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Money Laundering Threats – A Danger To Legitimate Business

Almost every forensic accounting case handled by Mark Jenner & Co Limited will involve some money laundering threats. It is the backbone of every fraud and financial crime that is committed, and very often these days is the predicate offence that is being prosecuted. A forensic accountant must be familiar with all aspects of the proceeds of Crime Act 2002 and the associated anti-money laundering framework.

Money laundering is the pivot upon which all financial crime, and other crimes such as extortion, narcotics and sex trafficking, revolve. Indeed, any profit motivated crime involves money laundering. The trouble is, the very nature of money laundering means that the profit from criminal activity becomes mixed with, or replaces, money within the legitimate market place.

If you take your wallet out and examine the bank notes within, it is likely that one of them will have been used to buy drugs in the past. Another might have come from a shopkeeper who has evaded his tax obligations. Yet another was originally in the wallet of the cowboy builder who repeatedly rips off vulnerable people. The point is that the proceeds of crime must enter the legal money system and circulate within it unseen. At what stage does the recipient of proceeds of crime take on any responsibility for assisting the criminals with their money laundering activity?

At What Stage Do You Become Involved In Money Laundering?

International trade is an essential part of a strong economy. According to the Office for National Statistics in 2015 there were £509 billion goods and services exported from the UK. This means that customers situated abroad have to pay UK businesses £509 billion. Some will potentially be offset against UK imports, but most of the transactions will be settled by bank transfers. However, there is a proportion (still likely to be measured in £billions) that is settled using alternative money transmission systems – money service businesses (MSBs) such as Hawala and Similar Service Providers (HOSSPs). Every high street or shopping centre around the world will have one or more such services that many people and businesses will rather use than their nearest bank. For one thing it is within their culture to do so, but it is often cheaper, quicker and easier.

Some commentators place a value on the impact of fraud on the UK economy at £100 billion, some say even more. Add to this the proceeds of other profitable crimes such as drug trafficking and the potential size of the money laundering threats market in the UK alone is immense, probably worth £trillions in the global market place. What better place to start hiding large sums of money than a £509 billion export market.

In the UK, HOSSPs are highly regulated, just like any bank. The local money transfer agent must undergo vetting, registering as a Small Payment Institution at the very least (SPI). If the intention is to remit money abroad, the more rigorous process of registering as an Authorized Payment Institution with the Financial Services Authority is required (API). As an SPI or API, ongoing monitoring by HMRC is mandatory, to see that the money transfer business fully complies with the anti-money laundering framework.

In The UK The Anti Money Laundering Rules Are Tough

While some UK based money transfer agents are also criminals, or their businesses are exploited in the same way as mainstream banks, the UK regulatory system at least makes it harder and no doubt prevents much money laundering activity. This cannot be said in equal measure for money transfer agents abroad, situated in places like Pakistan, India, Somalia and Afghanistan (to name but a few). It seems the transfer agents are sometimes being operated by the criminals. interacting with the HOSSP network in such way that any legitimate customer wishing to send a remittance to the UK is very likely to deposit money into the money laundering network.

Thus an Indian businessman deposits his legal cash with his local high street transfer agent and the UK factory sending his goods receives a deposit into their bank account the next day. The problem is the legitimate cash is retained by the network abroad, and the criminal gangs deposit the equivalent amount of money into the UK bank account that has been obtained from crooks in the UK wishing to launder their cash. Dirty street cash in the UK is used to settle obligations for legitimate UK suppliers awaiting funds from abroad, with the equivalent clean money being pooled abroad. This pooled money could be deposited into a bank and paid to anywhere in the world, safe in the knowledge its provenance was clean. Meanwhile, the dirty street money has been banked, normally by depositing small amounts here and there to avoid suspicion (“cuckoo smurfing”) and thereby dissipated back into the legitimate economy.

Increasing Incidence Of Hijacked Money Transfer Systems

Assignments that Mark Jenner & Co Limited has worked on in recent years have shown the worrying increase in cases involving this activity. It is normal practice for large and respectable organizations to be paid in this way. Bills of £20,000, £50,000 and even £100,000 are routinely settled, often broken down into deposits of a few £1000s to avoid suspicion. The problem is the recipient is happy they have been paid, and is unlikely to look closely at the cash nature or even question why a £20,000 bill has been paid in four installments on the same day! Yet while individuals have no legal duty to prevent such money laundering, a business does. Therefor, there is also an onus on a business based in the UK receiving funds through the Hawala system that it believes to have come from abroad (for example for purchase of machinery to be exported) to ensure that the source of funds are reliable and that the business is not an unwitting participant in a money laundering scheme.

If you accept large, or frequent, cash deposits into your bank account, you will be classed as a regulated entity by HMRC and are liable to sanctions under the Proceeds of Crime Act 2002 if found to be negligent in your monitoring of such activities. Penalties can be severe, with prison sentences likely. You will not be protected by the corporate veil, particularly if you receive a regular and substantial part of your turnover in this way.

Are Money Laundering Threats On The Increase?

Most businesses insist on payment methods. Some simply accept incoming money. A University or college might require several £1000s from a foreign student before they start a course, and believe they are complying with anti-money laundering regulations by not accepting a large wad of cash. However, if the money arrives in their bank, ostensibly by the HOSSP remittance system, they may be more relaxed, not knowing the payment is more likely to be money laundering than the pile of cash from the student.

I fear that the UK regulatory framework needs to be substantially improved – to prevent any incoming money laundering threats that are not from adequately vetted banking institutions. This would be difficult, as it is impossible to police MSBs abroad. However, a stronger onus should be placed on UK businesses, to verify the sources or transfer methods of all their funds received.