It is only just over six weeks since the new regime came into force — but already cracks have begun to emerge in the regulations to clamp down on money laundering by fraudsters and terrorists. The regime is proving costly to implement and risks catching innocent people in its net. But is it proving its worth?

The Money Laundering Regulations 2007 mark a significant shift in approach which places more responsibility on lawyers, accountants and others to ensure that money is clean.

Anti-money-laundering and counter-terrorist financing compliance used to require a customer’s passport, amenity bills and some information about the purpose of the transaction. At the end of last year the tick-box approach was discarded in favour of “customer due diligence measures [applied] on a risk-sensitive basis depending on the type of customer, business relationship, product or transaction”.

The rationale, as the Third European Commission Directive on Money Laundering explains, is that some situations present a greater risk of money laundering or terrorist financing than others. If the risk is high, a higher level of customer due diligence is needed.

On top of this, the regulations require those operating in the regulated sector (financial institutions and advisers, legal and accountancy professionals, estate agents, high-value cash dealers and casino operators) to develop “appropriate risk-sensitive policies and procedures” for risk assessment in the anti-money-laundering arena.

These policies and procedures must ensure the scrutiny of activity that is particularly likely “by its nature” to be related to money laundering or terrorist financing. The regulations posit types of transactions where enhanced due diligence procedures must be carried out — say, for example, where a customer is not physically present for identification purposes, is a “politically exposed person”, or where the transaction favours anonymity.

But these scenarios are not exhaustive. To assess risk meaningfully in other cases, those covered by the regime need to understand how the criminal fraternity deploys their services for money laundering or terrorist financing. Regrettably there is a paucity of published information. Some trade and professional associations have put forward case studies and the Financial Action Task Force has helpfully published typologies in recent years. But these examples draw on recorded experiences and give limited help with identifying current criminal trends.

Large financial institutions and professional advisers are better equipped to respond to this challenge, if only because they have greater resources. Meanwhile, their smaller counterparts are less sanguine, as money- laundering reporting officers strive to implement the new requirements in a workable fashion.

On any view, the stakes are high. Failure to make a suspicious activity report (SAR) to the Serious Organised Crime Agency (Soca) when there are reasonable grounds for suspecting that a person is engaged in money laundering constitutes a serious criminal offence punishable by five years imprisonment and an unlimited fine.

Soca holds the key to the solution.In his review of the SARs regime in March 2006, Sir Stephen Lander recognised that feedback from Soca would help reporters to develop an accurate view of the risks to their business from laundered money and terrorist financiers.

To some extent Soca has sought to grasp the nettle with sector-specific seminars for banking, insurance, legal and accountancy. This is a step in the right direction but more needs to be done. First, Soca must publish regular bulletins on trends in money laundering and terrorist financing. Secondly, sensibly, it is considering whether intelligence products can be developed into an alert system for the private sector. Certainly Soca has an astonishing amount of material: one million financial disclosures are held on its database and the figure is growing by 220,000 a year.

The qualitative use of this snapshot raises the question — how much is all this costing? In June 2005 the Corporation of London reported that compliance costs versus GDP was almost one quarter higher in the UK than in the US, more than double that in Germany and almost three times that in France and Italy. The cost in terms of invasion of privacy should also be taken into account. What is more, innocent parties inevitably get caught up in the system and in some cases, for minor allegations of criminal transgression.

There is good cause for the public and business community to be uneasy. While SARs have featured in a number of prominent investigations, Soca describes their use as “patchy with significant areas of weakness”. Meanwhile, lack of resources is a problem. The Financial Intelligence Unit employs 96 staff when about 200 are needed. Soca diplomatically records that it is operating within “a challenging resource requirement”.

If Government wants to impose significant regulatory burdens, Soca must be adequately resourced, so it can properly support the business community and effectively promote the SARs regime. Without, the vigorous implementation of an expensive risk-sensitive compliance regime will be undermined. A strong commitment to detecting, investigating and prosecuting organised crime costs money.

The author, a QC at 23 Essex Street, is a practising barrister, visiting professor at the London School of Economics and a trustee director of the Fraud Advisory Panel

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