---

Money-laundering and the Financing of Terrorism: EUC Report

My Lords, I begin by congratulating the noble Lord, Lord Jopling, on initiating this debate and on the thorough report that he and his committee colleagues have produced. I start by perhaps disappointing the noble Lord, which will not surprise him, and then perhaps surprise him a little by being more helpful. He made a request in respect of another report from the Select Committee, saying that he hoped that it would be the subject of debate before the Christmas Recess, and asked me to give an opinion. The noble Lord knows better than I that these matters are for the usual channels. I understand that a request has been made and no doubt the usual channels will take it on board. However, it is not for me to venture a comment. While commending the decision of the Government to provide a summary of the report of the chairman of the Financial Action Task Force, the noble Lord suggested that a Written Statement would be more useful. The Government are happy to provide such a Statement on FATF’s work on a regular basis if the House would find that helpful. I hope that that goes a little way towards making up for the disappointment of my not being able to respond more fully to the noble Lord’s first point. The ability to acquire, disguise and dissipate funds lies at the heart of most criminality and plays a significant role in facilitating terrorism. This welcome report and the useful and timely debate help to shape our approach to challenges facing us both here in the UK and globally in combating money-laundering and countering the financing of terrorism. The Government provided their response to your Lordships’ report in October, and of course agreed with the majority of the decisions. Perhaps not surprisingly, quite a lot of contributions from noble Lords tonight have been about cases where the Government have not accepted recommendations, or where we are not seen to have delivered, and some criticism has been made in respect of international protocols that are outstanding and which have not yet been responded to. First, the UK Government have a strong commitment to the prevention and control of money-laundering and the financing of terrorism, and we currently have robust legislation and other measures in place demonstrating that dedication. We are committed to the aims and objectives of the Warsaw convention—a number of noble Lords made the point that it has been outstanding for some time—on the search, seizure and confiscation of the proceeds from crime and on the financing of terrorism. It is our aim to sign and ratify the convention. We are still looking at the method of implementation, but we give a commitment that it will be finalised as soon as possible in 2010. We made that very clear in the first conference of parities to the convention, which took place earlier this year in Strasbourg. Secondly, other concerns have been raised, particularly in relation to Article 47 of the convention; these were outlined in detail in the Government’s response to the report. We are working to resolve those concerns as a matter of urgency and priority, and hope that it will be done as soon as possible. The third element of the report highlighted concerns over the delay in concluding an EU-USA negotiation for an agreement on mutual legal assistance. The noble Lords, Lord Jopling and Lord Richard, the noble Baroness, Lady Garden, and others raised that as a matter of concern and sought an update on our position. I can confirm that the instruments of ratification for the EU and USA agreement on mutual legal assistance in criminal matters were exchanged on 28 October. The agreement will now enter into force on 1 February 2010. Similarly, the Government fully support the 2006 framework decision on mutual recognition of confiscation orders, and intend to implement that as soon as practicable. I recognise that it was quite a sharply worded report on some issues. It is not the worse for being sharply worded, for it was no doubt the committee’s intention that it should be seen by the Government as both an encouragement and something of a stick to make the donkey move a little quicker. Noble Lords can take it that the encouragement that the Government received for their response to your Lordships’ report and, indeed, the bruises that some of the criticism has caused—both tonight and in the original report—are such that the Government are seeking to meet their obligations at the earliest possible moment. We will write to the Council and the Commission to provide an interim report on the extent to which the UK has taken measures to comply with the framework decision on the application of the principles of mutual recognition to confiscation orders. We are currently content that the UK can largely give effect to the framework decision under existing domestic law. None of our fellow member states has criticised the effectiveness of existing provisions. We are not aware of any cases from member states in relation to confiscation orders that have been refused. Equally, we do not believe that member states have had difficulties in processing matters from the UK for assistance in confiscation matters under the present arrangements. Any matter received under this framework will be handled within its spirit, as far as is practicable. We do not foresee any major obstacle; the changes required to our law are likely to be mostly technical. Another area where noble Lords raised concerns was on the question of the suspicious activity reports. Here, there is a point of difference. I must highlight to your Lordships that, as was said in our response as a Government, there may be little correlation between the sums laundered and the seriousness of an offence. Also, reports on the laundering of small amounts can help to tackle serious crime. Therefore, the Government remain of the view that we should maintain the all-crimes approach, and have set out their reasons in detail in response to the report. I know that this was countered somewhat strongly by one of your Lordships, but it is the case that the Government still believe that the use of prosecutorial discretion in this area is necessary. We believe that a regime with a de minimis exclusion would present significant risks, including of circumvention by serious criminals. An "all crimes" approach provides a far more flexible and responsive means for setting the boundaries of what is and what is not criminal conduct worthy of prosecution. The issues were raised of burdens upon the private sector and doubts that the smallness of some of the amounts involved could lead to any great advantage. We have looked at this in some detail, and examples can be reported of how detecting the laundering of small amounts can help tackle serious crime. One is protecting the vulnerable. SARs on low-value transactions are increasingly being used to identify vulnerable and elderly victims of fraud. For example, suspicious activity on an account triggered a SAR, which resulted in an investigation into a member of a criminal family in an area. A man was arrested on suspicion of fraud. He had stolen the identity of an elderly victim and carried out several unauthorised transactions on credit cards amounting to over £5,000. There is also the question of protecting business from fraud. There are details from the banking sector of an account that was in receipt of third-party cash deposits, all of which amounted to £3,000. The funds were then being quickly debited. On investigation, it was discovered that these out-of-character deposits related to the thefts of funds by the subject from an employer. The information in the SAR was pivotal in identifying the true sums stolen and, later, a conviction. On the question of restraint, a number of SARs featuring restraint transactions of values under £1,000 have resulted in restraint orders being made on individual amounts that, when multiple SARs are looked at, come to thousands of pounds’ worth of seizable assets. That would not have been identified had we had a de minimis exclusion. Reports are being made by banks on suspected tax credit fraud for small sums, typically tens or hundreds of pounds. SOCA receives many of these. HMRC can recoup the money and the bank can close the account as a result. Sometimes evidence of organised tax credit fraud is uncovered and investigated. Some criminals use parts of the regulated sector to send small, fraudulent, frequent amounts, sometimes with several different identities, to consolidation points overseas. These individual amounts have been seen to be as low as £36, but can aggregate into sums of tens of thousands of pounds. SARs make a record of these sums, and the identities associated with them are then readily available to law enforcement and any investigation into criminal activities. There is also the question of new criminal trends. Criminals develop money-laundering methods to exploit the new technologies and financial products, and to take advantage of those products through the new technology. Often those new methods are trialled on a small-amounts basis, but pave the way for large amounts when confidence in the method has grown. When new products have restrictions placed on them and can be used only to process low volumes, SARs reports on these transactions can assist the UKFIU in identifying emerging trends. We believe that there is far more to be seen than just the initial quantity of reports that are made, and we consider that it is still valuable to keep the "all crimes" basis. The issue of the SAR database was raised by several noble Lords, and we were asked where we are with the discussions with the Information Commissioner. In early October, SOCA received a letter from Christopher Graham, the Information Commissioner, as part of existing correspondence on SOCA initiatives. In that letter, he referred to the House of Lords committee’s recommendation regarding the retention of data on the ELMER database. The letter states that, with SOCA’s co-operation, the Information Commissioner’s Office is planning to implement this recommendation in the form of a review. That review is likely to cover the legal basis for the establishment and operation of the ELMER database, together with SOCA’s relevant policies and procedures and an on-site inspection of the database. The purpose of the review will be to establish the extent to which SOCA, and possibly other contributory users of the database, are meeting the requirements of the Data Protection Act. The Information Commissioner may then make recommendations about future compliance. SOCA and the Information Commissioner’s Office are currently seeking an agreement on a timetable on which the review can take place, and SOCA will provide the Information Commissioner’s Office with all the relevant documents and assistance required. Again, we see that as a matter to be pursued with a degree of urgency. Other issues included burdens on the private sector. The Government’s aim is to find a balance between a competitive advantage in our regulated sector and continuing to have an effective regime that combats money-laundering and counters the financing of terrorism. The noble Lord, Lord Hodgson, made this point at some length. I shall commend his contribution to my officials and colleagues, coming as it does from someone with considerable experience of several parts of business where this issue is as of much concern as it is to the Government and SOCA. The Government will continue to seek to minimise burdens placed on regulated firms where possible. The UK’s preferred risk-based approach, which has included adopting all the simplifying derogations within the EU’s third money-laundering directive, demonstrates our attitude. The Treasury, with the assistance of colleagues from the Better Regulation Executive, is conducting a review of the Money Laundering Regulations 2007. The review is considering evidence and is grounded in the three guiding principles of the UK’s financial crime strategy: effectiveness, proportionality and engagement. We expect to identify aspects of the regime that work well and areas that might be improved. The report following this review is due in the spring and will be made available to your Lordships. The noble Lord, Lord Hodgson, and others mentioned the cost/benefit analysis. The Government recognise the importance of applying cost/benefit considerations to the anti-money-laundering and counterterrorist financing regime. Steps have been taken to improve the benefits of the SARs regime in the recently published three-year strategy, outlined in the Suspicious Activity Reports Regime Annual Report 2009. The report gives an assessment of the performance of the suspicious activity reports regime for the reporting year October 2008 to September 2009 and announces a three-year strategy. The main objective for the regime during the next three years is to increase the value and impact of the SARs regime, which will bring added focus and efficiency to the regime, driving up the benefits from the efforts and resources contributed by stakeholders. Another important issue raised by the noble Lord, Lord Hodgson, and others was feedback to the business community and beyond. Further to the feedback initiatives outlined in the Government’s response in October, the Government have unveiled in the SARs annual report 2009 a number of further ways in which they intend to address the report’s recommendations on feedback. The issue of feedback runs through the strategy’s aims and is an integral part of the published action plan for the first year. SOCA recognises the importance of this issue to reporters and is committed to providing them with information where it helps them meet their legal requirements. I shall take on board the point made by the noble Lord, Lord Hodgson, that not just top reporters but also small and medium-sized companies are affected. Another important issue raised, again because it was not one on which the report and the Government were necessarily in accord, was piracy. The Government regularly examine all available intelligence for evidence of links between piracy and terrorism. I have to say that, to date, we have found no evidence. I sympathise with the view that one cannot see vast sums of money being passed around in Somalia without believing that some of it could be going to terrorist organisations in one form or another. However, we have found no evidence of any operational or organisational links. There is much open-source speculation—we are all a part of it. The noble Lord, Lord Skelmersdale, asked what we are doing to try to establish whether it is true. It has not been possible for any of our or our partners’ intelligence agencies to corroborate it. Therefore, it is a question not of a country having a view, but of intelligence that we have been able to glean from allies, as well as from our own endeavours, failing to find any organisational or operational link. However, we shall continue to monitor the matter closely because we share the concern that many noble Lords expressed.