Money laundering – the process of making criminal money appear clean, universally involves three steps. First is the placing of criminal money into the financial system away from its true source – by moving and disguising it. The money is then layered, often through a series of transactions, to further move it away from the original source. Finally, the money is integrated back into the financial system as ‘cleaned’ money, which can be used.
Terrorist financing, by contrast, is not about cleaning money through the system – rather, it is simply about getting money to terrorists. The money may have come from entirely ‘clean’ activity to begin with, but become destined for criminal use.
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By nature, those engaged in money laundering and terrorism financing, are elusive and often highly sophisticated. The law needs to evolve as new methods of laundering are identified.
The Money Laundering and Terrorist Financing (Amendment) Regulations 2019 came in to force on 10 January 2020, with the effect of implementing Fifth Money Laundering Directive into UK law to provide further tools to tackle crime by going for its proceeds – to do this, obligations are placed on business sectors which are often targeted by money launderers.
Which business activities fall within the new regulations?
Under the regulations, businesses falling within the scope of money laundering regulations need to ensure that staff is adequately trained with respect to the core obligations and changes, breach of which is a criminal offence and can, in some instances, attract further regulatory sanction. The business sectors now brought within the scope of the rules, include:
- Tax advisers
- The letting agency sector for high-value transactions with a monthly rent of EUR 10,000 or more.
- Art intermediaries for transactions exceeding EUR 10,000
For all of the above, Customer Due Diligence (CDD) measures to be taken by regulated businesses.
Significantly the rules now regulate ‘cryptoassets’ exchange providers and wallet providers. Any activity involving exchange, security, and utility tokens brought within the AML rules. One of the main attractions of bitcoin is that it exists across borders, outside of traditional banking controls, and with a secure cloak of anonymity. Those three magic ingredients have made this type of currency attractive to those seeking to launder the proceeds of crime.
The proceeds could be cashed in almost anywhere in the world. Whilst a key benefit of cryptocurrencies is that the chain of ownership can be traced, they are still a very attractive method of moving money. It is far easier to move crypto-assets by computer than to carry large bags of cash through airports. Blockchain encryption has made life difficult for law enforcement impotent in this brave new world of international finance.
A wallet provider is one who offers exchange services as creator or issuer of any of the cryptoassets involved – an ‘initial coin offering’. The rules now cover this as initial coin offerings are another point of exchange at which those in possession of illicit funds could launder their money by obtained a new cryptoasset – which will appear clean, whose original source cannot be easily traced and which can now be moved throughout the world with a click.
Cryptoasset exchanges must also carry out CDD for all exchanges of money for cryptoassets, irrespective of the amount. This is to tackle the use of high volume, low-value transactions to move money.
What requirements are placed on businesses?
The CDD requirement is for relevant persons to take reasonable measures to understand the ownership and control structure of their customers.
Secondly, to require relevant persons to take reasonable measures to verify the identity of senior managing officials when the beneficial owner of a body corporate cannot be identified.
Relevant persons must ensure that they have policies to ensure they undertake risk assessments prior to the launch or use of new products or business practices, as well as new technologies.
Parent businesses must also ensure they have group-wide policies on the sharing of information about customers, customer accounts, and transactions for Anti Money Laundering and Counter-Terrorism Financing purposes.
Relevant persons must also take appropriate measures to ensure agents used for the purposes of its regulated business receive AML/CTF training.
Access of account details
The Financial Intelligence Unit operates throughout Europe and within the UK, post-Brexit. It allows sophisticated analysis and sharing of financial information to tackle money laundering and terrorist financing. The new rules create a mechanism for the FIU and competent authorities to access details of UK bank accounts, building society accounts, certain credit union accounts, and safe-deposit boxes.
The details that can be accessed are limited to details about the accounts/ deposit boxes details (numbers, opening/closing dates, etc.) and the account holders’ and beneficial owners’ personal identity details. It does not include a power for law enforcement to collect
details about transaction history or to open deposit boxes – for these, Court orders are required.
What can businesses do?
These obligations are serious, and failure to implement can have serious consequences. Responsibility ought to be high up – ideally at Board level, and Relevant Persons should have full directorial support.
Staff training is critical, and systems should be developed with this in mind.
Weak organisations will be targeted, whereas those who have robust systems and alert staff will be avoided.
Daniel Berke is a Director of 3D Solicitors, and one of the UK’s leading experts on regulatory law.