2006 Speech to Cambridge Symposium on Economic Crime

18th September 2006



Peter Neville

Director General, Guernsey Financial Services Commission


Improving the Arrangements and Procedures for Handling Suspicions that a Transaction or Account Involves Issues Related to Criminal or Terrorist Activity

In my address to this Symposium last year I said that it was time for us – as regulators and law enforcers – to look at the Suspicious Activity Reports (SARs) regime and evaluate whether we really are doing things in the most effective way.
Since then I have realised I am not a lone voice. Let us hope that the growing chorus means that someone will take notice.
My point was that financial services firms have great difficulty deciding whether the money or other assets they are handling might be passed to someone who will use the funds to finance terrorism. It is one thing to have procedures that give the firm a good chance to identify money that is the proceeds of crime, but it is whole lot more difficult for a firm to predict whether honestly obtained funds will be used for criminal purposes. They have to reach into the minds of those involved to decide what their intentions are. Unless those making the judgement have information about the people moving the money, what we are asking them to do is virtually impossible.
I appreciate that the system does not place on the firm – or the people working for it - the ultimate responsibility for making that judgement. That is placed on the authorities to which the suspicion is reported. But this still leaves the firms in the invidious position of having to operate a very bureaucratic set of procedures, backed up by punitive sanctions if they fail to observe those procedures. The result is an avalanche of suspicious activity reports, reporting far too many transactions for the authorities in many countries to be able to process effectively.
My main message last year was not that the system is fundamentally flawed, but that it needs to be fine-tuned. Firms need to be given better and more accurately focussed information – so that the whole system is more effective.
It was therefore music to my ears to read Sir Stephen Lander’s comments in his report on the SARs regime in March this year – and I quote: “The importance of the regime, given the terrorist and organised crime contexts, was well appreciated by those consulted. Its weaknesses were familiar ones” – and here I am selective in my quotes:  
  • poor dialogue between the reporting sectors on the one hand and users on the other; and
  • a lack of feedback from law enforcement on the successes achieved.  
Sir Stephen also made the point that I just made – that the system was not failing completely, but it could be improved. He said “SOCA should deliver regular reporting on the functioning of the regime, build up dialogue with reporting institutions and end users, assist regime participants with guidance and support for their training, and develop and propose a performance measurement framework for the regime as a whole.”
And it is probably worth emphasising that this is in the context that much less information that is held by law enforcement bodies in relation to combating the financing of terrorism (CFT) is made publicly available than is the case in respect of information relating to money laundering.
I am very conscious that I am in danger of treading on the toes of my colleague from SOCA, the Serious and Organised Crime Agency, who will be speaking in a few minutes but I wanted to emphasise that what Sir Stephen said in his report is – as far as I am concerned – very helpful and a major step in the right direction. I am grateful to SOCA for having agreed to me quoting what Sir Stephen said.
Taking the wider view – how are we doing in our fight against the abuse of the financial system and dealing with criminals and terrorists? And more importantly – how can we improve what we are doing?
In asking that question I am raising issues that relate not only prevention of money laundering but also to the countering of terrorist financing. These two aspects of our responsibility present very different challenges. In the one case the origin of the funds is all important, in the other case it is the destination of the funds that matters. We are therefore looking for very different kinds of evidence. What I am going to say relates in part to countering terrorist financing and in part to identifying and recovering the proceeds of crime. We should not forget this dichotomy – the tools we use for the one may not be at all appropriate for the other – although, I will argue, that to some extent what will help us to fight the one can help us fight the other.
Coming back to my question – how are we doing in our fight against abuse of the financial system? It seems to me that, as a society, we are not doing all that well. There are five reasons I say this: 
  1. We are not handling our SARs well enough;
  2. The freezing and seizing of assets does not seem to be effective;
  3. We do not understand and deal effectively with Alternative Remittance Systems and Non-Profit Organisations;
  4. There are problems making the system comprehensive; and
  5. Financial services firms are overburdened with bureaucratic requirements and do not receive enough help to focus their efforts. 
As far as the first point is concerned – and this relates both to terrorist and to criminal funds - I have made my case and we wish SOCA well in dealing with the problems.
Freezing and seizing assets – what publicly available information there is seems to indicate that there is a problem when it comes to using the system to prevent the funding of terrorism.
Recent reports indicate that around £500,000 of money and assets have been frozen in the UK. It is possible that this represents the total amount frozen under UK requirements, including not only money in respect of the Taliban and Al Qaeda but also money suspected of being linked to other terrorist individuals and groups from Chechnya, Northern Ireland, Iraq, the former Yugoslavia, Burma, Belarus, Zimbabwe, Colombia and Peru. I say this because a year ago a figure of £378,000 was said by the Treasury to have been frozen by UK financial institutions in 45 accounts linked to all forms of terrorism. The amounts originally frozen since 9/11 were much higher – around £80 million – but the vast majority of this has been returned to the new governments in Afghanistan and Iraq.
In the wake of the recent terror alert in the UK there were reports from Pakistan of thousands of pounds being transferred in small amounts to buy tickets. The problem is that the amounts are very small and they are difficult to separate from transfers for legitimate purposes.
There is also the difficulty that terrorists and their supporters appear less and less likely to use high street banks for moving their funds around.
All of this leads me to conclude that the seizing and freezing orders are not doing much to stop the terrorists. Terrorists are more likely to obtain money from deals arranged through local outlets such as shops that have connections in their home countries.
That brings me to my next point – we do not understand well enough the alternative ways that are used to transfer money from one place to another.
The problem here is obvious. We start from the premise that if we regulate a firm we can require it to sift through its transactions and identify those that look suspicious. We can then monitor and vet the firm, to make sure it is doing the job well enough. This is feasible when we are dealing with the mainstream financial firms, such as banks and insurance companies, but conventional approaches do not work when the firm – perhaps it is not even a firm but a small local shop or religious institution – is not carrying on a regulated business.
What do we do in these circumstances? We may decide we had better bring it into regulation – at least for the purposes of anti-money laundering (AML) and CFT. But is that practical – and who is going to oversee it and carry out some kind of vetting of what it does? There are thousands – probably hundreds of thousands - of small shops and institutions that have links abroad. If they enter into an arrangement under which the member of a family in England pays £500 to a shop in London, and the shop then agrees to advise another shop in Pakistan – or perhaps in Germany and through it to a shop in Pakistan – to let the brother of the person in England draw £500 from the shop in Pakistan, how can the authorities track that transaction if those involved do not want to co-operate? There may be some kind of transfer through the conventional banking system at a later date to balance the books between the two shops, but it could be an entirely different amount, routed through any number of intermediaries, and the settlement may not even be in cash – it may be in goods or services of an untraceable kind.
I am sure a lot of work is going on to understand these networks and how best to contain the threat they may pose, but the challenge of doing so in a way that is effective and that does not create the bureaucratic paralysis that will serve only the terrorists’ purposes is a massive one. After all, until these alternative routes were identified as a terrorist funding risk they were – quite rightly – seen as very useful and socially acceptable arrangements. Should we regulate them out of existence?
Then again, consider non-profit organisations such as charities. It is very difficult to introduce a system that will identify – and therefore bring into regulation – only those charities that pose a threat. The difficulty is separating them from the ones that are benign. How do you make sure you do not force the local ladies knitting circle to introduce expensive corporate governance procedures and reporting systems – just to make sure that collections of small amounts of money are not used to pay for air tickets for terrorists? The answer may be to focus on charities that make payments abroad – but so many of them are small, and they are trying to keep their costs down, and as far as we can tell the vast majority fund legitimate and needy causes.
It is very difficult to see how the authorities can monitor them all effectively without causing substantial and entirely unnecessary collateral damage.
My fourth point is one that applies both in relation to anti-money laundering activities and to countering terrorist funding.
Accountants and lawyers – the professionals who bring clients and their business into the international financial system – are gatekeepers. As far as the accountants are concerned there seems to be a clear way forward to bring them into the AML/CFT system at least in the UK. In the case of lawyers, however, it seems there may be a problem. Steps are being taken to introduce regulatory frameworks for them in the UK, but in the US the impression I have is that there is no appetite for taking on the legal profession to force them to submit to AML and CFT reporting and monitoring requirements in the same way. When I was in Washington recently, one of the Treasury’s senior AML/CFT experts commented that he thought the EU might turn out to be the only territory in the world which applied such requirements to lawyers.
It is clearly a major gap in our defences if the FATF believes lawyers should be subject to FATF standards and if through the majority of the world this will not be achieved.
My final point really brings all my other comments together.
I said earlier that the two areas of fighting money laundering and countering the funding of terrorism posed different challenges but that, when it came down to it, there is one way in which we can become much more effective in countering both kinds of abuse.
Firms need good record keeping, on-line checks, and intelligent vetting and transaction analysis systems not least for commercial reasons, but even here they need help – to focus their analysis and vetting.
The one thing that could help financial firms know which customer to focus on, to decide whether or not to transfer money, to decide which transactions to ask their IT system to identify, and to decide which firms they should concentrate on because they present the highest risk – would be to have better feedback and information from the intelligence services and the criminal authorities.
This has an important implication for us in the anti-terrorism field. Serious thought needs to be given to changing the way we approach this whole area of activity. There are major challenges – not least in relation to human rights – because society cannot deal effectively with terrorists using the same methods as we use for normal criminals. We have built a system of justice that, quite correctly, contains checks and balances and ultimately punishment following conviction at a fair trail. Regrettably, such sanctions are ineffective against terrorists who act without any heed to the consequences. There is no doubt that more must be done to educate and persuade, and to deal with the underlying problems. But these are long-term strategies. What we need to do now is become smarter, more focussed, and much more effective in collecting, analysing and sharing information if we are to prevent the atrocities before they happen.