The Law Commission is consulting on the UK’s anti-money laundering regime. There is a hefty document, weighing in at over 200 pages with 38 questions, and a deadline of 5 October.
Although there are questions about whether individual aspects of the current scheme are sensible – for instance, the all-crimes approach, the definition of suspicion, financial thresholds for disclosure – there is no question about whether the whole approach is working. The Law Commission itself concedes that ‘the reporting scheme isn’t working as well as it should’, and admits its consultation is limited. But the question arises as to whether tinkering with a system that does not work is worthwhile.
Money laundering is undoubtedly a grave phenomenon. The consultation contains an estimate that it costs every household in the UK £255 a year. In 2005, £25 billion was the best estimate for the amount of money laundered per annum at that time. The knock-on effects can contribute to damaging social disruption, of which an increase in house prices, keeping out first-time buyers and causing severe generational inequality, is doubtless one.
All solicitors know that the current scheme is exceedingly burdensome. The consultation cites the impact on the legal profession at some length, with the help of Law Society research, now around 10 years old. On average, most firms were spending then about four hours per week on discussing suspicions and making disclosures. Cost estimates per firm varied, but 21 top 100 firms reported a combined expenditure of almost £6.5 million per year in 2009 on such activities, which excluded the broader costs of anti-money laundering systems development, conducting due diligence, training and staff salaries.
But has the system achieved its goals? The Law Commission focuses on some aspects of dysfunction - for instance, the defensive reporting of suspicious transactions, which leads to a high volume of reports of poor quality, causing enforcement agencies to struggle; and the burden of compliance on entities under duties to report, as mentioned above.
But those are minor details compared to the bigger picture. In May of this year, for instance, the House of Commons Foreign Affairs Committee published a hair-raising report ‘Moscow’s Gold: Russian Corruption in the UK’. The evidence showed that Russian oligarchs hold their doubtful money at the behest of the Russian government, and spend it at governmental order or suggestion. One witness memorably added: ‘So you steal in a place of legal nihilism and you offshore in a place of legal solidity.’
The report concluded: ‘The use of London as a base for the corrupt assets of Kremlin-connected individuals is now clearly linked to a wider Russian strategy and has implications for our national security. Combating it should be a major UK foreign policy priority. The assets stored and laundered in London both directly and indirectly support President Putin’s campaign to subvert the international rules-based system, undermine our allies, and erode the mutually-reinforcing international networks that support UK foreign policy.’
As a side issue, the report singled out Linklaters because of its work on the flotation of En+, which at the time was controlled by one of the Kremlin-associated oligarchs, as follows: ‘We asked Linklaters to appear before the committee to explain their involvement in the flotation of En+ and to give their assessment of the regulatory framework that enabled the flotation to take place. They refused. We regret their unwillingness to engage with our inquiry and must leave others to judge whether their work at “the forefront of financial, corporate and commercial developments in Russia” has left them so entwined in the corruption of the Kremlin and its supporters that they are no longer able to meet the standards expected of a UK-regulated law firm.’
You can read Linklaters’ reply here.
Remember that this House of Commons report was written 16 years after the introduction of the Proceeds of Crime Act 2002, and 28 years after the first EU money laundering directive. It deals only with Russia, and not with launderers from, say, China or the Middle East. Such a state of affairs has occurred despite the UK government being the best pupil in the class, gold-plating the EU anti money laundering directives and acting as teacher’s pet at the OECD, which is the origin of the current reporting framework.
The problem is the system doesn’t work. For whatever reason, laundered money has continued to pour into the UK over the years in damagingly large quantities, to the point – according to the Foreign Affairs Committee – of concern for our national security.
So why are we tinkering with a system which is not fit for purpose, and which causes such burdens to our profession and others? It is time for a completely new take on how to tackle it, an utterly fresh approach.