Financial Crime - Money Laundering and Bribery

Money Laundering

• Definition: Converting proceeds of crime into assets appearing to have a legal source.
• Aim: To disguise the source of property, allowing the holder to enjoy it without suspicion.
• Example: Drug dealers channeling proceeds through a legitimate business, extracting profits as salary or dividends to buy luxury items.

Money Laundering Legislation

• Proceeds of Crime Act 2002 (POCA): Primary legislation regulating money laundering.
  • Three categories of offenses:
    • Laundering
    • Failure to report
    • Tipping off

Laundering (s.327 POCA 2002)

• Offense to conceal, disguise, convert, transfer, or remove criminal property from England, Wales, Scotland, or Northern Ireland.
• Concealing or disguising: Hiding its nature, source, or location.
• Criminal property: Property known or suspected to represent benefit from criminal conduct.
• Three phases of laundering:
  • Placement
  • Layering
  • Integration

Phases of Money Laundering

• Placement:
  • Initial disposal of proceeds into a legitimate business activity or property.
  • E.g., a takeaway or tanning salon.
• Layering:
  • Transfer of money from business to business to conceal its source.
  • E.g., transferring money between bank accounts to blur the audit trail.
• Integration:
  • Money takes on a legitimate appearance.
  • E.g., withdrawal from a bank account as salary.

Failure to Report (s.330 POCA 2002)

• Individuals in a relevant business must disclose knowledge or suspicion of money laundering.
• Failure to report is a criminal offense.
• Relevant businesses: Banks, accountants, and lawyers.
• Disclosure must be made as soon as practically possible to:
  • Designated Money Laundering Reporting Officer (MLRO) within their organization, or
  • Directly to the National Crime Agency (NCA)
• Suspicious Activity Report (SAR) completed.

Tipping Off (s.333 POCA 2002)

• Offense to make a disclosure likely to prejudice a money laundering investigation.
• Do not make your client aware that you have made a report to your MLRO or the NCA.
• Prejudicing an investigation: Client may destroy or conceal evidence, or leave the country.

Penalties

• Money Laundering:
  • Maximum 14 years imprisonment and/or
  • Unlimited fine.
• Failure to Report/Tipping Off:
  • Maximum 5 years imprisonment and/or
  • Unlimited fine.

Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017

• Secondary legislation replacing Money Laundering Regulations 2007.
• Transposes EU fourth money laundering directive (2015) into UK law.
• Gives effect to the global Financial Action Task Force (FATF) standards.
• Updates 2007 regulations for global and technological developments:
  • Electronic communication, money transfers, online gambling.
  • Terrorism, pre-paid cards & e-money.
  • Shell banks, PEPs, sanctions.
  • Trusts and beneficial ownership.
• More risk-based approach.

Secondary Legislation (Money Laundering Regulations 2017)

• Requires firms to put preventative measures and staff training in place:
  • Know Your Client (KYC) / due diligence checklists must be completed for ALL clients at the start of the relationship and periodically:
    • Client ID and address - proof!
    • Sources of Income and Capital
• Applies to:
  • Financial firms – banks, building societies, bureaux de change, savings and investment firms.
  • Accountants, lawyers, insolvency practitioners, estate agents, and all gambling firms!

Money Laundering Regulations 2017 - Examples of controls in investment firms:

• Risk assessment on account opening
  • High risk PEP, trusts, jurisdiction, source of funds
• Risk assessment drives documentation required (types, originals vs copies, look through to beneficial owners etc)
• Account opening documentation received
  • Checked for consistency (nationality etc)
• Details submitted to international database for sanctions, criminal hits etc
  • Any hits verified or false positive
• Based on risk assessment document review, update and database check periodically (but no less frequent than annually)
• Mandatory staff training annually and documentation
• Board review of controls results and policy review

Money Laundering and Terrorist Financing (Amendment) 2019 and (Amendment) (No 2) 2022 Regulations, and 2023

• Further regulations introducing by way of example:
  • Extend scope of regulations to include virtual currency holders (e.g., Bitcoin).
  • Extend scope to those who carry out similar services to accountants and tax advisors as a principal business activity.
  • Extend CDD checks e.g., reducing e-money exemption so that firms can only forgo CDD for electronic payments where the maximum amount stored electronically is EUR150.
  • Establishes central register of beneficial ownership.
  • Person acquiring control of an FCA registered cryptoasset firm must have prior approval of FCA.
  • Enhanced due diligence on domestic PEPs to be less than in relation to foreign PEPs.

Bribery

• Definition: Offering, giving, receiving, or soliciting any item of value to influence actions of an official or other person in charge of a public or legal duty.
• Purpose: To prevent the situation where the objectivity of accountants, professionals, or public officials (e.g., a tax inspector) is jeopardized by financial incentives.

The Bribery Act 2010

• Legislation came into force on 1 July 2011.
• The Act creates four offences:
  • Bribing: Bribing a person to induce or reward them to perform a relevant function improperly (s.1).
  • Being Bribed: Requesting, accepting, or receiving a bribe as a reward for performing a relevant function improperly (s.2).
  • Bribing a Foreign Official: Using a bribe to influence a foreign official to gain a business advantage (s.6).
  • Failure to Prevent Bribery: A form of corporate liability for failing to prevent bribery on behalf of a commercial organization (s.7).

Penalties and Policies

• Penalties:
  • Penalty for individuals = maximum 10 years imprisonment.
  • Penalty for commercial organizations = unlimited fine.
• Policies:
  • Organizations must put in place anti-bribery policies, training, and procedures. (Defence under s 7)

Market Abuse & Insider Dealing

Market Abuse

• The Market Abuse Regulation (MAR) came into effect on 3 July 2016.
• Aims to increase market integrity and investor protection, enhancing the attractiveness of securities markets for capital raising.
• MAR strengthens the previous UK market abuse framework by extending its scope to new markets, new platforms, and new behaviours.
• Contains prohibitions of insider dealing, unlawful disclosure of inside information, and market manipulation and provisions to prevent and detect these.

Insider Dealing - Introduction

• Using confidential inside information to inform an investment decision.
• Example: As a director of Vulture Plc, you know the company is going to acquire another business, Target Plc.
• You know this information as an “insider” before anyone else does.
• Before the acquisition, you secretly acquire 100,000 shares in Target Plc for £1 per share.
• Following news of the takeover, Target Plc’s share price doubles in value – so you make a £100,000 profit!

Insider Dealing - Offences

• According to the Criminal Justice Act 1993 (CJA93) Insider Dealing is a Criminal Offence.
• An individual will be guilty of insider dealing if they have “price sensitive information” as “an insider” and they:
  • Deal in price affected securities based on that information (i.e., they use the information to buy or sell shares).
  • Encourage others to deal in those price affected securities.
  • Disclose the information to anyone, other than in the proper performance of their duties.

Insider Dealing - “Inside Information”

• Meaning of “Inside Information”
  • S.56: only information which:
    • Relates to a specific security or company
    • Has not been made public
    • If made public would be likely to have a significant effect on the price
      • i.e., it is price sensitive information
  • Examples: takeovers, profit announcements, restructuring, etc.

Insider Dealing - “Insider”

• Meaning of “Insider”
  • S.57: a person has information as an insider only if they know it is inside information, and they have it from an insider source
    • A person has information from an inside source if:
      • They have it through being a director, employee, or shareholder of the company (i.e., actual insiders)
      • They have access to information by virtue of their employment, office, or profession (e.g., as accountant or lawyer for the company)

Insider Dealing - Consequences

• Summary conviction
  • "Summary offence” = less serious offences
  • Limited fine
  • Maximum 6 months imprisonment
• Indictment
  • Remember: “indictable offence” = more serious offence
  • Unlimited fine
  • Maximum 10 years imprisonment
• Company Director?
  • Breach of statutory duties and may be liable to account to company for any profit made

Insider Dealing - Defences under CJA 1993

• No knowledge or expectation that information would lead to profit
• Belief that information is already available to the public
• Proof that they would have done what he did even without the information
• Proof that information was not expected to be used by third party to profit in company security.