MONEY LAUNDERING IN GENERAL

Successive governments point to ever increasing tomes of legislation as evidence of their attempts to combat money laundering. Enacting legislation, however, is the least onerous part of regulation. The real problem is effectiveness. Under the Drug Trafficking Act, for the period 1993-95, there were just 39 prosecutions for money laundering. Of these, 26 did not reach the trial stage. Under the CJA, there have been only three prosecutions (Hook, 1998). The UK laws do not apply to British offshore dependencies, such as the Bahamas, the Cayman Islands, the Channel Islands and the Isle of Man which facilitate secrecy and have become international centres for laundering dirty money (Organisation for Economic Co-operation and Development, 1998; United Nations Office for Drug Control and Crime Prevention, 1998). International regulators openly refer to British offshore financial centres as "inherently corrupt and corruptible" (Accountancy Age, 3 April 1997, p. 17). As the New York Assistant District Attorney, John Moscow, who started the investigation which eventually led to the closure of the Bank of Credit and Commerce International (BCCI) noted, "My experience with both Jersey and Guernsey²⁷ has been that it has not been possible for US law enforcement to collect evidence and prosecute crime. In one case we tracked money from Bahamas through Curacao, New York and London, but the paper trail stopped in Jersey....... it is unseemly that these British dependencies should be acting as havens for transactions that would not even be protected by Swiss bank secrecy laws" (The Observer, 22 September 1996, p.19). Successive British governments have not only tolerated these havens, but have encouraged, protected and nurtured their political and economic practices. The secrecy facilitated by these offshore havens does not easily enable regulators to collar either the criminals or the crime.

It may be tempting for the regulators to manufacture confidence in the system by taking high-profile action against `bent' individuals and further individualise white-collar crimes, but such policies alone are likely to be of very limited help in effectively combating money laundering. Money laundering is, perhaps, best understood as an activity that is increasingly undertaken by organised groups, corporations and elite occupations that operate within the values of capitalism. The cultural shifts encouraged by an `enterprise culture' and `deregulation' have led many to believe that `bending the rules' for personal gain is a sign of business acumen (Coleman, 1994; Department of Trade and Industry, 1997; Partnoy, 1997). In a deregulatory environment, stealing a march on a competitor, at almost any price, to make money is considered to be an entrepreneurial skill. In such a climate, it is to be expected that `rule-bending' shading into money laundering will increase, especially where competitive pressures link promotion, prestige, status and reward, profits, markets, niches with meeting business targets.

It may further be hypothesised that much of the reported increase in money laundering in the 1990s is connected with historical changes in the nature of capitalism in the Western world giving rise to a new class of entrepreneur. In the global markets, profits are increasingly made from speculative ventures such as currency trading, take-overs, futures trading, land speculation, insider trading, beating exchange controls; or what might be called `placing good bets'. People making these `bets' rarely use their own monies. They use other people's monies (e.g. bank deposits) to make `bets'. If the bets pay off they make huge personal gains. If the bets fail, the traders then resort to illicit means to cover their losses, as evidenced by the BCCI episode. Accompanying and amplifying these historical shifts has been an erosion of moral restraint and `gentlemanly conduct' (so far as this ever existed). In a deregulatory environment which encourages `secrecy', any `deal' becomes acceptable as long as it is profitable. So, increasingly, the crime resides more in being caught than engaging in dishonourable or illegal activity. Indeed, `smart' business activity resides in constructing mechanisms through which benefits are derived from illegal or suspect activities whilst escaping any (legal) responsibility for their operations (McBarnet, 1991). Through such activities little, if anything, is produced, but the gains are quick and big and can be made with anonymity. Any durable management of the risks of money laundering requires that attention be paid to the value systems of capitalism. Yet there is no sign that any government or regulator is keen to examine such issues. Instead, the legislative frameworks continue to individualise money laundering issues.

Regulation, detection and curtailment of money laundering pose major challenges as any business engaged in legitimate transactions and international financial transactions can also be used as a vehicle for illicit activities (McCormack, 1996). The state's capacity to combat money laundering is severely constrained. At one level, under the weight of the liberalist ideologies, it is obliged to deregulate, reduce public surveillance and facilitate secrecy to businesses. This may appease some but it also facilitates secrecy necessary for the execution of money laundering activities (Gold and Levi, 1994; Home Affairs Committee, 1994). At the same time ordinary citizens expect the state to ensure that capitalism is not corrupt and that their savings and pensions are safe. The state's capacity to intervene in business affairs and investigate allegations of money laundering is also constrained when for ideological reasons (let the business get on with managing the business) its role in the internal affairs of enterprises is severely restricted. Faced with an ideological strait-jacket, the state is forced to rely upon businesses or those reporting upon businesses (e.g. accountants/auditors) to report suspicious transactions to regulators. But, as we have shown, accountants themselves are involved in money laundering. Under the current mode of regulation, there is no effective public check against money laundering.

CHAPTER 8
THE ACTION TO TAKE

The deregulation mania and inadequate public accountability has facilitated secrecy and encouraged money laundering activities. Successive governments have indulged the City, big business and elite occupations (e.g. accountants, lawyers) through the system of self-regulation, or more correctly little/no public regulation. Self-regulation has failed. Alternative institutional structures and policies need to be developed.

Any government interested in seriously combating money laundering has to make a start by creating independent regulatory structures. Thus accountants need to be regulated by a body independent of the DTI and vested accountancy interests. The independent regulator must not be a defender and protector of the system. Its sole objective must be to advance and safeguard the public interest.

There should be a clear `statutory duty' upon accountants and auditors to detect and report money laundering to the regulators within 48 hours of them first becoming aware of it. Failure to act in a socially responsible way should attract a daily fine of £500,000.

The secrecy enjoyed by firms of accountants and their associates should be ended. They should all be required to publish meaningful information. This should include matters such as the number of shell-companies operated by them, the fees from such companies, the instances when they act as fronts for the real owners, the instances of money laundering that they report to the regulators, convictions of money laundering against them and so on.

The NCIS statistics clearly show that despite claiming to be experts in fraud detection and reporting, accountants/auditors are least likely to report suspicious transaction to the regulators. The public suffers from this contrived silence. Accountants should not be able to hide behind arguments of `confidentiality to clients' which is really a phrase for advancing the `private' interests of the accountancy industry at the expense of the `public' interest.

Since auditor costs are directly borne by stakeholders, they or their nominees should be able to examine auditor files. The independent regulator should also have statutory powers to examine any files and documents held by accountants whether acting as auditors, tax advisers, or in any other capacity.

As the NCIS statistics show that accountants are least likely to notice and/or report money laundering transactions, their education training and organisational loyalties should be the subject of an independent investigation. Redesigning their curriculum and discussing the impact of their predatory actions on ordinary people should encourage changes in their value systems.

Any effective fight against money laundering requires greater openness and accountability of business affairs. Instead, "deregulation" has been the slogan for the 1980s and the 1990s even though it has encouraged a "cynical disregard of laws and regulations" (Department of Trade and Industry, 1997, p. 309). `Secrecy is the badge of fraud', as Mr. Justice Millet asserted. Therefore, the ideologies of secrecy need to be challenged and reversed. Excessive business secrecy provides an environment for anti-social activities, such as money laundering and harms all of us.

Company stakeholders need to be empowered. For example, employees should be able to blow the whistle on corrupt practices without any fear of reprisals and loss of employment opportunities. A dedicated government department should be required to protect the interests of all ethical dissenters ensuring that they are not victimised by their employers.

If necessary, those blowing the whistle on money launderers should also be financially rewarded.

Nominee shareholdings and company registrations should not be permitted since this provides fronts for shell-companies engaged in money laundering.

Bankers should be required to report all receipts/payments of money greater than £10,000 to the regulators, thus enabling regulators to look for patterns of unusual transactions and cash transfers to connected parties.

On occasions, governments have used the powers of Inland Revenue and Customs & Excise to track down frauds, but they have rarely been used to combat money laundering or to probe secretive organisations. Greater use should be made of the powers of Inland Revenue and Customs & Excise to investigate suspicious transactions and examine records held by accountants, including some spurious tax avoidance schemes at tax havens.

With successive governments devoted to reducing public expenditure, the agencies investigating and fighting money laundering have invariably been poorly resourced. They need to be properly funded. The government needs to raise additional revenues. We recommend that the government close tax loopholes and other blind-spots. For example, virtually everyone has to pay Value Added Tax (VAT) on goods and services that they purchase. However, there is an anomaly. In the UK, companies are traded as commodities. Around £100 billion is spent each year on mergers and take-overs. But, the purchase of companies is not subjected to VAT. A reasonable rate of VAT on the vast amounts spent on buying and selling companies can raise large revenues to finance the fight against money laundering.

The prosecutions for money laundering should be made easier requiring lower burdens of proof. For example, individuals should be forbidden from using postal, telephone and other telecommunications technologies for money laundering activities. Thus regulators would not need to spend years chasing documentation to prove money laundering. They could, instead, secure conviction on the basis that the communications technologies were used for illicit purposes.

A range of civil penalties for money laundering need to be developed; ranging from confiscation of assets, large fines and statutory power for the regulators for raiding the premises of suspected money launderers. Regulators should always pay attention to the organisational context that encourages money laundering.

Britain should end the excessive secrecy that is the hallmark of the offshore centres, such as the Channel Islands. As long as these and other offshore centres facilitate secrecy and lax laws, there is little prospect of checking the global growth of money laundering. The secrecy and lax laws of these offshore havens are an outcome of their political and economic system. Any programme of reform will need to secure major constitutional and institutional changes.

The above proposals will not eliminate all money laundering problems, but can help to make a new start by tackling the social and organisational context of money laundering, as well as dealing with the deviant individuals.

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