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3.1 One of the items on the shopping list of a money launderer is an efficient financial system. Such a system can be used to move funds away from their place of origin, to perform numerous transactions with these funds and ultimately, to make these funds available to the offender under the guise of being legitimate earnings. The importance of the financial system to the money launderer is therefore that it is a device to transfer the proceeds of crime and to alter the appearance of such proceeds. If the control over access to the financial system is weak it will add to the attraction of the system to the money launderer.
3.2 In order to benefit from the fact that a money-laundering scheme needs to involve the financial system to accomplish its objective,[10] certain administrative measures that will apply to the institutions of the business community must be introduced. Such measures should facilitate the prevention, identification, investigation and prosecution of money-laundering activities. To accomplish this, a legislative framework comprising both criminal and administrative measures must be introduced.
3.3 The Commission therefore accepts as a point of departure that an anti money-laundering policy should be developed. Such a policy should not only be aimed at punishing offenders, but should include mechanisms that are directed at the persons who are in a position to identify and prevent money-laundering practises.
3.4 The Financial Transactions Reports Act 1988 of Australia includes the following institutions in its scope: financial institutions, insurers and insurance intermediaries, futures brokers, trustees or managers of unit trust schemes, persons dealing in travellers’ cheques, persons dealing in bullion, persons collecting and delivering currency on behalf if other persons, gambling institutions and totalisator betting services.[11] The legal profession in Australia is not included in the scope of the regulatory framework introduced by the Financial Transactions Reports Act, 1988. However, the Australian Government is considering a proposal to impose a limited reporting obligation upon solicitors.[12]
3.5 The British Money Laundering Regulations 1993[13] include the following in its scope: deposit-taking business, the acceptance of deposits by building societies, the business of a credit union, investment business, financial leasing, money transmission services, issuing means of payment, trading in money market instruments, foreign exchange, futures and options and securities, money broking and portfolio management advice.[14] In the United Kingdom legal practitioners are not included in the regulatory framework as set out in the Money Laundering Regulations. However, the scope of the offences of "Assisting another to retain the benefit of criminal conduct"[15] and "Acquisition, possession or use of proceeds of criminal conduct"[16], to which disclosure of a suspicion that a transaction involves the proceeds of crime is a defence, is broadly structured and includes legal practitioners.
3.6 The Bank Secrecy Act of the United States of America as codified under Title 31 of the United States Code deals with currency transaction reporting. This applies to the following: banks, commercial banks or trust companies, private bankers, branches of foreign banks in the United States, thrift organisations, securities brokers, investment bankers or investment companies, currency exchanges, dealers in travellers’ cheques, operators of credit card systems, insurance companies, dealers in precious metals, stones or jewels, pawnbrokers, finance companies, travel agencies, senders of money, telegraph companies, sellers of vehicles, the United States Postal Service and gambling institutions.[17]
3.7 From these examples it seems clear that in the interest of maximum effectiveness, the scope of an administrative framework should not be limited to the mainstream banking sector. Nearly all financial intermediaries can be used as a vehicle to bring illegally obtained cash into the financial system.
3.8 Administrative measures that are applied in jurisdictions where anti money laundering-schemes are in place, consist mainly of the identification of clients, record keeping of particulars of clients and transactions and the reporting of information on certain transactions. The establishment of a body that can record and manage the information obtained through the reporting system is an integral part of administrative schemes to combat money laundering.
3.9 The procedure to ensure that an effective audit trail is established begins with the proper identification of a client of a financial intermediary. This means that anonymous accounts, accounts held under a false name or pseudonym and accounts held by nominees as well as transactions done through agents where the beneficial owners or principals are unknown to the institution should not be allowed.
3.10 The Australian Financial Transactions Reports Act provides that information identifying the account and account holder must be obtained when an account with a cash dealer is opened. If the required information is not received by the institution, such an account is blocked as soon as the balance in the account reaches a certain level for the first time after the opening of the account.[18] Verification of the required information is done by the financial institution under the Financial Transactions Reports Regulations.
3.11 The British Money Laundering Regulations also require that information identifying a prospective customer is obtained.[19] This only applies to new and one-off transactions and business relationships. The information should be obtained as soon as possible and if it has not been obtained within a reasonable time the business relationship or transaction may not proceed.[20] The institution concerned must furthermore verify the information obtained from the customer.[21]
3.12 Once a transaction has occurred through which the proceeds of an offence have been laundered, the only effective way of identifying the transaction and those involved in it is to follow the so-called audit trail. This means that by identifying the nature of the transaction and the true participants in that transaction, not merely their agents, the money-laundering scheme can be exposed. This will only be possible if sufficient records have been kept by the institution at which the transaction had occurred. Mechanisms ensuring effective record-keeping must therefore be an essential part of an administrative scheme.
3.13 The Australian Financial Transactions Reports Act requires that records be kept of all information in respect of an account and a signatory to an account.[22] This includes all documents provided to the institution in question. These records must be kept for a period of at least seven years after the business relationship has ended.[23]
3.14 In the United Kingdom records of information on the identity of customers as well as on all transactions must be kept for at least five years after the account has been closed or the transaction has been finalised.[24]
3.15 The aim of a reporting system should be to identify transactions involving the proceeds of crime. Such transactions will probably, upon further investigation, appear to be part of a money-laundering scheme. It is therefore not the money-laundering scheme itself that has to be identified and reported, but any transaction that involves illegally derived assets or at least the suspicion that particular assets have an illegal origin.
3.16 Various options exist for criteria to base the identification of transactions to be reported on. The reporting requirement can be suspicion-based, or an amount can be set as a threshold together with certain other criteria. A combination of these methods can also be used as the reporting criterium.
3.17 In Australia the Financial Transaction Reports Act introduced a range of provisions that relate to the reporting of information in connection with various types of financial activities. The first of these activities is that of cash transactions involving the transfer of amounts of Australian $10 000 or more.[25] Another instance of mandatory reporting is where an electronic fund transfer is made out of, or into Australia.[26] In this case no threshold is set, which means that all international fund transfers must be reported.
3.18 The Australian Act also makes provision for suspicion-based reporting.[27] Where reasonable grounds exist to suspect that information regarding a transaction is relevant to an investigation or prosecution of any offence, or may be of assistance in the enforcement of the Proceeds of Crime Act, 1987,[28] the transaction must be reported. The obligation to report under these provisions applies to all cash dealers.[29]
3.19 The Australian statute furthermore makes it an offence to transfer Australian or foreign currency to the value of Australian $5 000 or more into, or out of Australia, unless the person making the transfer has made a report on.[30] This provision applies to all persons except a bank, where the currency is transferred on behalf of the bank by a commercial carrier.
3.20 The information that must be reported generally includes the identity of the person making the report, the identity of the person conducting the transaction, the identity of the person on whose behalf the transaction is conducted, the identity of the payee or beneficiary, the nature of the transaction, the amounts involved and the type and identifying number of the accounts that are affected by the transaction.[31]
3.21 The United States of America have a number of provisions dealing with the reporting of information on certain transactions. These are prescribed under Title 31 of the United States Code. The American provisions are mainly based on threshold reporting. This applies to domestic cash transactions,[32] transactions in respect of the importing or exporting of monetary instruments[33] and transactions with a foreign financial agency.[34] The Secretary of the Treasury is entitled to set the threshold in respect of domestic transactions and transactions with a foreign financial agency. This threshold is set at US$10 000. The threshold for importing and exporting of monetary instruments is set by the Bank Secrecy Act at US$10 000.[35]
3.22 Title 31 of the United States Code also makes provision for suspicion-based reporting. Any financial institution and any person associated with a financial institution must report any suspicious transaction.[36] Institutions or persons making a report under this provision are protected from liability under any law.[37]
3.23 The system for reporting in the United Kingdom is purely suspicion-based. The Criminal Justice Act, 1988, creates inter alia the offences of assisting a person to benefit from crime[38] and acquiring another's proceeds of crime.[39] In both cases the disclosure of a suspicion that the money involved is derived from criminal conduct excludes liability for the offences.[40]
3.24 Suspicion-based reporting has the advantage that a person at the institution making the report has had to apply his or her mind to the matter at hand. As a result the investigating authority is provided with information on which to base an investigation namely the grounds upon which the suspicion was founded. This leads to a better quality of disclosure of information to the investigating authority.
3.25 Reporting of this kind requires a certain level of training and insight from the persons to whom it applies. Otherwise they will not be able to notice irregular characteristics that should trigger their suspicion about a transaction. Under a suspicion-based reporting system responsible managers should therefore acquaint themselves of the fact of money laundering and how it affects the type of institution in which they are engaged. They should also make sure that their staff, especially the frontline staff who deal with the customers, are acquainted with the sort of circumstance that ought to appear suspicious and their legal obligations in this regard. The development of guidelines and training material specifically aimed at each type of organisation required to make reports on suspicious transactions is an integral part of implementing a suspicion-based reporting system.
3.26 A system that ties the reporting requirement to easily ascertainable criteria, such a cash amount exceeding a set threshold, should be less complicated for institutions to comply with. With such a system the transactions that should be reported can be easily identified and relayed through the proper channels.
3.27 A major advantage of a threshold-based reporting system is that it can ensure that a transaction at a reporting institution which appears totally innocent when seen in isolation, is reported and can be found to warrant investigation when compared with information reported by other institutions. Another advantage of a threshold-based system is that it tends to cause a variation in the behavioural pattern of criminals who want to launder the proceeds of crime. Such criminals will usually attempt to structure the transactions placing these proceeds in the financial system in order to avoid the threshold. In doing so they may perform transactions that do not make any economic sense and will therefore immediately appear suspicious. In this way threshold-reporting can complement suspicion-based reporting.
3.28 The main disadvantage of a threshold-based system of reporting is the overburdening of the available resources is indeed the. The success of a threshold-based reporting system is therefore absolutely dependant on the existence of a body or bodies that can manage the reported information effectively, either by analysing and distributing such information or by investigating it. The setting of a threshold should furthermore be coupled with other criteria such as the transaction being a cash transaction or a foreign exchange transaction. If this is not done the burden on both the reporting body and the body to whom reports must be made, will become intolerable.
3.29 Institutions should implement internal policies based on responsible business conduct in order to facilitate the implementation of the administrative measures. Care should be taken in any legislation on this topic not to be too prescriptive of the contents of the internal policies which these institutions are required to adopt. The contents of internal policies cannot necessarily be the same for all the types of institutions to which this requirement will apply. These policies will therefore have to be developed in conjunction with the various organisations to which they will apply.
3.30 The Money Laundering Regulations 1993 of the United Kingdom requires the institutions to which they apply to maintain procedures in relation to client identification, record-keeping, internal reporting, internal control and communication to prevent money laundering and training of employees.[41] The standard of these internal procedures must be in accordance with the regulations applicable to each of the above-mentioned topics.[42] In order to determine whether an institution adheres to this standard reference may be had to any supervisory guidance that applies to that institution.[43]
3.31 The tendency in other jurisdictions has been to set up a central institution to which all reports are made. Such an institution is referred to as a financial intelligence unit as its task is to gather intelligence for investigating authorities to base their investigations on. It receives and analyses reported information through the reporting structure and disseminates it to the investigating authorities concerned. A financial intelligence unit is an integral part of an administrative scheme as it facilitates the communication between the persons or institutions reporting certain information and the authority whose responsibility it is to use that information in the course of the investigation of money laundering and other criminal activities. Without such an institution the whole reporting exercise will be futile as there would be no way to add value to the reported information.
3.32 Various options exist in respect of both the form and function of an institution that is concerned with gathering and disseminating information reported through a reporting structure. In Australia the financial intelligence unit is named Australian Transaction Reports and Analysis Centre (AUSTRAC) and it was instituted by the Financial Transactions Reports Act.[44] The American version of such an institution is the Financial Crimes Enforcement Network (FINCEN) and its equivalent in the United Kingdom is the National Criminal Intelligence Service (NCIS). In Italy information is reported to the Bank of Italy where it is placed on a national database. This information is collected and analysed by the Italian Exchange Office (UIC) which is a satellite of the Bank of Italy.[45]
3.33 The financial intelligence unit can be attached to a government department or to the central bank, or it can function independently from a specific organisation. Each of these scenarios has certain advantages and disadvantages. AUSTRAC is attached to the Office of the Attorney General but functions virtually independently. FINCEN is attached to the US Treasury which has very strong law enforcement branches. NCIS functions as an independent organisation. These multi-disciplined institutions all incorporate sections of their respective law enforcement communities which are represented in the financial intelligence units. The Italian financial intelligence unit is, however, connected to the central bank and provides its information to the so-called tax police who carry out the money-laundering investigations.
3.34 By attaching the financial intelligence unit to an existing government department the unit will have immediate access to the human and other resources of that department. This will, however, necessitate the establishment of channels of communication with the institutions that will have to report to the unit, and with the investigating authorities that will have to utilise the information disseminated by the unit.
3.35 Attaching the financial intelligence unit to the central bank has the advantage that there already exists a channel for communication between the banking sector and the central bank. A problem that may, however, be experienced in this respect is that it may exclude financial intermediaries outside the banking sector, who have little or no contact with the central bank, from the reporting structure
3.36 The main benefit to be gained from the information provided by a financial intelligence unit is that it can facilitate money trail investigations of offences as an alternative to the traditional investigation of the primary criminal conduct itself. The worth of a financial intelligence unit will therefore lie in its ability to promote the idea that money trail investigation is a sound law enforcement approach. A financial intelligence unit that functions independently may be in a better position to distribute the relevant information among the different authorities whose task it will be to investigate the information with a view to instituting criminal proceedings. This will serve to enhance the credibility of the financial intelligence unit within the law enforcement community and to have the unit accepted as part of that community.
3.37 To provide for the enforcement of an administrative framework offences and penalties will have to be introduced. The use of the criminal law in this respect may, however, not be sufficiently effective to ensure the enforcement of the types of measures discussed in the previous paragraphs. For this reason administrative sanctions will probably have to be relied upon. Possible options in this respect are the imposition of pecuniary penalties, the revoking or suspension of licences or removal from the relevant registers.
3.38 A practical problem is the extent to which those contemplated for inclusion in a regulatory framework are themselves regulated through registration or some other system by which their existence and scope of operations are recorded. In respect of those institutions that are overseen by regulators or supervisors the enforcement of the regulatory system can be readily facilitated. A suitable government authority could be commissioned with the policing of these measures in respect of the institutions that are not regulated or supervised. In the absence of such an authority the normal law enforcement authorities will have to see to the enforcement of the regulatory system through the medium of the criminal law.
3.39 Emphasis should, however, be placed on fostering a culture of co-operation between the business community, the financial intelligence unit and the various law enforcement agencies. Experiences in other jurisdictions have shown that promoting such a spirit of co-operation is far more effective than strong handed enforcement in ensuring compliance with a regulatory framework.
3.40 The successful implementation of a regulatory scheme will also require self-regulation by the business world and its determination to prevent its institutions from becoming associated with criminals or being used as a channel for money laundering.
[10] Namely to cause the proceeds of crime to appear as legitimate earnings.
[11] Definition of “cash dealer” in section 3 of the Financial Transactions Reports Act 1988.
[12] This will require Australian solicitors to report cash transactions exceeding Australian $10 000.
[13] Statutory Instrument 1933 of 1993.
[14] The definition of “relevant financial business” in section 4 of the Money Laundering Regulations, Statutory Instrument 1933 of 1993.
[15] Section 93A of the Criminal Justice Act, 1988.
[16] Section 93B of the Criminal Justice Act, 1988.
[17] The definition of “financial institution” in section 5312 of USC 31.
[18] Section 18 of the Financial Transactions Reports Act 1988.
[19] Regulations 7 and 9 of the Money Laundering Regulations, Statutory Instrument 1933 of 1993.
[20] Regulation 7 of the Money Laundering Regulations, Statutory Instrument 1933 of 1993.
[21] Regulation 11 of the Money Laundering Regulations, Statutory Instrument 1933 of 1993.
[22] Section 23 of the Financial Transaction Reports Act 1988.
[23] Ibid.
[24] Regulation 12 of the Money Laundering Regulations, Statutory Instrument 1933 of 1993.
[25] Section 7 read with section 3 of the Financial Transactions Reports Act 1988.
[26] Section 17B of the Financial Transactions Reports Act 1988.
[27] Section 16 of the Financial Transactions Reports Act 1988.
[28] Which deals with the confiscation of the proceeds of crime and criminalises money laundering.
[29] Section 3 of the Financial Transactions Reports Act 1988.
[30] Section 15 of the Financial Transactions Reports Act 1988; proposals were made to raise this threshold to Australian $10 000.
[31] Schedules 1 to 4 of the Financial Transactions Reports Act 1988.
[32] Section 5313(a) of USC 31.
[33] Section 5316(a) of USC 31.
[34] Section 5314(a) of USC 31.
[35] Section 5316(a) of USC 31.
[36] Section 5318(g)(1) of USC 31.
[37] Section 5318(g)(3) of USC 31.
[38] Section 93A of the Criminal Justice Act 1988.
[39] Section 93B of the Criminal Justice Act 1988.
[40] Sections 93A(3) and 93B(5) of the Criminal Justice Act 1988.
[41] Regulation 5(1) of the Money Laundering Regulations, Statutory Instrument 1933 of 1993.
[42] Ibid.
[43] Regulation 5(3) of the Money Laundering Regulations, Statutory Instrument 1933 of 1993.
[44] Section 35 of the Financial Transactions Reports Act 1988.
[45] Cinelli et al at 7.
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