compliance with anti- money laundering (AML) regulations is a now fact of life. However, the law and practice in this area continues are continuing to change and if you don’t keep yourself up to date, you and your firm run the increased risk of falling foul of either your regulators or, the sometimes overlooked, increasingly AML aware law enforcement agencies.

The scale of the problem
Firms sometimes struggle to understand the volume of dirty money washing through UK plc. Now there are no precise figures as criminals do not seem to complete their tax forms accurately. However, in the UK, Robson Rhodes estimated the figure to be approximately £40 billion (Oct 2004) and growing. In June 2005, the new Serious Organised Crime Agency, gave an estimate of between £20 to £40 billion. Given that these figures are generated not only from cheque fraud and asset misallocation but primarily from drugs, people trafficking and illegal arms sales, I would suggest that these estimates should give us all pause for thought. It is also worth bearing in mind that the vast majority of these funds are unlikely to be in cash but in the form of property, jewellery, tainted investments and bank accounts etc.
Out & Out Answers Limited is a limited company registered in England and Wales (Registered Number 5148265) with its registered office at 3 Locks Yard, High Street, Sevenoaks, Kent TN13 1LT . Members of The Personal Contractors Group

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Out & Out Answers Limited
Helping you and your firm achieve risk based Anti-Money Laundering compliance Frog Soup was originally published in “The Score”, Winter 2005 edition

The Regulated Sector
For the purposes of this article Regulated Firms include those businesses subject to the ML Regulations. Namely; Financial services business subject to regulation by the Financial Services Authority, professional advisers such as members of the Law Society, the Institute of Chartered Accountants of England and Wales, the Royal Institute of Chartered Surveyors, Money Service Businesses and High Value Dealers, regulated by HM Revenue and Customs. All of the above have issued rules and guidance for the business in their patch. You must make sure that your firms systems and procedures are compliant with these rules but also that you have included any updates or clarifications issued. Here is a tip, remember some of your regulators/ professional bodies have issued short videos and / or DVDs to help businesses. Check them out; it helps to demonstrate a constructive approach to AML issues!

Recent changes in the law
For some reason, perhaps because of the general election that followed on almost immediately after it was passed, some firms have not picked up on the impact of The Serious Organised Crime and Police Act 2005 (SOCPA) on AML regulations. SOCPA will require ML Regulated firms to update their AML systems and controls in order to remain compliant with the law. SOCPA established SOCA, which is due to become operational in April 2006. SOCA will then take over the operation of both NCIS and the National Crime Squad.

Out & Out Answers Limited is a limited company registered in England and Wales (Registered Number 5148265) with its registered office at 3 Locks Yard, High Street, Sevenoaks, Kent TN13 1LT . Members of The Personal Contractors Group

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Out & Out Answers Limited
Helping you and your firm achieve risk based Anti-Money Laundering compliance Frog Soup was originally published in “The Score”, Winter 2005 edition However, SOCPA also made four changes to PoCA Part VII money laundering offences 1. Conduct overseas may no longer count as criminal conduct, if it is not a criminal offence in the jurisdiction in which it occurs. 2. There will no longer be an obligation to report where the information you have does not disclose the identity of the potential offender or the whereabouts of the criminal property. 3. A disclosure by a lawyer to a Law firm’s Money Laundering Reporting Officer (MLRO) other wise know as a nominated officer will not automatically oblige the MLRO to report the matter to NCIS. 4. The existing provision that permits the Government to prescribe the form and manner of disclosures is given further force by making it a criminal offence to make a disclosure in any other way What does this mean in practice? Well with respect to points 1 and 2 you must be careful to satisfy the extra considerations imposed by the statute in order to make the defence of failing to report watertight.[1] Point 3 makes the process of evaluating the need to make a Suspicious Activity Report (SAR) to NCIS less complex. Please see the referenced press article for full details. But it is actually point 4 that may have the biggest short term impact on systems and controls. At the time of writing, it appears that mandatory disclosure will require all SARs to be submitted electronically and in forms prescribed by the Home Secretary forms by April 2006. So the existing practice of making disclosures and consent requests by fax, letter, or crate of information may well be going the way of the quill pen or the bobby on the beat. The advice must be to start preparing for this change as soon as possible.

AML Enforcement: turning up the heat!
The high profile enforcement activities of the FSA are widely covered in the general press. For the purpose of this article, I shall look at how law enforcement agencies such as the police and asset recovery agencies are beginning to utilise their new powers. Since the beginning of October, the national press has reported three allegations of significance to those with responsibility for the prevention and forestalling money laundering.

[1]

Press Article, Pinsent Masons, August 2005, http://www.pinsentmasons.com/ media/1817902355.htm
Out & Out Answers Limited is a limited company registered in England and Wales (Registered Number 5148265) with its registered office at 3 Locks Yard, High Street, Sevenoaks, Kent TN13 1LT . Members of The Personal Contractors Group

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Out & Out Answers Limited
Helping you and your firm achieve risk based Anti-Money Laundering compliance Frog Soup was originally published in “The Score”, Winter 2005 edition The personal liability of those responsible for money laundering matters has been underlined by a report in The Guardian that the City of London Police have charged, a former compliance officer at City Index (Mr Stephen Judge), with consenting to transfer £30,787.26 when doing so was prohibited under the PoCA. [2] It appears that although a disclosure had been made to NCIS as required, the funds were not blocked as they should have been and they were, somehow, paid away by the firm prior to consent being issued by NCIS. The key point for your firms here must be that it is not enough to just report suspicious activity to NCIS. Where consent to deal is required you and your firms must have effective systems and controls in place to prevent the processing of a transaction without the specific consent of NCIS. In theory, that period could be up to 38 working days although I understand NCIS appears to be turning consent issues around in under 2 working days and usually a lot faster. Those property companies who have taken “a relaxed” or frog like view of their obligations had a rude awakening on October 6th 2005 when Greater Manchester police and officers from the Northern Ireland Asset Recovery Agency raided properties in the Manchester area as part of an investigation into alleged money laundering by the Irish Republican Army.[3] This intergovernmental investigation not only triggers a number of related terrorist reporting obligations but underlines the risks of inadequate KYC. I am not sure that I would like to argue, in court, that a company of mine had managed properties for the brother of a man widely alleged to be the IRA’s chief of staff![4] The learning point here is not only know who your client is, but also where their money comes from. Finally, the conduct of your client and suspicions around their funds may well dr ag you into the public spotlight. One of the students at a well known public school for girls suddenly found themselves in the limelight following a SAR by the bankers to one of their girls.[5]

[2] [3]

Police inquiry into suspicious bets at City Index, The Guardian, Saturday October 1, 2005 Probe into IRA cash leads to police raids, The Financial Times, Friday October 7, 2005 [4] Tycoon “did not know” of IRA lin k to property, The Daily Telegraph, Tuesday October 11 2005 [5] The Dorset public school girl, the Russian mafia and a £ 300,000 bank account, The Sunday Telegraph, October 9 2005
Out & Out Answers Limited is a limited company registered in England and Wales (Registered Number 5148265) with its registered office at 3 Locks Yard, High Street, Sevenoaks, Kent TN13 1LT . Members of The Personal Contractors Group

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Out & Out Answers Limited
Helping you and your firm achieve risk based Anti-Money Laundering compliance Frog Soup was originally published in “The Score”, Winter 2005 edition The learning point here is that where there is insufficient evidence to bring a criminal prosecution, then the Government’s Asset Recovery Agency may attempt to confiscate money through the High Courts. Thus those on the periphery of the incident may find their conduct and their reputation could well come under public scrutiny. Is that where you want your firm to be?

Staying out of the pot!
Money launderers build their fortunes on other peoples misery. They will seek out those firms with weak controls, out of date systems or a convenient blindness for AML regulations. They will have no hesitation in trading upon the reputation of you and your firm if your systems and procedures are not up to snuff. Their actions may well land you and your firm in hot water! At the same time, the law continues to change, regulatory expectations of best practice continue to rise and law enforcement agencies are now demonstrating a willingness to use the powers granted to then under PoCA. If you are to avoid the pot, you have to be sure that your systems for detecting and forestalling the financial activity of criminals are robust, effective, and compliant. You must continue to scan the regulatory horizon for further changes in the UK’s AML regime (e.g. the next set of Guidance Notes from the JMLSG due in December 2005 and the promulgation of the 3rd EU AML directive in July 2005, due to come into UK law in mid July 2007). Be alert to the possibility of money laundering but remember, only a minority of clients will be money launderers. Make sure that you and your colleagues know your AML procedures before an incident happens. Train your staff in how to recognise and deal with suspicious transactions. Identify your client effectively and keep accurate records. Make sure you really understand why the deal you are working on as well as the source and movement of the funds involved. Love your MLRO and if in doubt, get professional help! Now pass the croutons.
Out & Out Answers Limited is a limited company registered in England and Wales (Registered Number 5148265) with its registered office at 3 Locks Yard, High Street, Sevenoaks, Kent TN13 1LT . Members of The Personal Contractors Group

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Out & Out Answers Limited
Helping you and your firm achieve risk based Anti-Money Laundering compliance Frog Soup was originally published in “The Score”, Winter 2005 edition
Di sclaimer This article does not constitute specific legal advic e and it is designed to build on your AML knowledge and experience and to help keep AML issues at the front of your mind

Out & Out Answers Limited is a limited company registered in England and Wales (Registered Number 5148265) with its registered office at 3 Locks Yard, High Street, Sevenoaks, Kent TN13 1LT . Members of The Personal Contractors Group

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