477

9â Illicit finance

‘provides stabilisation powers that consist of a transfer to the private sector,

bridge banks and public ownership’.81 These provisions are administered by the

Bank of England,82 HM Treasury83 and the FSA.84

isdiction any criminal property;89

81

See Hsiao, above n. 60, 227.â 82â Banking Act 2009, s.1(5)(a).

83

Ibid. s.1(5)(b).â 84â Ibid. s.1(5)(c).

85

HM Treasury, Anti-money Laundering Strategy (HM Treasury, London, 2004).

86

Ibid. 12.

87

HM Treasury, above n. 85, at 11. For a similar view see A. Leong, (2007) ‘Chasing dirty money:

domestic and international measures against money laundering’ (2007) 10(2) Journal of Money

Laundering Control 140, 141–2.

88

SI 2007/2157. It is important to note that drug money laundering was initially criminalised by

the Drug Trafficking Offences Act 1986, while money laundering was criminalised by virtue of

the CJA 1993.

89

PCA 2002, s.327.

478

Banking regulation

90

Ibid. s.328.â

91â Ibid. s.329.â

92â Ibid. s.330.â

93â Ibid. s.331.

94

Ibid. s.332.â

95â Ibid. s.333A.â

96â Ibid. s.342.â

97â FSMA 2000, s.146.

98

FSA Handbook, above n. 30, SYSC 3.1.1.â 99â Ibid. SYSC 3.2.6 R.

100 Ibid. SYSC 3.2.6 C.â 101â Ibid. SYSC 3.2.6 H and I.â 102â FSMA 2000, ss.165–6.

103

Ibid. ss.167–8.â 104â Ibid. s.169.â 105â Ibid. s.172.

479

9â Illicit finance

money laundering reporting officer.109 The FSA also implements the Money

Laundering Regulations 2007, the purpose of which is to prevent businesses

based in the United Kingdom from being abused by criminals and terrorists for

the purposes of money laundering.110

The final part of the United Kingdom’s AML strategy is the use of suspicious

activity reports (SARs) to gather financial intelligence, which are to be found in

the PCA 2002 and the Money Laundering Regulations 2007.111 The PCA 2002

provides that SARs should be submitted if a firm ‘suspects’112 or has ‘reason-

able grounds for suspecting’ that an offence has been committed.113 If a firm

has ‘reasonable suspicion’114 or considers it in any way possible (provided that

it is more than ‘fanciful’) that the firm is being used for the purposes of money

laundering, it is required to notify its money laundering reporting officer,

who will complete a SAR and send it to the Serious Organised Crime Agency

(SOCA), who will then determine if further action is to be taken.115 The inter-

pretation of the term ‘suspicion’ has been considered by courts in England and

Wales on many occasions, and is seen by many commentators as limiting the

effectiveness of money laundering reporting requirements.116 In the decision of

the Court of Appeal in Shah v. HSBC Private Bank (UK) Ltd,117 Longmore LJ

stated ‘I cannot see why, rather than submit to summary judgment dismissing

the claim, Mr Shah cannot require the bank to prove its case that it had the rele-

vant suspicion and be entitled to pursue the case to trial so that the bank can

make good its contention in this respect’.118

A common criticism of the reporting requirements is that they have created a

‘fear factor’, which has resulted in a significant increase in the number of SARs

109

See, e.g., FSA ‘FSA fines firm and MLRO for money laundering controls failings’, 29 October

2008, www.fsa.gov.uk/pages/Library/Communication/PR/2008/125.shtml, and FSA, ‘FSA

fines Alpari and its former money laundering reporting officer, Sudipto Chattopadhyay, for

anti-money laundering failings’ 5 May 2008, available at www.fsa.gov.uk/pages/Library/

Communication/PR/2010/077.shtml.

110

Money Laundering Regulations 2007, SI 2007/2157.

111

The reporting obligations imposed by the PCA 2002 have been severely criticised by the Court

of Appeal in UMBS Online Ltd [2007] EWCA Civ 406.

112

PCA 2002, ss.328(1), 330(2)(a) and 331(2)(a).

113

Ibid. ss.330(2)(b) and 331(2)(b).

114

The Court of Appeal in R v. Da Silva [2006] EWCA Crim 1654 rejected the argument by Da

Silva that the court ‘could not imply a word such as “reasonable” into the relevant statutory

provision’ (1655).

115

K Ltd v. National Westminster Bank plc [2007] 1 WLR 311.

116

Further guidance on the definition of ‘suspicion’ is offered by Joint Money Laundering Steering

Group, Prevention of Money Laundering/Combating Terrorist Financing: Guidance for the UK

Financial Sector (London, 2007), Part 1, Guidance 6.9. Longmore LJ in R v. Da Silva [2006]

EWCA Crim. 1654 stated ‘It seems to us that the essential element of the word suspect and its

affiliates, in this context, is that the defendant must think that there is a possibility, which is

more than fanciful, that the relevant facts exist. A vague feeling of unease would not suffice.’

117

[2010] EWCA Civ 31, [2010] Lloyd’s Rep. FC 276, CA. For an analysis of the impact of this case

see P. Marshall, ‘Does Shah v HSBC Private Bank Ltd make the anti-money laundering consent

regime unworkable?’ (2010) 25(5) Journal of International Banking and Financial Law 287.

118

Ibid. 22.

121

Leong, above n. 87, at 142.â 122â Directive 89/592/EC.

123

CJA 1993, s.52.â

124â Ibid. s.52(1).â 125â Ibid. s.52(2)(a).

126

Ibid. s.52(2)(b).

127

M. Stallworthy, ‘The United Kingdom’s new regime for the control of insider dealing’ (1993)

4(12) International Company and Commercial Law Review 448.

128

Ibid.â 129â CJA 1993, s.52(3).â 130â Ibid. s.60(1).

131

Contrast this with the early regulation in the United States, where only face to face deals and not

anonymous markets were caught by the Securities and Exchange Act 1934.

132

CJA 1993, s.56(1)(a). This does not include securities generally or issuers of securities generally.

133

Ibid. s.56(1)(b).â

134â Ibid. s.56(1)(c).

482

Banking regulation

would be prejudiced by not having the information;143 or (c) that he would have

done what he did even if he had not had the information.144 Further defences

are listed in Schedule 1 to the Act.145

In addition to the criminal insider dealing provisions discussed above,

English law also criminalises the intentional misleading of financial markets.

Such a provision is contained in FSMA 2000, section 397, which makes it an

offence to make statements, promises or forecasts knowing that they are materi-

ally misleading, false or deceptive; to dishonestly conceal material facts; or to

recklessly make a statement, promise or forecast which is materially mislead-

ing, false or deceptive.146

(c)â Market abuse regime

A new approach to tackling abuse is the Market Abuse Regime. One of its key

objectives is to give the FSA maximum flexibility in its task by requiring a lower

standard of proof than needed to secure a criminal conviction.147 The Code of

Market Abuse148 section of the Handbook will play a central role in control-

ling market abuse. Reference must also be made to the Handbook generally,

in particular the High Level Standards such as Principles of Business,149 Senior

Management Arrangement, Systems and Controls,150 and other specific regu-

lation such as the Supervision Manual,151 Decision Procedures and Penalties

Manual,152 Disclosure Rules and Transparency Rules153 and the Listing Rules.154

The new regime is designed to complement the criminal provisions of the CJA

1993, to run in parallel and in addition to, not to replace and substitute them.155

While the regime only came into force in 2001, it has already been subject to a

major revision by virtue of the passage of the Market Abuse Directive, which

aims to set a minimum standard across EU markets.156 The revised Market

Abuse Regime came into force on 1 July 2005.157 The FSMA 2000 provides that

market abuse can take a number of forms and that it comprises behaviour that:

(a)â occurs

in relation to:

(i) qualifying investments admitted to trading on a prescribed market;

148

MAR.â

149â PRIN.â

150â SYSC.â 151â SUP.

152

DEPP.â

153â DTR.â

154â LR.

170

FSMA 2000, s.118(6).â 171â Ibid. s.118(7).â

172â Ibid. s.118(8).

173

Ibid. s.168(2)(a).â

174â Ibid. s.168(2)(d).â

175â Ibid. s.123(1)(a).

176

Ibid. s.123(1)(b).â

177â Ibid. s.402(1)(a).

486

Banking regulation

The FSA’s fraud policy can be divided into four parts: a direct approach;193

increased supervisory activity;194 promoting a more joined up approach; 195

and Handbook modifications.196 The FSA requires a firm’s senior management

to take responsibility for managing the risk of fraud, and firms are required to

have in place effective controls and instruments that are proportionate to the

risk the firm faces. The FSA sees its role as encouraging firms to maintain their

systems and controls, thematic work, improving whistle-blowing arrangements,

amending the financial crime material in the FSA Handbook and ensuring that

the financial services sector, trade associations and the government continue to

communicate the risk of fraud to customers.197

To implement this policy, the FSA has been given an extensive array of

enforcement powers, some of which it has utilised to combat fraud. It has the

power to impose a financial penalty where it establishes that there has been a

contravention by an authorised person of any requirement.198 The FSA fined

Capita Financial Administration Ltd £300,000 for poor anti-fraud controls,199

and in May 2007 fined BNP Paribas Private Bank £350,000 for weaknesses in its

systems and controls which allowed a senior employee to fraudulently transfer

£1.4 million out of the firm’s clients’ accounts without permission.200 The FSA

also has the power to ban authorised persons and firms from undertaking any

regulated activity.201

The most recent agency created to tackle fraud is the National Fraud

Authority (NFA).202 The objectives of the NFA include creating a criminal just-

ice system that is sympathetic to the needs of victims of fraud by ensuring that

the system operates more effectively and efficiently;203 discouraging organised

criminals from committing fraud in the United Kingdom and increasing the

public’s confidence in the response to fraud. An important measure introduced

193

It is intended that the FSA should focus its efforts on specific types of fraud or dishonesty which

constitute the greatest areas of concern, and where they can make a difference.

194

This would include, for example, considering the firms’ systems and controls against fraud

in more detail in the FSA’s supervisory work, including how firms collect data on fraud and

dishonesty.

195

This involves the FSA liaising closely with the financial sector and other interested parties in

order to achieve a more effective approach towards fraud prevention in the financial services

sector.

196

This would include codification and clarification of the relevant fraud risk management

provisions of the Handbook.

197

FSA Handbook, above n. 30, SYSC 3.2.6 R.

198

FSMA 2000, s.206(1).

199

FSA Press Release, ‘FSA fines Capita Financial Administrators Limited £300,000 in first

anti-fraud controls case’, 16 March 2006, www.fsa.gov.uk/pages/Library/Communication/

PR/2006/019.shtml.

200

FSA, Financial Services Authority Annual Report 2007/2008 (London, 2008) 23.

201

FSMA 2000, s.56.

202

National Fraud Authority. The National Fraud Strategy: A New Approach to Combating Fraud

(London, 2010) 10.

203

For a more detailed discussion of how this is to be achieved see Attorney General’s Office,

Extending the Powers of the Crown Court to Prevent Fraud and Compensate Victims: A

Consultation (London, 2008).

487

9â Illicit finance

by the NFA was the publication of the National Fraud Strategy, which is an inte-

gral part of the government’s fraud policy.204

The Office of Fair Trading ‘is chiefly concerned with the protection of con-

sumers. It also regulates competition amongst businesses but this is approached

from a consumer protection perspective.’205 The OFT has three regulatory

objectives: investigation of whether markets are working well for consumers;

enforcement of competition laws; and enforcement of consumer protection

laws. It is important to note that the OFT has its own fraud policy.206 The object-

ives of the OFT are to inform and protect consumers from fraudulent scams.207

The OFT also works and co-operates with other agencies such as the SFO,208

and it also liaises with overseas agencies.209

If a suspected fraud is committed against a bank, it should be reported to

its money laundering reporting officer (MLRO). Successful frauds should be

reported to SOCA. However, it is a decision for the individual bank to deter-

mine whether or not to report the fraud to the police. In 2007, the Home Office

announced that victims of credit card, cheque and online banking fraud should

report the matter to banks and financial institutions.210 The obligation to report

allegations of fraud is not as straight-forward, but nonetheless still important.

The primary statutory obligation for reported instances of fraud is contained

in the PCA 2002.211 It is a criminal offence under the 2002 Act to fail to disclose

by means of a SAR when there is knowledge, suspicion or reasonable grounds

to know or suspect, that a person is laundering the proceeds of criminal con-

duct. Successful fraud is defined as money laundering for the purpose of the

2002 Act.212 Furthermore, the Act specifies that members of the regulated sec-

tor are required to report their suspicions ‘as soon as reasonable practical’ to

SOCA via their MLRO. There is no legal obligation to report unsuccessful or

attempted frauds to the authorities because attempted frauds will not give rise

to the criminal proceedings that are available for money laundering, and fall

outside the scope of the mandatory reporting obligations under the PCA 2002.

Ultimately, the decision lies with the police whether or not an investigation will

be conducted.

A firm in the regulated sector is obliged to report fraud to the FSA in the fol-

lowing circumstances:

204

National Fraud Authority, above n. 202, at 3.

205

P. Kiernan, ‘The regulatory bodies: fraud and its enforcement in the twenty-first century’ (2003)

24(10) Company Lawyer 293, 295.

206

OFT, Prevention of Fraud Policy (London, n/d).

207

See, e.g., OFT, Scamnesty 2010 Campaign Strategy (London, 2009).

208

See, e.g., OFT, Memorandum of Understanding between the Office of Fair Trading and the

Director of the Serious Fraud Office (London, 2003).

209

See, e.g., OFT, ‘OFT and Nigerian financial crime squad join forces to combat spam fraud’, 4

November 2005, available at www.oft.gov.uk/news-and-updates/press/2005/210–05.

210

Home Office. ‘Fraud’, available at www.crimereduction.homeoffice.gov.uk/fraud/fraud17.htm.

211

PCA 2002, s.330.

212

The PCA 2002 applies to serious crime, which includes fraud.

490

Banking regulation

Council may also be made to permit foreign forfeiture orders to be recognised

in England.239

The Anti-terrorism, Crime and Security Act 2001 amended the provisions

for account monitoring orders, financial information orders and disclosure

information orders. Under the 2001 Act, an account monitoring order may be

granted by a Crown Court judge provided that the court is satisfied that (a) the

order is sought for the purposes of a terrorist investigation; (b) the tracing of

terrorist property is desirable for the purposes of the investigation; and (c) the

order will enhance the effectiveness of the investigation.240 The Anti-terrorism,

Crime and Security Act 2001 provides that a court may grant a financial infor-

mation order to compel a financial institution to disclose certain types of cus-

tomer information for a terrorist investigation. A disclosure of information

order allows for the disclosure of certain types of information and is very wide-

ranging.

The Counter-Terrorism Act 2008 contained a number of provisions which

the government states were designed to enhance counter-terrorism powers.

Under the Act, HM Treasury gained additional powers to direct financial

institutions to impose a graduated range of financial restrictions on busi-

nesses connected with jurisdictions of concern regarding money laundering

and terrorist financing.241 If HM Treasury is of the opinion that a country

poses a considerable threat to the United Kingdom’s national interests due to

an increased threat of money laundering of terrorist financing, it may issue a

direction.242

The Anti-terrorism Crime and Security Act 2001 authorises the seizure of

terrorist cash anywhere in the United Kingdom;243 the freezing of funds at the

start of an investigation;244 the monitoring of suspected accounts;245 the impos-

ition of requirements on people working within financial institutions to report

where there are reasonable grounds to suspect that funds are destined for ter-

rorism; and permits HM Treasury to freeze assets of foreign individuals and

groups. Part II of the 2001 Act permits HM Treasury to freeze the assets of

overseas governments or residents who have taken, or are likely to take, action

to the detriment of the United Kingdom’s economy or action constituting a

threat to the life or property of a national or resident of the UK.246 HM Treasury

may make a freezing order if two statutory requirements are met. First, they

must reasonably believe that action threatening the UK economy or the life or

property of UK nationals or residents has taken place or is likely to take place.247

Secondly, the persons involved in the action must be resident outside the

239

Peddie, above n. 234, at 443.â 240â Terrorism Act 2000, s.38A.

241

Counter-Terrorism Act 2008, Sch. 7.â 242â Ibid. Sch. 7 para. 3.

243

Anti-terrorism, Crime and Security Act 2001, Sch. 1 Part 2.

244

Ibid. ss. 4–16.â 245â Ibid. Sch. 1 Part 1.

246

This provision repealed the Emergency Laws (Re-enactments and Repeals) Act 1964, s.2.

247

The Anti-terrorism, Crime and Security Act 2001 provides that HM Treasury is not required to

prove actual detriment to freeze the assets of a suspected terrorist, but that a threat is sufficient.

491

9â Illicit finance

United Kingdom or be an overseas government.248 A freezing order prevents

all persons in the United Kingdom from making funds available to, or for the

benefit of, a person or persons specified in the order.249 HM Treasury is also

required to keep the freezing order under review and to determine whether it

should be enforced continually over a period of two years.250 HM Treasury has

frozen the assets of individuals and organisations who were suspected of finan-

cing terrorism.251 The government regularly updates a list of organisations and

individuals whose accounts have been frozen.252

In October 2007, HM Treasury’s Asset Freezing Unit was created, which is

responsible for legislation on financial sanctions; the implementation and

administration of domestic financial sanctions; the designation of terrorist

organisations; the implementation and administration of international financial

sanctions in the United Kingdom, liaising with the Foreign and Commonwealth

Office and collaborating with international partners to develop international

frameworks for asset freezing.

The United Kingdom has implemented the Terrorism (United Nations

Measures) Order 2006 to give legal effect to UN Security Council Resolution

1373.253 The Order also gives effect to EU Regulation 2580/2001, which pro-

vides for the designation of persons and entities for the purposes of measures

that relate, among other things, to the freezing of funds, financial assets and

economic resources.254 The legality of the Terrorism (United Nations Measures)

Order 2006 was challenged in A v. HM Treasury.255 The matter finally came

before the Supreme Court, who also considered the legitimacy of the Al-Qaeda

and Taliban (United Nations Measures) Order 2006, SI 2006/2952. The

Supreme Court determined that both of the Orders were ultra vires.

Schedule 2 Part III to the Anti-terrorism, Crime and Security Act 2001

inserted section 21A into the Terrorism Act 2000 and created the offence of

failure to disclose information regarding offences which came to the per-

son in the course of a business in the regulated sector. A person commits an

offence under this section if three conditions are met: (a) that the accused

knows or suspects, or has reasonable grounds for knowing or suspect-

ing, that a person has committed an offence under sections 15 to 18 of the

Terrorism Act 2000;256 (b) that the information or other matter upon which

the accused has based his knowledge or suspicion, or which gives reason-

able grounds for such knowledge of suspicion, came to him in the course

of a business that operates within the regulated sector;257 and (c) that the

248

Terrorism Act 2000, s.4(1)(a) and (b).

249

Ibid. s.5.â 250â Ibid. ss.7 and 9.

251

The freezing of assets is permitted by the Terrorism (United Nations Measures) Order 2006, SI

2006/2657.

252

Terrorism Act 2000, Part II, Sch. 1.â 253â SI 2006/2657.

254

Regulation 2580/2001 on specific restrictive measures directed against certain persons and

entities with a view to combating terrorism.

255

[2008] EWHC 869.â 256â Terrorism Act 2000, s.21A(2).

257

Ibid. s.21A(3).