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Money-laundering and the Financing of Terrorism: EUC Report

My Lord, I begin by adding my congratulations to my noble friend Lord Jopling on his expert chairmanship, to our clerk, Michael Collom, on his cool professionalism and infinite patience in shepherding his at times unruly flock, and to his support staff who assisted him. I do not forget our witnesses who so well illuminated our discussions and deliberations. The focus of my remarks will be on chapter 4 of our report on the private regulated sector. I share the view of my noble friend Lord Jopling that the Government’s response to our recommendations has been disappointing, to say the least. Given this, I should declare some interests, which are recorded in the Register. I am chairman of three companies subject to regulation by the Financial Services Authority, and I am a regulated person. I was a member of the Securities and Investments Board, the first City regulatory body, and the Securities and Futures Authority, which was swept up into the Financial Services Authority. In the light of what I am going to say, I should congratulate SOCA on being better than NCIS. It is not saying a lot, but it is better. When I was chairman of the audit and compliance committee of a building society in the West Midlands—we were a blue-collar society and made 400 or 500 reports a year, none of which was for more than £200 or £300 each—I asked the secretary of the committee to write to NCIS and inquire what use was being made of the reports we were compiling with such care. We got back a letter that was just this side of rude saying we should mind our own business. It goes without saying that I fully and enthusiastically support the fight against organised crime and terrorism but I have to say the effectiveness and the cost-effectiveness of the present regime is deeply flawed for a number of reasons. The all-encompassing nature of the definitions in the Proceeds of Crime Act 2002, together with the all-crimes approach of the reporting regime, fails to take account of the costs of compliance to the private sector—not just the provision of the suspicious activity reports, but also the base data to companies, to partnerships and to virtually every man, woman and child in this country who falls under this particular provision. There is also the failure to grant third country equivalence. Perhaps I can give the House some real-life examples of the consequences of each of these. The impact of the Proceeds of Crime Act 2002, the definitions therein and the all-crimes approach, is illustrated by one of my other directorships which is of a brewery. We operate breweries and 2,200 pubs. We sell pubs from time to time. When we sell them we have to complete a huge range of reports on health and safety, licensing, asbestosis, control of fat disposal, waste packaging regulations and a great many other issues. Unless we have completed all those, we have to make a suspicious activity report. This is because we have benefited to the tune of a few hundred pounds, probably, by not having completed the reports—we have inflated the price we have received for the particular public house. It is not just the cost of preparing the report. It is not just the way it is done. It is the diversion of SOCA’s time and effort from looking at and examining really serious cases. This is a pub company and by no stretch of the imagination can it be undertaking any money-laundering, serious crime or terrorism activities as a result of these sales. This is not unique. As my noble friend Lord Jopling said, talk to any solicitor in any part of the country who undertakes corporate transactions and there are simply thousands of these reports being produced every year. Then there is the cost to individuals of compliance—individuals who may have had long standing relationships with financial institutions, clear life and career histories and unblemished credit records. Members of Your Lordships’ House may have experienced the extraordinary machinations to open a new account for a child, a grandchild or a godchild, even at a bank where the individual has banked for years. The fact that you are then asked to provide a utility bill shows the idiocy of the regulations. When does a child ever have a utility bill? Last January, I was approached by a bank where I have banked for 40 years which told me that unfortunately its money-laundering records were inadequate and that I had to provide a whole series of new records, including a certified passport. This is just a duplication of effort that achieves nothing and which incurs enormous costs both for the individuals who provide the information and the institutions which have to keep it. Finally, there is the lack of third country equivalence provisions. A private equity company with which I am involved has recently completed an acquisition in France. Money-laundering checks have been carried out by our French solicitors, a well-known Paris firm. However, we had to begin afresh as our English lawyers advised us that we simply could not rely on French checks even though France is a member of FATF and as such is able to call on similar standards to this country. Our French colleagues were truly amazed by this duplication of work and effort. It is getting worse. The spread of the money-laundering regulations and the lengths to which people now have to go are increasing all the time. Since July this year, the brewery has to carry out money-laundering checks on every new tenant of any of its 1,700 tenanted pubs. This is a new extension, the value and validity of which is very doubtful and which follows again from the all-crimes approach. Our report makes a number of specific suggestions to improve the situation, which I fear have not found favour with the Government. They prefer to fall back, in their own words, on "prosecutorial discretion", which is not good enough. No director of a company or partnership can possibly rely on prosecutorial discretion. The damage to reputation from a zealous member of SOCA who decides that prosecutorial discretion should not be waived far outweighs any possibility. As the noble Lord, Lord Richard, pointed out, it is not as though enormous sums of money are being recovered. Our report makes clear that £136 million was reclaimed by SOCA last year, not all of it from SARs. That is less than half of 1 per cent of the estimated cost of serious and organised crime of £20 billion. By contrast, the cost to the private sector is very large. Major City firms will say that the cost to them is well over £1 million per firm. In the light of all that, it is not surprising that suspicion among many people in the private sector is that, for the most part, it is not the big well-organised firms which are caught. Instead, the net sweeps up the small and incompetent, as well as millions of our innocent fellow citizens. As a minimum, the Government need to offset the deadly effect of the combination of the all-crimes approach with the wide PoCA definition. They need to introduce third country equivalence, to undertake serious cost-benefit analysis, to improve the practical feedback and, as my noble friend Lord Jopling also said, to reassure people about the way in which the data collected on the ELMER database are being used and retained. To conclude, the present all-crimes regime as regards money-laundering reminds me very much of some ancient tribal ritual. The great god—in this case the Serious Organised Crime Agency—needs to be propitiated. Propitiation is achieved in two ways: first, by filling in large numbers of forms in an entirely mechanical way, covering a vast number of members of the tribe. But that is not all. SOCA requires secondary and deeper propitiation by demanding direct reports. It is clear that the vast majority of these are a complete waste of time. As to the remainder, the god SOCA is reluctant to explain to his tribe what has been achieved by their preparation. Only the god SOCA has the wit and breadth of knowledge to interpret the forms, every one of which—collected at huge trouble and expense, but not SOCA’s expense—the god will tell you, needs to be completed in order to ensure the future prosperity of the tribe. I have said that I fully support the fight against organised crime and terrorism, but this regime is not contributing to that fight in a cost-effective way.