Money Laundering Bulletin, 20 September 2022
Prosecutors are often unwilling to put their hand in the proverbial snake pit to go after professional launderers, opting for easier, low hanging fruit instead. (Paul Cochrane).
MLAAS – Money Laundering As A Service – must, logically, exist to layer in the billions and billions of, well, choose a currency, generated by criminal enterprise: who does it, how should they be stopped and why isn’t that happening? Paul Cochrane talks to those with reason to know.
Professional money launderers are exceedingly hard to catch, and - if convicted - are invariably replaced by other pros waiting in the wings. What more can be done to go after them?
Negligible returns
Going by estimates of the global scale of money laundering, and the low seizure rates - by some accounts 1%, by others (such as New Zealand AML specialist Ron Pol) less than 0.1% - efforts to curb the amounts of dirty money sloshing around the financial system are proving ineffective. (1) This is especially apparent when it comes to investigating, charging and convicting professional money launderers (PMLs) and related enablers.
Known unknowns
Indeed, as Sir Rob Wainwright, now a senior partner at Deloitte, said, before stepping down as executive director of Europol, in 2018: “Professional money launderers – and we have identified 400 at the top, top level in Europe – are running billions of illegal drug and other criminal profits through the banking system with a 99 percent success rate.” (2)
The inability to arrest these 400 European PMLs and the unknown hundreds, if not thousands, of other top-level PMLs around the world cannot be simply put down to a general lack of anti-money laundering (AML) controls at financial institutions, or the high rate of false positives in suspicious transaction reports (STRs) filings, said Jim Richards, head of RegTech Consulting in the US.
Hard facts
“People talk of a failure in the private sector, but I think it’s doing a bang-up job in doing what they’re supposed to do. The failure is law enforcement and prosecutors in bringing money laundering cases,” he said. “In my 20-plus years as a Money Laundering Reporting Officer (MLRO), my teams filed over 1 million STRs, but in many cases, law enforcement did nothing with the intelligence. They don’t have the interest or ability to go after the enablers.”
A rare success story is the arrest in Spain, on 12 September 2022, of “one of Europe's biggest money launderers,” according to Europol. Identified in press reports, Johnny Morrissey is alleged to have worked for the Kinahan clan, an Irish organised crime group responsible for trafficking drugs across Europe. He is said to have overseen hawala transfers of criminal proceeds totalling over Euro 200 million in 18 months: the laundering allegedly involved use of Nero Drinks, a vodka business, set up as a front to justify the large sums of cash, and linked shell companies in London and Gibraltar to disguise the underground banking activity.
The difficulty in tackling PMLs was highlighted by the Financial Action Task Force (FATF) in a 2018 report on Professional Money Launderers (3): “Many countries are not sufficiently investigating and prosecuting a range of money laundering activity, including third-party or complex money laundering. Many countries continue to limit their investigations to self-launderers: criminals who launder the proceeds of drug trafficking, fraud, tax evasion, human trafficking or other criminality… (this) does not impact on those specialised in providing criminals with money laundering services. PMLs, professional money laundering organisations and professional money laundering networks can survive law enforcement interdiction against any of its criminal or organised crime group clients, while still standing ready to support the next criminal clientele.”
Lawyers for hire
To Canadian law enforcement veteran (ex-Royal Canadian Mounted Police) and AML expert Chris Mathers, the biggest challenge in going after PMLs lies with the legal profession. “It is impossible to launder money without lawyers, even just to set up the corporate structure to move money around,” he said. “The absolute majority of lawyers are law-abiding individuals, but we have to realise a small percentage are not, so we need to change the rules regarding (lawyers’) financial disclosures or we’ll not accomplish anything.” Canada, for instance, does not insist that lawyers (except notaries in British Columbia) file STRs.
Plenty of form
The role law firms can play as enablers was highlighted in the Panama Papers, leaked in 2016, which detailed the financial and attorney-client information of more than 214,488 offshore entities held by Panamanian law firm Mossack Fonseca. The Paradise Papers, leaked in 2017, involved Bermuda-based law firm Appleby. And the Pandora Papers, a leak of nearly 12 million documents in 2021, also involved law firms and service providers.
Another case is that of 1Malaysia Development Berhad (1MDB), the Malaysian-government joint venture development vehicle whose exploitation has just led to the imprisonment of former Malaysian Prime Minister Najib Razak. Between 2009 and 2010, financier Jho Low embezzled USD368 million through an ‘Interest on Lawyer’ account held by a New York-based law firm. No action has been taken against the law firm as it did not violate AML rules at that time. That is unlikely to be the case in the future, however. The 1MDB case features in the Appendix of the USA’s ENABLERS Act, which was proposed in response the Pandora Papers. Passed in July 2022 by the House of Representatives, with a supporting vote anticipated later this year in the Senate, the Establishing New Authorities for Businesses Laundering and Enabling Risks to Security (ENABLERS) Act is part of the regularly approved National Defense Authorization Act (NDAA) for Fiscal Year 2023. Section 5401 of the NDAA is called the STOP Dirty Money Act (Services That Open Portals to Dirty Money). (4)
The proposed Act, however, has been watered down since it was proposed in 2021. The initial draft required seven professions to have full AML programmes: investment advisors; dealers in art, antiquities, and collectibles; lawyers “involved in financial activity on behalf of another person”; trust or company service providers; accountants; public relations (PR) firms that “provide another person with anonymity or deniability”; and third-party payment providers. In the final House of Representatives version of the Act, investment advisors, art dealers and PR firms were excluded, said Richards. This goes against advice in the OECD’s 2021 paper, ‘Ending the Shell Game, cracking down on the professionals who enable tax and white collar crime’. (5) However, it goes beyond Designated Non-Financial Businesses and Professions (DNFBPs) - lawyers, accountants and other service providers - to include financial institutions as targets for AML action against professional launderers; that is a sensible suggestion, in Richards' view: “If we stick to DNFBPs, my sense is that PML cases will be very difficult to prosecute,” he reflect, stressing that financial institutions should also be included as they are the conduits for cash transfers.
Too tough to tackle
As for targeting lawyers, “The Feds and Europe know who these law firms are but are afraid of challenging them due to client-attorney privilege, said Richards. He added that often, going after an accounting firm, or a real estate type of organisation involved with ML “is just so fraught with political and prosecutorial difficulties that such cases are too difficult to take on”: the firms are able to bring pressure to bear on politicians, while prosecutors prefer to go after easier cases - “low hanging fruit”.
The international element to such cases is a further hinderance to prosecuting cases against PMLs, said Tristram Hicks, an AML and criminal justice expert in the UK: “Even the most simple of money laundering crimes are extremely difficult to deal with in different jurisdictions. As we have an International Criminal Court for war crimes, we should have an international facility for financial crimes,” proposed Hicks.
While greater international cooperation not readily apparent, more could be done at the national level to fight professional ML if there was the political will, he added. Substandard information requirements for registering a company have been a particular bugbear, impeding beneficial ownership data collection and adding a layer of obfuscation to law enforcement investigations.
Reliable registers
In the UK, Companies House, which registers companies established in England and Wales, the need for reform has been a topic for some 25 years. “It is ridiculous that a government agency receives information which it doesn’t verify, and then it is published without making clear there is no real veracity to the information there,” said Hicks. “If law enforcement had a team of half a dozen investigators at Companies House, I am sure they would find some crime.”
The US also needs to do more despite passing the Corporate Transparency Act (2019-20), which requires companies to disclose their ownership and control structures. The Act also calls for a national registry of companies to be established. (6) “The registry is still years away, but the problem is, like with Companies House, it is a garbage in and out type of situation. There is no verification of the information of the companies, such as the address or the beneficial owner,” said Richards.
Actionable answers
Law enforcement needs to be emboldened to go after PMLs and for there to be consequences against enablers. Richards said prosecutors are unwilling to be involved in complex money laundering cases that cannot always be won, instead going after easier cases or those with a good media angle, such as seizing a criminal’s mega yacht. “I would empower law enforcement and prosecutors to enable them to go after the elite enablers. Instead of seizing a Russian oligarch’s yacht, a better strategy is to go after the enablers of the oligarchs that buy and service for them,” he said.
Enablers, including financial institutions, should also be held accountable for money laundering violations, said Hicks. “We could convict bankers,” he said, although he was not generally in favour of prosecuting bankers: “It should not be up to the public prosecutor to determine who in the bank was culpable, the bankers can sort that out among themselves,” he said. In this regard, inside investigators are in a better position to do this than an outside investigator: “That would focus minds. If not fines, then confiscations in relation to the crime committed,” he said. If bankers are targeted, then Iceland's post-financial crash convictions is a good example to follow, he said: “When Iceland sent (36) bankers to prison (for market manipulation and breach of fiduciary duties following the 2008 financial crisis) it had an effect,” with Iceland's financial sector being scandal-free since that time.
Stronger consequences are certainly needed to make the lives of PMLs and enablers harder, said Robert Mazur, a former undercover operative that worked for the US’ Drug Enforcement Agency (DEA) and US Customs Service. “Unless and until somebody has the balls to yank someone’s licence for intentionally committing an offence, they will pay a fine that the shareholders pay, and it all moves on. You can’t regulate morality,” he said.
Notes
Ron Pol estimates that AML policy intervention has less than 0.1% impact on criminal finance.
2) Sir Rob, now working at Deloitte, declined an interview with MLB. https://www.politico.eu/article/europe-money-laundering-is-losing-the-fight-against-dirty-money-europol-crime-rob-wainwright/)
3) FATF report 2018, Professional Money Laundering - https://www.fatf-gafi.org/media/fatf/documents/Professional-Money-Laundering.pdf
4) https://amendments-rules.house.gov/amendments/GATEKEEPERS_NDAA_xml%20v3220711190941114.pdf
5) OECD paper 2021, Ending the Shell Game: Cracking down on the Professionals who enable Tax and White Collar Crimes - https://www.oecd.org/tax/crime/ending-the-shell-game-cracking-down-on-the-professionals-who-enable-tax-and-white-collar-crimes.htm
6) https://www.congress.gov/bill/116th-congress/house-bill/2513/text
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