Edition 2, April 2013
This learning manual relates to syllabus
version 1.0 and will cover examinations from
11 July 2013 to 31 May 2015
Combating
Financial
Crime
Welcome to the Chartered Institute for Securities & Investment’s Combating Financial Crime study material.
This manual has been written to prepare you for the Chartered Institute for Securities & Investment’s Combating Financial Crime examination.
The manual and syllabus for Combating Financial Crime have been developed in partnership with QCo.
www.qcoholdings.com
Published by:
Chartered Institute for Securities & Investment © Chartered Institute for Securities & Investment 2013 8 Eastcheap London EC3M 1AE Tel: +44 20 7645 0600 Fax: +44 20 7645 0601 E-mail: [email protected] www.cisi.org/qualifications
This is an educational manual only and Chartered Institute for Securities & Investment accepts no responsibility for persons undertaking trading or investments in whatever form.
While every effort has been made to ensure its accuracy, no responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the publisher or authors.
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the prior permission of the copyright owner.
Warning: any unauthorised act in relation to all or any part of the material in this publication may result in both a civil claim for damages and criminal prosecution.
A learning map, which contains the full syllabus, appears at the end of this manual. The syllabus can also be viewed on cisi.org and is also available by contacting the Customer Support Centre on +44 20 7645 0777. Please note that the examination is based upon the syllabus. Candidates are reminded to check the Candidate Update area details (cisi.org/candidateupdate) on a regular basis for updates as a result of industry change(s) that could affect their examination.
The questions contained in this manual are designed as an aid to revision of different areas of the syllabus and to help you consolidate your learning chapter by chapter. They should not be seen as a ‘mock’ examination or necessarily indicative of the level of the questions in the corresponding examination.
Learning and Professional Development with the CISI
The Chartered Institute for Securities & Investment is the leading professional body for those who work in, or aspire to work in, the investment sector, and we are passionately committed to enhancing knowledge, skills and integrity – the three pillars of professionalism at the heart of our Chartered body.
CISI examinations are used extensively by firms to meet the requirements of government
regulators. Besides the regulators in the UK, where the CISI head office is based, CISI examinations are recognised by a wide range of governments and their regulators, from Singapore to Dubai and the US. Around 50,000 examinations are taken each year, and it is compulsory for candidates to use CISI learning manuals to prepare for CISI examinations so that they have the best chance of success. Our learning manuals are normally revised every year by experts who themselves work in the industry and also by our Accredited Training Providers, who offer training and elearning to help prepare candidates for the examinations. Information for candidates is also posted on a special area of our website: cisi.org/candidateupdate.
This learning manual not only provides a thorough preparation for the examination it refers to, it is also a valuable desktop reference for practitioners, and studying from it counts towards your Continuing Professional Development (CPD). Mock examination papers, for most of our titles, will be made available on our website, as an additional revision tool.
CISI examination candidates are automatically registered, without additional charge, as student members for one year (should they not be members of the CISI already), and this enables you to use a vast range of online resources, including CISI TV, free of any additional charge. The CISI has more than 40,000 members, and nearly half of them have already completed relevant qualifications and transferred to a core membership grade. You will find more information about the next steps for this at the end of this manual.
With best wishes for your studies.
The syllabus was developed in a collaborative venture between the CISI and QCo to CISI standards and format.
Reviewer of the Overall Manual
Nikos Passas, Chairman QCo Holdings is Professor at Northeastern University in Boston Mass. He specialises in the study of corruption, money laundering, illicit flows, informal fund transfers, white-collar crime, terrorism, targeted sanctions, organised crime and international crimes. He is a prolific author, with more than 140 publications, undertakes expert witness work and consults with law firms, financial institutions, private companies, international organisations and government agencies in all continents. Editor of the Manual and Author of the Section on Corruption
Alan Doig is Visiting Professor, Centre for Public Services Management, Liverpool Business School and Hon. Senior Research Fellow, University of Birmingham. Prior to that he was the United Nations Office for Drugs and Crime UNCAC mentor in Thailand, and Resident Adviser for the Council of Europe Prevention of Corruption project for Turkey. He has been Professor of Public Services Management at Teesside Business School and Liverpool Business School, where he ran the Fraud Management Studies Units.
Editor of the Second Edition Manual and Co-Author of the section on Combating the Financing of Terrorism
David Artingstall is Senior Consultant at John Howell & Co Ltd, specialising in financial crime and regulatory matters. David has previous experience as a terrorist finance investigator at Metropolitan Police Special Branch and also worked at the UK’s Financial Intelligence Unit for several years. Immediately prior to starting his consulting career he was a Technical Specialist in Financial Crime at the Financial Services Authority.
Author of the Section on Anti-Money Laundering
Jackie Harvey is Professor of Financial Management at Newcastle Business School, Northumbria University and academic leader of the financial management, risk and performance subject area. She sits on the Editorial Board of the European Cross Border Crime Colloquium. Prior to becoming an academic she was Fiscal Policy Adviser to the Ministry of Finance in Belize and also spent ten years working for a major merchant bank in London.
Co-Author of the Section on Combating the Financing of Terrorism
John Howell established John Howell & Co Ltd, in 1992. He is an expert in financial crime and regulation, and has carried out numerous assignments in this field, particularly in relation to international standards. He carried out the independent review of the implementation of the FATF Special IX Recommendations in EU member states and is the author of the ICC Guide to the prevention of Money Laundering and Terrorist Financing.
First Edition Senior Reviewer of the Manual
Monica Bond is Principal at Bond Solicitors and MD at Bond Associates, Forensic Accountants. She has specialised in the investigation of money laundering, fraud and corruption cases, often acting as the Expert Witness for the Prosecution/Claimant. She practises as a solicitor, a Chartered Accountant and a Certified Fraud Examiner. Monica authored the first publication in the UK on AML compliance for accountants and is a prolific writer and a regular conference speaker. Bond’s core practice is services to entities in the areas of compliance, investigatory/due diligence and/or recovery.
Contributing organisations to the syllabus include: Dubai Financial Services Authority
Guernsey Financial Services Commission HSBC Group
PricewaterhouseCoopers Cardiff University
Predicate and Associated Offences
. . . .Money Laundering
. . .Terrorist Financing
. . .Corruption
. . .Bribery
. . .Combating Financial Crime
. . . .The Role of the Private Sector
. . . .Glossary and Abbreviations
. . .Multiple Choice Question
. . .Syllabus Learning Map
. . .It is estimated that this manual will require approximately 70 hours of study time.
23
39
85
111
167
185
209
273
291
311
What next?See the back of this book for details of CISI membership. Need more support to pass your exam?
See our section on Accredited Training Providers. Want to leave feedback?
2
3
4
5
6
8
7
Chapter One
The Background and
Nature of Financial Crime
This syllabus area will provide approximately 12 of the 100 examination questions
1. Definitions
3
1
1.
Definitions
1.1
Financial Crime in the Financial Services and Markets Act
(FSMA) 2000
Learning Objective
1.1.1 Know the definition of financial crime in the Financial Services Act 2012
This manual covers the combating of various forms of financial crime, including money laundering (ML), terrorist and proliferation finance, corruption and bribery. In order to set the scene, it will be useful to start with some definitions.
Financial crime can be regarded as any crime involving money or other types of asset with monetary value. A formal, general definition of financial crime can be found in the UK’s Financial Services Act 2012, which amended the Financial Services and Markets Act (FSMA) 2000 definition of financial crime to include any offence involving:
a. fraud or dishonesty;
b. misconduct in, or misuse of information relating to, a financial market; c. handling the proceeds of crime; or
d. the financing of terrorism.
The use of the term to include means financial crime can be interpreted widely under this act to also include, for example, corruption.
In November 2012, the Financial Services Authority (FSA), at the time the UK’s financial regulator, produced ‘A Financial Crime Guide for Firms’ which expanded on some of these terms:
• Fraud – is a type of financial crime that has an effect on all parts of the economy. It commonly involves the perpetrator making personal gains, or avoiding losses, through the deception of others. Fraud can take a variety of forms including phishing, skimming, carousel fraud, identity theft and advance fee fraud. It fell within the FSA’s statutory objective of reducing the risk of financial crime. The Financial Conduct Authority (FCA) (see below) retains the same responsibilities under the Financial Services Act 2012.
• Market abuse – defined in Section 118 of the FSMA and in the European Union (EU) the Market Abuse Directive (MAD), this consists primarily of insider information and market manipulation. The MAD provides an EU-wide market abuse regime, aimed at reducing the incidence of market abuse (see Chapter 2, Section 2.6).
• Proceeds of crime – firms and organisations in the financial services industry can be used, wittingly or unwittingly, by criminals seeking to launder the proceeds of crime (money laundering), thereby concealing the illegitimate origins. Under the FSA 2012, the FCA is charged with reducing the extent to which regulated firms1 are used in connection with financial crime, including money laundering.
In April 2013, the FCA and the Prudential Regulation Authority (PRA) replaced the FSA, by virtue of the Financial Services Act 2012. The responsibility for, and work on, financial crime has been taken on by the FCA, under its integrity objective found in the revised Section 1D of the Financial Services and Markets Act 2000 (FSMA). The Act states that the integrity of the UK financial system includes it not being used for a purpose connected with financial crime, as defined above. The definition is similar to the one in previous legislation, so previous FSA guidance and activity remain useful sources, and are used throughout this workbook.
1.2
Money Laundering (ML) in the Proceeds of Crime Act
(POCA) 2002
Learning Objective
1.1.2 Know the definition of money laundering in the Proceeds of Crime Act (POCA 2002)
Money laundering (ML) is the process of making dirty money appear clean. Criminals want to make the proceeds of their crimes appear legitimate, so they can be retained and used to fund their lifestyle. The proceeds of crimes such as drugs trafficking, fraud, smuggling or corruption can be huge and the criminals involved must find a way to use the money generated. This is done by disguising the source, changing the form or transferring the money to other locations and jurisdictions. Criminal proceeds may also be used to fund further criminal activity, in which case they may also need to be transferred.
The UK’s Crown Prosecution Service (CPS) provides guidance on the interpretation of money laundering as follows:
Money laundering is the process by which criminal proceeds are sanitised to disguise their illicit origins. Acquisitive criminals will attempt to distance themselves from their crimes by finding safe havens for their profits where they can avoid confiscation orders, and where those proceeds can be made to appear legitimate.2
1 It is worth noting here the use of the term regulated in the UK context. It is used in relation to those over whom the statutory responsibility regulators, such as the PRA and FCA, exercise. It is also used for those governed by the proceeds of crime legislation, which includes: those engaged in financial services work; bureaux de change and money service businesses; estate agents; casinos; insolvency practitioners; businesses providing accountancy services, tax advice, audit services; legal services relating to financial or real estate transactions; services related to the formation, operation or management of companies or trusts; businesses which deal in high-value goods for cash; and certain activities listed in a schedule to the regulations – see Schedule 9 of POCA available at: www.legislation.gov.uk/ukpga/2002/29/schedule/9 2 www.cps.gov.uk/legal/p_to_r/proceeds_of_crime_money_laundering
1
Money laundering is now generally criminalised as a separate offence in jurisdictions around the world. The Proceeds of Crime Act (POCA) 2002 is the act used for this purpose in the UK. Under this, money laundering is defined as doing something which constitutes one of three offences, which broadly speaking cover:• Section 327 – concealing, disguising, converting, transferring or removing criminal property. • Section 328 – entering into arrangements to facilitate the acquisition, retention, use or control of
criminal property.
• Section 329 – acquisition, use and possession of criminal property.
1.3
Terrorist Financing (TF)
Learning Objective
1.1.3 Know the United Nations International Convention for the Suppression of the Financing of Terrorism (1999) definition of terrorist financing
Terrorist financing (TF) is the financing of terrorist acts and of terrorists and terrorist organisations generally, even in the absence of links to a particular terrorist operation. It was formally defined by the United Nations (UN) in December 19993 in Paragraph 1 of Article 2 of the International Convention for
the Suppression of the Financing of Terrorism, which states that:
Any person commits an offence within the meaning of this Convention if that person by any means, directly or indirectly, unlawfully and wilfully, provides or collects funds with the intention that they should be used or in the knowledge that they are to be used, in full or in part, in order to carry out:
a. An act which constitutes an offence within the scope of and as defined in one of the treaties listed in the annex; or
b. Any other act intended to cause death or serious bodily injury to a civilian, or to any other person not taking an active part in the hostilities in a situation of armed conflict, when the purpose of such act, by its nature or context, is to intimidate a population, or to compel a government or an international organisation to do or to abstain from doing any act.
The nine international treaties mentioned in sub-paragraph (a) of the Convention require parties to establish various terrorism offences in their national legislation.
In the Convention, funds are defined in Article 1 as:
Assets of every kind, whether tangible or intangible, movable or immovable, however acquired, and legal documents or instruments in any form, including electronic or digital, evidencing title to, or interest in, such assets, including, but not limited to, bank credits, travellers cheques, bank cheques, money orders, shares, securities, bonds, drafts [and] letters of credit.
Article 3 excludes offences committed within a single state if the alleged offender is a national of that state and is present in the territory of that state (and no other state has jurisdiction), so the Convention does not apply to purely national/domestic offences.
TF will be covered in more detail in Chapter 4 of this manual.
1.4
Proliferation Finance
Learning Objective
1.1.4 Understand the Financial Action Task Force (FATF) provisional definition of proliferation finance
There is, as yet, no universally accepted definition of the financing of proliferation of weapons of mass destruction. The Financial Action Task Force (FATF), an inter-governmental body, which sets international standards relating to money laundering, the financing of terrorism and the proliferation of weapons of mass destruction, has produced two papers on proliferation finance; a Status Report on Policy Development and Consultation in February 20104 and an earlier typology report (June 2008)5.
Building on their work in the 2008 paper, the 2010 Status Report included, the following working definition of proliferation finance:
The act of providing funds or financial services which are used, in whole or in part, for the manufacture, acquisition, possession, development, export, trans-shipment, brokering, transport, transfer, stockpiling or use of nuclear, chemical or biological weapons and their means of delivery and related materials (including both technologies and dual use goods used for non-legitimate purposes), in contravention of national laws or, where applicable, international obligations.
In contrast to the Convention definition of TF in Section 1.3 above, this definition does not refer to knowledge, intention or negligence. However, the FATF stated that these issues should be taken into account when a jurisdiction specifies the responsibilities of financial institutions or a possible criminal offence of proliferation financing.
1.5
Definitions of Corruption
Learning Objective
1.1.5 Understand why definitions of corruption have evolved
There is no universal agreement on a generic definition of corruption. Some organisations seek such a definition; others do so through nominated offences (examples of both are discussed in more detail in Chapter 5, Section 1.1).
4 Combating Proliferation Financing: A Status Report on Policy Development and Consultation, February 2010, http://www. fatf-gafi.org/media/fatf/documents/reports/Status-report-proliferation-financing.pdf
1
Historically, as we will examine in more detail in Section 1 of Chapter 5, some behaviour that would now be considered corrupt was normal and accepted practice. In the UK, for example, holders of Crown offices blended their personal and private roles to benefit themselves and others. However, the offence of bribery for personal gain (often committed by a public-office holder being bribed to act in a way contrary to the rules of honesty and integrity) was recognised. Early corruption statutes, such as the 1889 Public Bodies Corrupt Practices Act, focused on such offences, as did the first significant international agreement on corruption the OECD Convention against Bribery of Foreign Public Officials in 1977.The requirement that those who hold public office, whether elected or appointed, do so for the public good, and act and/or make decisions that are in the public interest, is clearly an important aspect of corruption, but may be considered as too narrow. There is a range of decisions or actions that may not be undertaken for direct personal gain, but for other personal, partisan or third-party benefits, and these may not necessarily require the intervention of another party. Thus conflicts of interest, misuse of public resources for personal benefit and trading in influence may also be described as corrupt conduct. Further, the emphasis on public office is seen as not paying sufficient attention to the possibility of bribery on the supply side, from the payer, or from the private sector.
In some discussions, half a century ago, corruption was seen to have some pragmatic advantages. Excessive bureaucracy, where facilitation payments (ie, small bribes paid to officials to speed up bureaucratic processes, sometimes also known as ‘speed money’) were seen as an acceptable way of expediting business, encouraged behaviour that is now generally recognised as corrupt (although to this day not all corruption laws criminalise these facilitation payments and in some jurisdictions they have even been regarded as tax-deductible business expenses). Today, however, the prevalence of corruption in less developed countries have come to be seen as a major constraint to both democratisation and economic development, and the commitment to addressing it as evidence of reform and progress among multilateral and bilateral aid organisations. Also, it should be emphasised that the continuing presence of corruption in developed countries is seen as evidence that it is an integral aspect of public life everywhere.
Subsequent international conventions covered all these pernicious aspects of corrupt behaviour and imply broad definitions of corruption, usually involving abuse of public and/or private office for personal gain. In the words of World Bank General Counsel, Ibrahim Shihata:
Corruption occurs when a function, whether official or private, requires the allocation of benefits or the provision of a good or service. In all cases, a position of trust is being exploited to realise private gains beyond what the position holder is entitled to. Attempts to influence the position holder, through the payment of bribes or an exchange of benefits or favours, in order to receive a special gain or treatment not available to others is also a form of corruption, even if the gain involved is not illicit under applicable law.6
6 World Bank, Helping Countries Combat Corruption: The Role of the World Bank, September 1997, found at: www1. worldbank.org/publicsector/anticorrupt/corruptn/cor02.htm#note1
1.6
Risk-Based Approach (RBA)
Learning Objective
1.1.6 Know what FATF refers to as ‘the purpose, benefits and challenges of a risk-based approach to
combating money laundering and terrorist financing’
The risk-based approach (RBA) is regarded by the FATF as an effective way to combat ML and TF, ensuring that measures taken are appropriate and proportionate to the risks identified. It means that where there are higher risks, jurisdictions should ensure that enhanced measures are taken by financial institutions and other bodies to mitigate those risks. Conversely, where the risks are low, simplified measures may be permitted. This allows resources to be concentrated on the areas where they will achieve most benefit.
Thus, the FATF produced its ‘Guidance on the Risk-Based Approach to Combating Money Laundering
and Terrorist Financing: High Level Principles and Procedures’ (June 2007)7 in close consultation with
representatives of the international banking and securities sectors, and subsequently produced guidance papers for other sectors. The RBA was included in the revision of the FATF’s standards (the Recommendations) in February 2012 and we will cover this in more detail in Chapter 3.
The potential benefits and potential challenges, according to the FATF’s guidance, can be summarised as follows:
• Potential benefits:
Better management of risks and cost-benefits.
Financial institutions and other bodies focus on real and identified threats. Flexibility to adapt to risks that change over time.
• Potential challenges:
Identifying appropriate information to conduct a sound risk assessment. Greater need for more expert staff capable of making sound judgments. Regulatory response to potential diversity of practice.
Addressing short-term transitional costs.
1
2.
International Context
2.1
Globalisation and Financial Crime
Learning Objective
1.2.1 Understand how globalisation impacts on the scale, likelihood and mechanics of financial crime
There can be no doubt that the opening up of international markets and the extension of trade and investment has brought immense economic benefits. One of the single most significant contributors to this was trade liberalisation and the dismantling of restrictive trade policies. The role of technology is significant in this respect, in terms of global communication and electronic forms of commerce.
Just as globalisation has made opportunities available for expansion of the legitimate economy, so it has for the illegal economy. In particular, governments have been concerned about the ease with which criminals may be able to form ad hoc networks and operate with the removal of legal and administrative barriers. There is further awareness of the opportunities presented by global communications and the ease with which global financial transfers can be undertaken. As financial activity has become more mobile and supra-jurisdictional, it has raised challenges for nationally focused regulators.
The globalisation of legitimate business, and the competition for work around the world, has increased the scope and scale of corporate bribery. This is in part facilitated, as are other forms of financial crime, by the promotion of international economic liberalisation:
• the scope for international trade (where, for example, arms manufacturers seek international sales to maximise the rewards from the development of expensive equipment, whose costs will not be recouped from their domestic market);
• the ease and speed of international money flows;
• businesses based in countries with tolerant views of domestic corruption.
The overall effect of the increasing number of countries engaged in international business in countries with weak regulatory tax, law enforcement or compliance environments is to increase the potential for, or likelihood of, unethical or dishonest conduct.
It is presumed that globalisation has created opportunities for organised criminal networks to operate over a far wider geographic area, with the result that traditionally nationally focused law enforcement agencies (LEAs) have, in response, looked to establish co-operative cross-border networks such as Europol (see Section 2.5.2 of this chapter) and the Egmont Group of financial intelligence units, which is described in more detail in Chapter 3.
It should, however, be pointed out that academic research on the subject of organised crime is not in agreement as to whether criminal operations and organisations have similarly expanded internationally in general terms. Whether this has been the case just in certain areas (such as drugs or human trafficking) it is more noticeable because of investigations or media inquiries, or whether new opportunities have opened up because of developments in technologies and communication media or the expansion of particular fraud methods (for example, the rise of advance fee fraud and boiler room frauds) is still open to debate.
2.2
The Financing of Financial Crime
Learning Objective
1.2.2 Know how types of financial crime are financed
Of the types of financial crime discussed in this manual, money laundering concerns a perpetrator seeking to disguise the source, ownership or location of the proceeds of crime, by concealing or transferring them, or to convert them into funds that appear to have a legitimate origin. The money launderer may or may not be the same person who is also the source of the funds or assets – that is, involved in any preceding criminal activity – and the funding of any aspect of the money laundering process may come from the funds or assets themselves or from the resources of the person involved. Organised crime gangs may recycle funds from successful operations, such as drugs trafficking, to fund other criminal activities.
Fraud does not necessarily require financing, since it is often committed by customers, staff, contractors and so on as part of a normal business relationship. Those using false documentation to establish such a relationship do not need significant funding to create this documentation, although the effort involved in long-term systemic fraud can be significant and costly. Some professional fraudsters may use their own funds to create the illusion of a functioning company, and long-term frauds may involve considerable investment before the final fraud.
Corruption is likewise often paid for from company or other private resources (and this is why the UN and the Organisation for Economic Co-operation and Development (OECD) Conventions require that states disallow the tax deductibility status for such payments as a business cost).
TF may originate from either the proceeds of other crime or from legitimate funds (and TF offences apply to both). The following sources of funding have been seen:
• Self-funding by terrorists using their own legally obtained money. The amount of funds necessary is unlikely to be extensive and, in the case of a spontaneous act, are more likely to be negligible. The exception to this is where a wealthy individual sponsors their own organisation, again with legally obtained funds.
1
• Crime is often associated with TF. Low-level fraud, such as welfare benefit, bank, cheque or cardfraud has been a frequent method of TF in recent years. Terrorists may have advantages over ordinary criminals in terms of access to weapons, as well as individuals ready to commit acts of violence, and so may also be involved in violent crime such as robbery; or they may use their organisation and infrastructure to control smuggling and drugs operations. Extortion of ‘protection money’ (or illegal taxation) has also been used to raise money for terrorists in many scenarios around the world. • State sponsors of terrorism are governments and their agents who provide funds, safe havens,
training facilities and other infrastructure for terrorism. State sponsors are able to use privileged public sector channels to support terrorists, taking advantage of treaty entitlements such as diplomatic immunity.
• Community fundraisers can be used to support terrorist activity rooted in that particular community. Fundraising can take place through such means as collections, the sale of books and DVDs, and events such as dinners or social evenings.
• Charities and Non-Profit Organisations (NPOs) can be used in TF, either by being a front for TF through the community, or by diversion of funds originally (and legitimately) intended for charitable purposes.
• Legitimate enterprise can be the source of TF in a variety of ways, via the diversion of products, services, revenue, expenditure and capital in support of terrorist activities. This can be done wittingly by owners or members of staff, without the knowledge of others involved in the enterprise. Legitimate enterprises may also unwittingly fund terrorism by providing credit, which is subsequently diverted.
2.3
Transferring, Storing and Hiding Funds
Learning Objective
1.2.3 Know how funds derived from financial crime are transferred, stored and hidden
One of the first things that a criminal will seek to do with illegally gained assets is to give them the appearance of having been legitimately acquired, if the intent is to use them in legitimate activities in the future. If they are re-invested in criminal activities, there may be no need to do this.
Once funds derived from crime appear to be the proceeds of legal activity they can be stored (saved or invested) or transferred (moved into alternative accounts or jurisdictions) at will. There are various routes by which illicit assets may be moved, transferred or mixed with other funds. Similarly there are a range of activities and jobs – such as casinos, real estate, lawyers, accountants and currency traders – that can facilitate the process.
The international financial system and global trade are advantageous to the money launderer, as they provide opportunities to transfer funds through different jurisdictions, making them difficult to follow and frustrating investigative efforts.
The routes are extensive, from converting cash into travellers’ cheques, mingling it with other funds in a cash-intensive business, such as a restaurant, or buying other currencies on the black market, to gambling, or buying and selling high-value items such as jewels. Other routes are to move assets that have been successfully placed in the financial system into or through other jurisdictions, such as offshore finance centres, in order to exploit their confidentiality requirements, or to use informal banking systems to transfer money to other jurisdictions. One example of informal means of moving funds is hawala, a way of transferring value outside the conventional financial system, without using a negotiable instrument. How hawala works was described in a D 2009 report by a House of Lords Select Committe8.
2.4
International Conventions, International Law and
Domestic Law
Learning Objective
1.2.4 Understand the difference between international conventions, international law and domestic law
An international convention is a formal agreement between countries which are members of organisations, such as the UN, as to how a particular issue is to be addressed. Being a signatory to a convention is often symbolic, signalling an intention, while ratification is binding, committing the country to the mandatory provisions of the convention at national level. This may involve a requirement that relevant provisions be drafted into domestic legislation or that other measures are taken.
Some conventions may claim treaty status between countries which have ratified the convention, even where there is no bilateral (ie, between two particular countries) agreement to this effect. For example, countries traditionally provide mutual legal assistance on the basis of bilateral treaties. Some international conventions provide a legal basis for such co-operation even in the absence of a bilateral treaty. Article 44 of the United Nations Convention against Corruption (UNCAC) states, for state parties (ie, those states which are party to the Convention):
‘If a state party that makes extradition conditional on the existence of a treaty receives a request for extradition from another state party with which it has no extradition treaty, it may consider this convention the legal basis for extradition in respect of any offence to which this article applies.’
International law addresses the conduct of states in terms of state-to-state relations; the offences which states (or states’ officials representing the state) can commit; and who is responsible for adjudication. It is the set of rules by which the relations between states are conducted. Such law is derived from treaties, international customs and general principles of law.
Although international law primarily concerns countries, increasingly it can apply to individuals as well – one example of this would be genocide, which is a crime under international law for which individuals can be held liable and tried at the International Criminal Court.
1
Domestic law is the internal law that applies within a jurisdiction and to the citizens and inhabitants (including legal persons, such as corporations) of the country concerned. It can include law made at the national, state, regional or local level.Domestic law may also include offences committed overseas by a country’s citizens; thus the 2010 Bribery Act states that: ‘a person’s acts or omissions done or made outside the UK would form part of such an
offence if done or made in the UK, and that person has a close connection with the UK’.
2.5
Combating Financial Crime in the European Union (EU)
Learning Objective
1.2.5 Understand the work of the European Union in combating financial crime: Eurojust; European arrest warrant (EAW); money laundering directives
2.5.1 Eurojust
Eurojust was established in 1999 to promote judicial co-operation in combating cross-border crime. It improves co-operation in investigations and prosecutions between member states of the EU, by facilitating requests for international mutual legal assistance (MLA) and the implementation of extradition requests. At the request of a member state, Eurojust may assist investigations and prosecutions concerning that particular member state and a non-member state, if a co-operation agreement has been concluded, or if there is an essential interest in providing such assistance.
Eurojust is a permanent organisation, staffed by national prosecutors, magistrates and police officers of equivalent competence, detached from each member state, according to their own legal systems. It co-ordinates the activities of the national authorities responsible for a particular case and facilitates the collection of evidence under the EU and other international mutual legal assistance arrangements. It is a body with legal personality, which means it is able to conclude formal agreements with other organisations and countries. It has the power to ask competent national authorities to initiate investigations and prosecutions.
In order to fulfil its obligations, Eurojust regularly convenes strategic meetings to examine particular criminal justice issues, for example, specific types of offending, such as human trafficking or terrorism. In addition it conducts co-ordination meetings in respect of individual cases.
Eurojust’s areas of responsibility include terrorism, drug trafficking, trafficking in human beings, counterfeiting, money laundering, computer crime, crime against property or public goods, including fraud and corruption, criminal offences affecting EU financial interests, environmental crime, and participation in criminal organisations. For other types of offences, Eurojust may assist in investigations and prosecutions, at the request of a member state.
For information, there is also the European Judicial Network (EJN), which was established in 1998 to facilitate closer co-operation in criminal matters between EU member states. It comprises an informal network of in excess of 200 individuals EU-wide, who have been designated by their country as contact points, the majority of whom are English-speakers. They are generally located in authorities with responsibility for judicial co-operation (eg, Ministries of Justice or prosecuting authorities). The function of each contact point is to:
• assist authorities in other member states who are making enquiries as to the legal/practical position within their own jurisdiction on criminal justice issues;
• channel similar requests by the authorities in their own country in respect of other member states.
2.5.2 Europol
Europol is the law enforcement agency of the EU, intended to support law enforcement agencies of EU member states, in their fight against international serious crime and terrorism.
The 600+ staff at Europol headquarters in The Hague, the Netherlands, have no direct powers of arrest, but support member state law enforcement colleagues, by gathering, analysing and disseminating information and co-ordinating operations. Europol experts and analysts take part in joint investigation teams which help solve criminal cases in EU countries.
Europol personnel come from different kinds of law enforcement agencies, including regular police, border police, customs and security services. This multi-agency approach helps to close information gaps and minimise the space in which criminals can operate. Europol liaison officers (ELOs) are based at Europol headquarters. These ELOs are seconded to Europol by the EU member states and non-EU partners to support effective co-operation based on personal contact and mutual trust.
2.5.3 L’Office Européen de Luffe Antifraude (OLAF)
Another EU financial crime agency is L’Office Européen de Luffe Antifraude (OLAF), the European Anti-Fraud Office, which is an independent agency for the investigation of fraud, corruption and any other illegal activity affecting EU financial interests, under the responsibility of the Commissioner in charge of Taxation and Customs Union, Audit and Anti-Fraud.
OLAF has the power of access to information and the buildings of the community institutions, with the right to check accounts and to obtain extracts of any document. In addition, OLAF can request, from any persons or organisations spending EU funds, information that it judges useful for its investigations. In accordance with the arrangements laid down in the above-mentioned regulation, it can carry out on-the-spot controls of the economic operators concerned, in order to gain access to information concerning possible irregularities.
Currently, OLAF has about 400 personnel, many of whom have backgrounds in national investigative, police and judicial services and experience in investigations concerning complex fraud cases, analysis and evaluation of information, or in support or development of policies in the area of the fight against fraud.
1
2.5.4 European Arrest Warrant (EAW)
The European arrest warrant (EAW), which has been effective from 2004, it is intended to expedite inter-EU state extradition proceedings. If they are punishable in the issuing member state by a custodial sentence, the following offences among others may give rise to surrender:
• terrorism;
• trafficking in human beings; • corruption;
• participation in a criminal organisation; • counterfeiting currency;
• murder;
• racism and xenophobia; • rape;
• trafficking in stolen vehicles; and
• fraud, including that affecting the financial interests of the EU.
The framework decision defines EAW as any judicial decision issued by a member state, with a view to the arrest or surrender by another member state of a requested person, for the purposes of:
• conducting a criminal prosecution; • executing a custodial sentence; • executing a detention order.
It can be used to secure the arrest and surrender of an individual in order to conduct a criminal prosecution (in relation to any offence punishable under the law of the requesting state by at least 12 months’ imprisonment) or to execute a custodial sentence or detention order for an individual already sentenced, where a sentence of at least four months has been imposed.
The EAW is sent direct from one judicial authority to another, without the involvement of any diplomatic channel or other intermediary. The requesting state does not have to show that there is a case to answer. The merits of the request are taken on trust and there are limited grounds for refusing enforcement. Traditional exceptions for political, military and revenue offences are no longer applicable.
The EAW removes the principle of double or dual criminality for the range of offences noted above. This means that it is sufficient that the act that is the subject of the EAW is criminal in the state issuing the EAW and is punishable under the law of that state.
2.5.5 Money Laundering Directives
European legislation has been adopted to protect the financial system and other vulnerable professions and activities from being misused for money laundering and financing of terrorism purposes. This has been in response, not only to international requirements and the standards set by the FATF, but also in light of the knowledge that the creation of the single market provides opportunities for criminal, as well as legitimate enterprises, to exploit the financial system, for the purposes of money laundering. Directives require member states to adopt certain measures, by amending national law, if necessary.
There have been three EU directives on money laundering. The First Directive (91/308/EEC)9 dated 10
June 1991 on Prevention of the Use of the Financial System for the Purpose of Money Laundering was largely focused on drug trafficking and was the mechanism by which the UN Vienna Convention (see Chapter 3, Section 2.2.1) could be brought into EU law.
This was amended by the Second Directive (2001/97/EC)10 of the European Parliament and Council
adopted in 2001. The purpose of this directive was to expand the scope of the predicate offences, (ie, the underlying criminal activity that gives rise to money laundering) from drugs to all serious offences and to extend the scope of the regulations to a number of non-financial activities, such as bureaux de change and money transmission agents, real estate agents, accountants and legal professionals (incorporating the objectives of the UN Palermo Convention discussed in Chapter 3, Section 2.2.2).
Both of these earlier directives were repealed by the implementation of the Third EU Directive on the Prevention of the Use of the Financial System for the Purpose of Money Laundering (2005/60/EC)11
adopted in 2005. The purpose of this most recent directive was to implement revisions made to the FATF Recommendations in 2003. This directive brought TF within its scope as a separate crime, extended obligations to yet more sectors (including trust and company service providers, life insurance and dealers in high-value goods, who deal in cash payments above e15,000), and introduced the RBA to customer due diligence (CDD).
In February 2013, the European Commission (EC) adopted a proposal for a fourth directive on the prevention of the use of the financial system for the purpose of ML and TF. The proposal takes into account the revised FATF Recommendations and in particular a more targeted and focused RBA, requiring risk assessments at the European internal market, individual member state and firm level. It also has revised rules relating to customer identification, specifically relating to politically exposed persons (PEPs) and beneficial ownership. Other measures in the proposal will see the gambling sector, not just casinos, brought within scope of the directive and the cash payment threshold reduced to e7,500.
2.6
The Work of the US Authorities in Fighting Financial
Crime
Learning Objective
1.2.6 Understand the work of US authorities in fighting financial crime
The work of the US authorities and the reach of their legislation are important well beyond the borders of the US, as they impact on international transactions and institutions in foreign jurisdictions. Given the importance of the US dollar in international trade and financial markets, many foreign financial institutions will find themselves involved with US institutions, and therefore may be subject, to some degree, to US regulations and laws.
9 http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:1991:166:0077:0082:EN:PDF 10 http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2001:344:0076:0081:EN:PDF 11 http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2005:309:0015:0036:en:PDF
1
2.6.1 US PATRIOT Act 2001
Although the US had passed the Bank Secrecy Act in 1970, which required financial institutions to assist in the fight against money laundering, by keeping records of and reporting certain types of transactions, there is no doubt that the ‘Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act’ (better known by its official abbreviated form as the US PATRIOT Act
2001), passed in the aftermath of the terrorist attacks of 11 September 2001, hugely increased the focus on financial crime. It impacts both US institutions and non-US institutions that do business in the US, as it seeks to control access to the US financial system. Some of the key provisions are:
• Section 311 – the designation of a country or foreign institution as a primary money laundering concern and imposing special measures on US institutions doing business with the designated entity.
• Section 312 – imposing enhanced due diligence requirements for foreign correspondent accounts (ie, accounts with foreign institutions) and private banking accounts for non-US persons.
• Section 313 – prohibition of correspondent accounts for foreign shell banks (ie, those banks that have no physical presence, beyond a so-called brass plate).
2.6.2 International Reach of US Anti-Money Laundering (AML) Laws
The US has a wide range of predicate offences, known as specified unlawful activity (SUA) under their anti-money laundering (AML) laws, which were first included in the US Code in 1986. The law impacts on foreign individuals and financial institutions, if a money laundering transaction takes place wholly or partly in the US, or if the foreign institution maintains an account at a US institution. Section 319 of the US PATRIOT Act 2001 allows seizure of equivalent funds from the correspondent accounts of foreign institutions, even if the money representing the proceeds of the SUA is deposited in an account outside the US.
2.6.3 Office of Foreign Assets Control (OFAC)
The Office of Foreign Assets Control (OFAC) of the US Department of the Treasury administers and enforces economic and trade sanctions. These sanctions may target terrorists, drugs traffickers, and those engaged in the proliferation of weapons of mass destruction and they prohibit transactions and require the blocking of assets of persons or organisations on lists issued by OFAC. OFAC regulations apply to all US citizens and permanent residents, wherever they are; all persons and entities within the US; and US incorporated entities and their foreign branches.
2.6.4 Foreign Account Tax Compliance Act (FATCA)
The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010. FATCA requires foreign financial institutions to report directly to the Internal Revenue Service (IRS) certain information about accounts held by US taxpayers, or foreign companies with substantial ownership in US taxpayers’ hands. These requirements impose special CDD, record-keeping and reporting requirements on foreign financial institutions.
2.6.5 Foreign Corrupt Practices Act (FCPA) 1977
The Foreign Corrupt Practices Act (FCPA) applies to US citizens, residents and businesses, and to any company listed on a US Stock Exchange. The Act concerns the bribery of a foreign official for the purpose
of obtaining or retaining business for or with, or directing business to, any person. Since 1998, the Act has
also applied to foreign firms and persons who take any act in furtherance of such a corrupt payment while
in the US.
The FCPA is covered in more detail in Section 3 of Chapter 6 of this manual.
2.6.6 Federal Sentencing Guidelines
The US Sentencing Commission, an independent agency in the judicial branch of the US government, produces the Federal Sentencing Guidelines regarding the appropriate form and severity of punishment for offenders convicted of federal crimes. In our context, the important part of the Guidelines is Chapter Eight, the Organizational Guidelines, which apply to businesses convicted of crime, including financial crimes.
The Guidelines allow a potential fine on a company to be mitigated by up to 95% if it can demonstrate that it had put in place an effective compliance programme, assuming that no high-level individuals in the firm were involved in the criminal activity. The Guidelines set out key criteria for establishing an effective compliance programme, which are broad principles, not a detailed model for implementation12.
2.7
Civil and Common Law Jurisdictions
Learning Objective
1.2.7 Understand the difference between civil and common law jurisdictions 1.2.8 Know examples of civil and common law jurisdictions
These two types of jurisdictions reflect two very different legal traditions. The civil law jurisdiction is also termed the civil code jurisdiction and the common law the Anglo-Saxon tradition.
The civil law jurisdiction is one where the country has a codified constitution, which lays down general principles, as well as detailed statutory requirements, which are applied by judges.
The common law jurisdiction is where the courts interpret the body of law, through leading cases that develop the interpretation and implementation of law in practice.
12 See An Overview of the Organizational Guidelines, US Sentencing Commission, found at www.ussc.gov/Guidelines/ Organizational_Guidelines/ORGOVERVIEW.pdf
1
2.8
Examples of Different Jurisdictions
Common law countries tend to be those influenced by the UK legal tradition – examples include Australia, India, Malaysia and the US. The civil law countries tend to be European and those subject to European influences, such as Brazil, Mexico, Russia and Turkey. South Africa and Quebec are examples of mixed jurisdictions13.
2.9
Recovering the Proceeds of Crime
Learning Objective
1.2.9 Understand the role of civil and criminal process in recovering the proceeds of crime
The pursuit and recovery of the proceeds of crime can make a significant contribution to crime reduction objectives, as it sends out a message that crime does not pay, prevents the funding of further criminal activity and decreases the risk of instability in financial markets from criminal assets. Thus methods have to be found to remove criminals’ ill-gotten gains, not just to criminalise the activity of laundering them. Two main processes have arisen – confiscation in criminal proceedings and non-conviction-based confiscation in civil proceedings.
Under FATF recommendations, and in accordance with the various conventions mentioned above, countries have adopted measures to freeze or seize and then confiscate proceeds from predicate or money laundering offences, laundered property and property that is the proceeds of, or to be used, in the financing of terrorism.
Recognising that part of the money laundering process is also to change the form of assets, the property of an equivalent value may also be confiscated. In criminal confiscation this requires conviction for a criminal offence, with asset forfeiture/confiscation being available as a sanction alongside imprisonment or other punishment.
Criminal confiscation requires a conviction to the criminal standard of proof, namely beyond reasonable doubt. It became apparent with experience of operating criminal confiscation regimes that this presented difficulties, for example when dealing with organised crime, where senior figures in criminal organisations kept themselves distant from the criminal activity being carried out. In these circumstances it may be difficult to prosecute the individuals, despite clear evidence that they are living off the proceeds of crime. Certain jurisdictions, such as Italy, Australia, South Africa, Canada and the US, adopted civil confiscation regimes, where it was only necessary to prove the criminal origin of property on the balance of probabilities, not obtain a criminal conviction of the owner of the property.
13 In September 2011, the United Nations Office on Drugs and Crime (UNODC) launched a web-based anti-corruption portal known as Tools and Resources for Anti-Corruption Knowledge (TRACK). The legal library within TRACK includes a detailed list of national laws as they relate to each paragraph of the UNCAC, and includes the legal tradition from which they are drawn – the various legal traditions include, as well as civil and common, Islamic, customary and socialist. The objective of the UNCAC Legal Library is not only to collect national legislation, but also to demonstrate in a practical and user-friendly way how each state has implemented the provisions of the convention and what tasks still lie ahead. UNODC has collected a data set of laws from over 175 states and has conducted a detailed analytical breakdown of how that legislation relates to the provisions of the convention. See also Tetley, W. (1999). Mixed Jurisdictions: Common Law versus Civil Law. www. mcgill.ca/maritimelaw/comparative
As an example, in the UK the advantage of civil confiscation was recognised in the Cabinet Office Performance and Innovation Unit report ‘Recovering the Proceeds of Crime in 2000’. This led to the introduction of the Assets Recovery Agency (ARA) in the POCA. The ARA had three areas of responsibility:
• Confiscation – following a conviction and an order proposed by the CPS to the courts, confiscation would be enforced by the ARA, whose powers included restraint, customer information orders, account monitoring, and the power of discovery (requiring individuals or organisations to attend for interviews or produce documents).
• Civil recovery – this power resided with the ARA, because it did not require a court case. Rather it used the same powers to go to court to request an interim receiver be appointed to quantify and value assets. The report would go back to court for freezing and/or recovery.
• Taxation – if the director of the ARA had reasonable grounds to suspect that there was income, gains or profits that were chargeable to the relevant tax and which resulted from criminal conduct, the director then carried out the tax functions that the Her Majesty’s Revenue & Customs (HMRC) would ordinarily carry out. This was not just limited to the proceeds of unlawful conduct but all the defendant’s property. The only difference between the director and the HMRC was that, when the director was carrying out taxation functions, the source of income did not need to be identified.
Unfortunately, the ARA met with mixed success and was criticised for the fact that the recovered sums came nowhere near to covering the costs of running the organisation; this ignored the large values that could be attributed to work in progress, ie, cases where the victims of the seizures were still within the (fairly generous) permitted time scales to challenge the seizures in court. Until cases were heard or the right to go to court had been waived, the values of such seizures could not be treated as recovered sums14. Nevertheless, in April 2008, the ARA was absorbed into the Serious Organised Crime Agency
(SOCA), although the latter agency has also been criticised over its cost structure15. In June 2011, the
government announced that SOCA is to be replaced by a new National Crime Agency (NCA).
14 Sproat, P.A. (2007). ‘The new policing of assets and the new assets of policing: A tentative financial cost-benefit analysis of the UK’s
anti-money laundering and asset recovery regime’, Journal of Money Laundering Control, 10 (3), pp.277–299. 15 Rider, B. (2009). ‘Cost-Effectiveness – a two-edged sword!’ Journal of Money Laundering Control, 12 (4), Editorial.
1
End of Chapter Questions
Think of an answer for each question and refer to the appropriate section for confirmation. 1. What are the main elements of financial crime in the FSMA?
Answer reference: Section 1.1
2. What is money laundering designed to do?
Answer reference: Section 1.2
3. What acts comprise terrorist financing?
Answer reference: Section 1.3
4. What acts comprise proliferation finance?
Answer reference: Section 1.4
5. What are the benefits and challenges of a risk-based approach to combating money laundering and terrorist financing?
Answer reference: Section 1.6
6. How does globalisation facilitate financial crime?
Answer reference: Section 2.1
7. Name four ways of financing terrorism.
Answer reference: Section 2.2
8. To whom does international law apply?
Answer reference: Section 2.4
9. What is the difference between Eurojust and Europol?
Answer reference: Sections 2.5.1 and 2.5.2
10. Who uses the EAW?
Answer reference: Section 2.5.4
11. What do European directives require member states to do?
Answer reference: Section 2.5.5
12. What are three key provisions of the US PATRIOT Act?
Answer reference: Section 2.6.1
13. What is the role of OFAC?
Answer reference: Section 2.6.3
14. What is the main difference between civil and common law jurisdictions?
Predicate and
Associated Offences
This syllabus area will provide approximately 8 of the 100 examination questions
1. Predicate Offences
25
2
1.
Predicate Offences
1.1
The Definition of Predicate Offences
Learning Objective
2.1.1 Understand the term predicate offences
A predicate offence is the underlying criminal activity that gives rise to proceeds that may become the subject of a money laundering offence. Without the existence of a predicate offence, there can be no money laundering; however a conviction for the predicate offence should not be required for a conviction of money laundering. On the other hand, in some jurisdictions those convicted for the predicate offence cannot be also convicted of money laundering (so called self-laundering), although the FATF recommends that this should only be the case if it is required by fundamental principles of the law in a jurisdiction.
The emphasis on the money laundering offence has often been seen as a means to remove the benefits from crime and thus seek to reduce the level of crime. Money laundering offences also focus on those who may facilitate criminal activity, even though they are not involved in that criminal activity itself, on those who should be aware to avoid involvement in money laundering, and those major criminal figures whose direct involvement in the predicate offence is difficult to prove.
The focus on either the predicate offence or the money laundering offence, or both, may be affected by the relative sanctions attached to either. The UK’s Crown Prosecution Service’s approach is that the underlying offence ought normally to be proceeded with, as it represents the conduct which gives rise to the criminal proceedings. Further, it adds:
Money laundering and the underlying criminality are separate offences. Money laundering activities should not be seen simply as ‘part and parcel’ of the underlying criminality. As the courts have often said in connection with theft and receiving – receiving is the more serious offence because, without handlers and receivers there would be no thieves. However, prosecutors should recall that the practice of charging theft and handling in the alternative is followed where the evidence is unclear as to whether the defendant is a thief or a handler. In these types of cases both offences (the underlying crime and the money laundering offence) will be capable of proof.
1.2
Types of Predicate Offence
Learning Objective
2.1.2 Understand types of predicate offence
The predicate offences recognised in a particular jurisdiction’s money laundering laws may be specified in several ways:
• the all-crimes approach, in which all offences giving rise to proceeds (sometimes called acquisitive crime) are regarded as predicates;
• the threshold approach, in which categories of offences are made predicates, such as serious crimes, or crimes linked to a threshold, such as the penalty of imprisonment applicable to the predicate offence;
• the listing approach, in which a list is made of offences regarded as predicate offences.
The FATF states that countries should apply the crime of money laundering to all serious offences, with a view to including the widest range of predicate offences. If countries apply a threshold approach, predicate offences should, at a minimum, comprise all offences that fall within the category of serious offences under their national law, or should include offences that are punishable by a maximum penalty of more than one year’s imprisonment or, for those countries that have a minimum threshold for offences in their legal system, by a minimum penalty of more than six months’ imprisonment.
However, whichever approach is taken (and jurisdictions may take a combination of the approaches outlined above), there are some offences that should always be regarded as predicate offences, in accordance with the FATF Recommendations. These are known as the designated categories of offences and they are listed in the glossary to the FATF Recommendations. Terrorism and TF are among these categories of offences.
2. Fraud
2.1
The UK Definition of Fraud
Learning Objective
2.1.3 Know the UK Fraud Act (2006) definition of fraud
Fraud is one of the designated categories of offences, but is not further defined in the FATF Recommendations. Indeed, there is no single accepted, comprehensive definition of fraud, although generally speaking all definitions will contain an element of dishonesty or deceit, and loss or injury. All jurisdictions approach the matter of defining fraud in different ways. We will briefly examine the situation in the UK, which illustrates some of the more common elements, and challenges, of fraud definitions.
Until the Fraud Act 2006 was introduced, fraudulent conduct was an offence under an extensive range of specific legislation, while what was normally considered fraud, in its everyday meaning, was dealt with under the various theft acts. Despite revisions, the latter did not cover all eventualities and, after several considerations, the Law Commission returned to the issue of definition in 2002. It stated that the government wanted a law that was: readily comprehensible to juries; is adequate for effective prosecution;
is fair to potential defendants; [and] meets the need of developing technology including electronic means of transfer.
2
Recognising that there was no straightforward definition of fraud, it recommended that: the offence offraud would be committed where, with intent to make a gain or to cause loss or to expose another to the risk of loss, a person dishonestly (1) makes a false representation, (2) wrongfully fails to disclose information, or (3) secretly abuses a position of trust.
Section 1 of the Fraud Act 2006 introduced a new general offence of fraud and three ways of committing it:
• Fraud by false representation requires: dishonesty;
an intent to make gain or cause loss;
the person who makes the representation knowing that it is or might be false or misleading. • Fraud by failing to disclose information requires:
dishonesty;
an intent to make gain or cause loss;
failure to disclose information where there is a legal duty to disclose. • Fraud by abuse of position requires:
dishonesty;
an intent to make gain or cause loss;
abuse of a position where one is expected to safeguard another person’s financial interests.
Perhaps recognising that legal concepts and constructs can be difficult for the lay person, the UK’s national fraud reporting centre (Action Fraud) has a simpler, practical definition of fraud:
Fraud is when trickery is used to gain a dishonest advantage, which is often financial, over another person.
2.2
The Difference Between Fraud and Money Laundering
Learning Objective
2.1.4 Know the relationship between fraud and money laundering and how they differ
Money laundering is the movement, concealment and/or conversion, of the proceeds of crime, including the proceeds of offences of fraud. Since the purpose of most frauds is acquisition of wealth or property, it may be expected that the perpetrator will attempt to disguise illicitly obtained assets and funds.
Similarly, in order to undertake money laundering, the perpetrator may possibly undertake a fraud, such as misrepresentation to a bank, as to both their identity and the source of funds, in order to provide a legitimate front for money laundering.
Both are concerned with acquisitive crime, but the main difference between the two is that fraud is, by definition, a financial crime concerned with the illicit acquisition of assets, whereas money laundering is the process that seeks to conceal the source of such assets arising from a range of both financial and non-financial crimes such as drugs, human trafficking and corruption. Fraud is just one of the predicate offences for ML, which include many other offences generating substantial proceeds.
