using information that is obtained from a reliable independent source, hence the use of passports, driving licences and utility bills. It also requires that the company takes adequate steps to establish the identity of the ultimate beneficial owner, if that person is different from the customer, such as in the case of a trust arrangement or a company owned by nominees.
Companies governed by the regulations are also required to obtain information about the nature and purpose of the business relationship that they will be entering with the customer. CDD includes understanding the business of the customer, so that the institution is aware of the normal business- related transactions and account activity that is expected. In the UK the term used officially is normally customer and that applies regardless of how firms normally refer to their business relationships; so clients, counterparties and other terms used in the market on an everyday basis all end up being customers.
Identifying and verifying who their customers are and what types of business they are undertaking, allows firms to detect some of those using false identities, or companies with no legitimate purposes, with whom they should not enter into business relationships or transactions, preventing any proposed money laundering activity. Of course, it is recognised that criminals will always find ways to use convincing false identities and that legitimate companies may come to be misused over time, so although CDD is probably the most important and best way to detect and prevent money laundering at the customer take-on stage, other defences also have to be constructed.
In order to detect money laundering being carried out by their customers, firms should implement a transaction and account monitoring programme, be it system based or otherwise; such monitoring is a mandatory requirement in the UK. This monitoring is conducted according to the RBA, with low risk customers, whose transactions are routine, being monitored less rigorously than those who pose a higher risk of money laundering. CDD is vital here in being able to categorise the risks posed by different customers. Such monitoring will seek to identify both placement (for example, cash deposits by a customer who doesn’t normally handle cash) and layering transactions (for example, series of transactions that are outside of the expected profile of the customer and make no economic sense, but appear designed to disguise the origins of the funds).
Many large institutions now employ sophisticated automated transaction monitoring systems, which can monitor the many thousands or millions of transactions they undertake on a daily basis. Any monitoring system, whether manual or automated, must take into account the nature of the business of the firm, the frequency and size of transactions, and the type and location of their customers.
Having identified activity or transaction outside the norm for a particular customer, institutions will need to decide if it is truly suspicious (ie, indicative of money laundering on an objective level, but not requiring actual proof) and report their suspicions to the authorities, in the shape of the relevant national Financial Intelligence Unit (FIU).
It is highly unlikely that any one institution, such as a bank, will see all the stages of the money laundering process, but by combining reports of suspicions from several firms, along with other closed information, such as law enforcement records, the FIU can identify money laundering activities, which can then be investigated and prosecuted.
There is some debate over the efficacy of the reporting regime, particularly in view of the costs of compliance. On the one hand it is possible to argue that the same due diligence approach reduces the risk of fraud and client default risk and helps to protect against reputational damage. However, there are others who argue that the costs are disproportionate. For example, Professor Jackie Harvey1 reported
on interviews with a range of officials responsible for the process in firms (in some countries, including the UK and the UAE, these are known as Money Laundering Reporting Officers (MLROs)) and quoted one of the respondents: stopping money laundering is a worthwhile and worthy objective but it has implications
in terms of costs and the requirement to hire additional resources. Demands of money laundering are immense and it is harder to cope with the costs of compliance and that the level of rigour disregards how little is achieved by obtaining the required information.
In their 2011 Global Anti-Money Laundering Survey, KPMG found that costs of AML compliance had risen by an average of 45% in the previous three years, with enhanced transaction-monitoring being the main reason for the increase in expenditure.
1.3
The Proceeds of Crime Act (POCA) 2002
Learning Objective
3.1.3 Know these associated activities as defined by POCA 2002: concealment; arrangements; acquisition, use and possession; failure to disclose; tipping-off
We have examined the process of money laundering in its various stages (placement, layering and integration) in Section 1.1 and obligations imposed on certain firms to attempt to detect and prevent it in Section 1.2. Of course, once detected, it should be investigated and prosecuted. From the 1970s onwards, it was recognised that special laws, starting with drugs trafficking and moving over time to a wide range of offences, would be required to investigate and prosecute money laundering. Money laundering offences are based on international conventions, which we will cover in Section 2.2 of this chapter, but for the time being this quote from the UK’s CPS indicates the range of activities that need to be criminalised:
acquisition, use, possession, disguise, concealment, conversion, transfer or removal from one country to another of the benefit of any criminal conduct can be money laundering. Even an attempt to do any of these things, or becoming involved in an arrangement which facilitates them, can constitute a money laundering offence.2
To illustrate how these activities can be made criminal offences, we will look at the relevant part of the UK’s Proceeds of Crime Act (POCA) 2002, which had a major impact upon the regulation of money laundering through the creation of separate offences (and which has been amended several times since its enactment in order to keep it current with both the risks of money laundering and the practical challenges it poses).
1 Harvey, J. (2008). ‘Just How Effective Is Money Laundering Legislation?’ The Security Journal, Vol. 21, pp.189–211
2 Crown Prosecution Service (2008). ‘Money Laundering Offences – Part 7 Proceeds of Crime Act 2002 updated 06/02/2008’:
Proceeds of Crime Act Money Laundering Offences: Legal Guidance, available at: www.cps.gov.uk/legal/p_to_r/proceeds_ of_crime_money_laundering.