by Michel Klompmaker
Economic crime costs more than £193bn per year. Tackling this complex problem requires an interdisciplinary perspective. A seminar series in economic crime invited those with expertise and interest in economic crime across faculties, departments, students and broader community to come together, share ideas, and engage in a collaborative work. This interdisciplinary initiative was organised by Dr. Branislav Hock, who is a Senior Lecturer in Economic Crime at the University of Portsmouth. The Economic Crime Seminar Series was held on March 24 2021 online, and was organised through the joint effort of the Institute of Criminal Justice Studies, Portsmouth Law School, Portsmouth Business School – the Department of Economics and Finance, and Portsmouth Business School – the Department of Accounting and Financial Management.
Dr. Liliya Gelemerova was warmly welcomed as the guest speaker of the afternoon. With over 20 years of experience, she has worked across the financial crime space in different roles and capacities across different platforms. She has managed teams, due diligence projects in challenging environments, and led major investigations and litigation support cases. Dr. Gelemerova has delivered presentations on behalf of Stop the Traffik, a London-based non-profit organisation that fights human trafficking and slavery. At the Economic Crime Seminar Series, she gave her presentation on the topic of anti-money laundering (AML), where she covered four main areas, namely:
- How has the AML landscape changed since the introduction of the US’s Bank Secrecy Act in the 1970s?
- Are international AML standards effective?
- The role of the regulated sector – responsibility beyond compliance
- Focus areas moving forward
How has the AML landscape changed over the past few decades?
Dr. Gelemerova began her presentation by posing a fundamental question: what is money laundering? She stated that the common understanding of this term is the false representation of crime money as legitimate earnings. On the other hand, she noted that the legal definition of money laundering, which is adopted in both international and domestic legislation, is much broader than the common definition. The legal definition of money laundering includes the mere possession or any form of handling crime property.
Dr. Gelemerova then discussed what the next big question is: how old is the money laundering phenomenon? She spoke about how there are certain ways to conceal one’s wealth, to try and protect it or evade tax, which is known to have existed for a very long time. The legal concept of having to prove legitimate origin to one’s funds can be traced back to more modern times, in the 70s and 80s. She continued that it was not until the early 20th century when the US tax authorities began to require proof of legal earnings, that the concept of money laundering began to become relevant. In 1930 in the US, the Chicago Crime Commission published a list of known notorious gangsters, of which Al Capone was leading that list. She noted how at this point it appeared less possible to prove any crime other than tax evasion.
She explained that this was because the US Supreme Court decided a couple of years earlier in 1927, that illegal earnings should also be subject to taxation. If Al Capone was not paying tax and not trying to show legitimate earnings, then it is hard to believe he was laundering funds in the strict sense. But if we apply the currently adopted, very broad legal definition, then whatever Al Capone did with his crime proceeds all counted as money laundering. Furthermore, as Dr. Gelemerova explained, what happened to Al Capone served as a lesson to other criminal successors who decided it was high time for them to start managing their illegal money more efficiently.
Most importantly, she stated that the US has undoubtedly been the main driving force behind the introduction of AML legislation worldwide as well as the establishment of financial intelligence units (FIUs). FIUs are public sector bodies to which banks and other regulated businesses have to report activities suspected to be linked to money laundering or terrorist financing with the terrorist financing aspect coming into play at a later stage.
The Bank Secrecy Act of 1970 and the RICO Statute of 1970
Dr. Gelemerova then discussed the Financial Record Keeping and Reporting of Currency and Foreign Transactions Act of 1970, which also became known as the Bank Secrecy Act (BSA). She stated that it targeted crime wealth concealment and tax evasion and served as the first comprehensive US AML law, which then later served as a conceptual basis for other laws in the US and internationally that tackled crime money concealment. She carried on by saying that this act stipulated that financial institutions maintain records and file reports so as to enable law enforcement authorities to track financial transactions in criminal, fiscal or regulatory investigations.
In addition to this act, the US also adopted another very important piece of legislation in 1970, which was known as the Racketeering Influenced and Corrupt Organisations Act (RICO). This particular statute, as she described, played a very important role in shaping future AML legislation, as it was designed to prevent criminals from infiltrating the legal enterprises, and enabled prosecution of criminals who had already acquired a share of the legal economy. So, as she maintained, the RICO Statute and other laws and regulations introduced in the 1970s and 1980s in the US were ultimately aimed at assisting law enforcement authorities in confiscating the proceeds of crime.
Dr. Gelemerova stated that there is research indicating that not only had these new legislative developments failed to curb the money laundering phenomenon in its very early stages of development, but they actually appeared to have furthered its expansion and sophistication. She explained that this was because criminals found themselves in a situation where they had to look for ways to diversify their crime money management, including by further infiltration of the legal economy.
The Money Laundering Control Act of 1986 and the Financial Action Task Force
Another important act that came into force in the US was the Money Laundering Control Act of 1986, which enhanced the Bank Secrecy Act by essentially making it a crime to structure transactions in such a way as to avoid the BSA’s reporting requirements. The first major steps towards the international cooperation in the fight against money laundering were the Vienna Convention, which focused on the proceeds from illegal drugs trade, and the Basel Statement of Principles on the Prevention of Criminal Use of the Banking System for the Purpose of Money Laundering.
The Basel Statement provided guidance that served as a basis for a more consistent development of KYC and due diligence processes in the banking industry. Then, in 1989-1990, we saw the emergence of the Financial Action Task Force (FATF), which is a global intergovernmental body that sets AML standards worldwide. Legislation then expanded internationally to target not only proceeds from illegal drugs trade, but a broader range of criminal activities generating proceeds and covered an ever-increasing range of reporting institutions beyond banks.
On the whole, as Dr. Gelemerova pointed out, the AML landscape has become more complex in the years, with obligations for regulated businesses only increasing. She stated that when AML legislation first emerged, it focused on record keeping and reporting, which was burdensome enough, but with regulatory pressures and constant fines in the industry, AML became very much about processes, systems and controls. As such, regulators began to focus a lot more on processes rather than outcome. For example, a bank could be fined for what can subjectively be defined as a weakness in the bank’s controls and systems, even if there is no actual evidence of criminal proceeds going through the bank. Now there is an increasing focus on sharing information through public and private partnerships which is a positive development.
Money laundering – a global phenomenon
Dr. Gelemerova stated that the way we codify our understanding of criminality and apply this in practice has evolved over the years. This is particularly true when it comes to the money laundering phenomenon; it is a global phenomenon and involves the movement of funds internationally, but it doesn’t necessarily manifest itself the same way all the time. Crucially, she explained that laundering schemes are embedded in their financial, economic and cultural landscapes. Shifting money internationally, including offshore, has the capacity to avoid regulatory interference, but may also have pure economic motives, such as looking for the best performing economies i.e., the highest yields.
She also mentioned that laundering doesn’t have to be necessarily international. For example, if she were a launderer, she stated that she would first seek to always launder domestically because the cross-border element can actually be a point of vulnerability for criminals. She would then also look to laundering internationally if she needed to take her business ventures on a larger scale, or if she feels like the domestic economy was not doing well enough for her to safeguard and multiply her legitimised earnings. Moreover, schemes can range from fairly simple to quite complicated money laundering schemes, which involve numerous banks and companies, often fictitious and often in offshore areas. Sometimes, as she also explained, it is difficult to follow the money trail, especially in the context of financial worldwide money flows.
AML regime as a global panopticon – overlooking important differences in a local context
So, policy makers and regulators have sought to turn the AML regime into a global panopticon that can see everything, and which enables a global, financial control. While creating this global panopticon, we might be overlooking important differences in local contexts, including national/legal frameworks, law enforcement systems, socioeconomic environments, ethnic/culture values and language. Criminals themselves, as she stated, have to become familiar with the local environment before they begin to operate there. While creating this global panopticon, she also said that we may also be overlooking the differences between the ways different crime activities generate an economic benefit and consequently, how this shapes the way the economic benefit is then handled or laundered.
From an investigative point of view of studying the modus operandi of the criminal – the entry point of the crime proceeds into the legitimate economy is important as it will vary depending on the crime. We then arrive at several key questions:
- Is the laundering of criminal savings from tax evasion the same as the laundering of other types of crime property/criminally derived economic benefits, for instance, cash generated through human trafficking? Dr. Gelemerova stated here that it is not the same.
- Are all crimes the same?
- In terms of addressing the actual issues, the actual crime conduct, is the harm caused by all these crimes the same?
- And to add another complex dimension to this, what about the extraterritoriality of economic sanctions, which essentially are used by states to push their foreign policy agendas? Breaching sanctions as a criminal offence that generates an economic benefit would be predicate to money laundering in countries with an all-crimes approach.
Is the AML regime built on solid grounds or on constantly shifting platforms?
So, she asked, how do we factor this into our assessment of the effectiveness of an AML regime? And how clear is the legal term of money laundering, and what does this term imply? Tax evasion in jurisdictions that consider it a predicate offence is by default money laundering. Keeping criminally generated money under your mattress may, in theory, qualify as money laundering too, she stated. And in terms of the broad concept of money laundering, according to the legal definition, if tax evasion is a predicate offence to money laundering, then the grey economy equals money laundering by default. For example, all transactions where you don’t get a receipt from a store, which implies that tax may not be paid on this, forms part of the grey economy, so does this equal tax evasion and money laundering by default?
So, she further questioned; how are academia expected to study this phenomenon to then help policymakers develop the most effective approach to fight money laundering? Is the AML system then built on solid grounds, on a clear definitional basis, or is it rather built on constantly shifting platforms similar to a panopticon built on quicksand? Again, these are very important questions that we need to answer and study in depth.
She also stated that we have to see the increasing regulations in helping us to fight crime. But she also noted that it is not surprising that very little has been achieved in reducing the money laundering volumes – we constantly hear about the volumes still being very large and substantial – given that policy makers have broadened the money laundering concept beyond its strict meaning to include the handling of crime money. And as it happens, money laundering in the sense of handling crime money will exist almost tautologically as long as crime for profit exists.
How do we achieve a balance between commercial and compliance pressures?
Dr. Gelemerova also observed how we are on a continuous search for practical solutions but that this search has never properly included a definitive measurement of the effect of the current AML policymaking on crime and economic life. She said that we see the industry doing more and more and arguably, laundering doesn’t decrease. The FATF in recent years indicated that not only does the design of a country’s AML regime need be evaluated, but so does the effectiveness of these regimes as well. While she stated that such an assessment is needed, it gives rise to a number of questions that we need to address before such a research can be effectively undertaken:
- Given the broad, legal definition of money laundering – how do we assess the volume of laundering and are current estimates of volumes reliable?
- Does the volume of laundering depend only on the design of AML regimes, or are there other factors that play a role?
- And how is the ever-expanding power of the authorities to freeze, cease and confiscate being used?
- Is the judiciary in the evaluated country independent? Is the AML regime going to work once cases get to the judiciary stage?
- And a question particularly important for the regulated industry is proportionality: how do we achieve a balance between commercial and compliance pressures?
Addressing the final question, Dr. Gelemerova believes that it is largely through innovation and technology, including automation of certain processes and the use of artificial intelligence, to reduce false positives. This is actually already helping and will continue to help with achieving the balance.
The role of the regulated sector – responsibility beyond compliance
Dr. Gelemerova stated that the obligations to do Know Your Customer (KYC), Customer Due Diligence (CDD), and monitoring of transactions and of changes in customer risk profiles is all about understanding who we are facing, because that will then be connected to what the origin of the funds is that will be processed. Can we achieve responsibility beyond compliance on this point? She said that over the years the risk-based approach came to be seen as more pragmatic than the prescribed approach.
But we have now arrived at a junction where regulators and third-party reviewers expect processes to look a certain way. Banks have to constantly justify their decision making, document it and prove the negative at times, so we are expected to prescribe our risk-based approach, which she noted is a paradox.
She further mentioned that we need to focus on addressing the genuine conduct issues and ensuring that we have integrity among the decision-making individuals. But we also need to work on ensuring regulatory acceptance to more process flexibility when it comes to innovation and technology. Artificial intelligence and technology are our most feasible way of achieving efficiency and ultimately, effectiveness. As she maintained, by using automation we can actually shift human resources to the more complex areas of compliance where the human factor is absolutely crucial.
Moreover, she also stated that while risk rating methodology became a science of its own, we must recognise that risk rating still remains relative. Everything boils down to the human factor. A business in a low-risk jurisdiction may have the perfect policies on paper, and still engage in crime while a business in a jurisdiction perceived as high risk may be genuinely implementing KYC to stay away from crime. She also said it is reassuring to hear compliance officers at financial institutions in countries perceived as high risk to say that KYC is now all about how we safeguard our business from fraud and other crimes, so KYC is in everyone’s interest. This is also the way we have to see responsibility beyond compliance. Furthermore, she explained that responsibility beyond compliance is making sure that we are the driving force for a positive change.
Focus areas moving forward
Dr. Gelemerova stated that one of the key focus areas moving forward from her perspective has to be innovation and technology as she discussed. Another key focus area for her is the public and private partnerships. She stated that we need to learn more about typologies and share tactical intelligence. This is because our artificial intelligence only works if we as the humans understand the underlying typologies. So, information sharing, and cooperation is absolutely important and vital to fight offences such as human trafficking and terrorist financing, which can cause devastating harm.
Lastly, Dr. Gelemerova also made a point about the FATF and how they have been planning to study the possible side effects of AML such as de-risking, financial exclusion, the suppression of the non-profit sector and threats to fundamental human rights. The FATF says that any such effects would be an unintended result from the incorrect implementation of the FATF’s recommendations and its standards. It also brought back her point of the risk-based approach and not losing our sense of proportionality.
