THE GOVERNMENT is preparing a new crackdown on money launderers who, it suspects, are washing billions of pounds through the City of London each year.

New powers will be brought in to protect citizens, but there are also fears that the curbs could add to the administrative burdens on legitimate business transactions.

The complexity of mechanisms used by criminal and terrorist groups will also raise concerns that the new rules could prove difficult for regulators and law-enforcement agencies to act upon.

However, writing in The Times today, Ed Balls, the Economic Secretary to the Treasury, gives warning that the greatest threat to Britain today comes from “organised criminals and terrorists” living in the country.

“The new threats we face from serious organised crime and fanatical terrorism place new responsibilities on us all — and require new powers,” Mr Balls asserts.

According to the Treasury, organised crime costs the UK more than £20 billion a year — which does not include the attendant damage caused by drug addiction, people-trafficking and prostitution.

In preparation for the new curbs on money laundering, the Treasury is publishing its consultation paper on the European Union’s third money-laundering Directive today. Responses are due by October, giving the Government just over a year to enact the law before the December 2007 deadline.

The new Directive extends EU legislation to terrorist financing, requiring firms to report suspicious transactions. It also increases regulation of trusts and hedge funds and imposes additional duties on bankers and advisers to “know your client”, with continual monitoring.

Charlie McCreevy, the European Internal Markets Commissioner, has said that the legislation will help the fight against terrorist financing and boost the integrity of the financial sector.

The Directive was approved quickly by the EU in late 2004, winning strong support from politicians in the wake of the Madrid train bombings that year.

However, banks have claimed that the Directive places extra burdens on businesses already trying to cope with the implementation of the Markets in Financial Instruments Directive (Mifid). Mifid, intended to streamline the rules for securities trading, will be introduced in November 2007.

Banks have expressed irritation with the “box-ticking” approach adopted in previous Directives. In response, the Treasury says that it is keen to maintain the risk-based approach which has been adopted by the Financial Services Authority (FSA), the City regulator, which examines only those transactions that it believes may be suspect.

The proposed Directive has also won little support from regulators, which are keen to avoid extra duties to police the new regime. Last November the FSA said that it would initiate regular inspections of anti-money laundering measures at private equity firms after a review last year revealed poor compliance with policies and procedures.

Existing legislation in the UK includes the 2003 Money Laundering Regulations and the 2002 Proceeds of Crime Act.

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