March 2005

Money Laundering Law

A Regulatory bulletin from DLA Piper
 Money Laundering
EU lawyers voice concerns
over Third Money Laundering
Directive
According to an article published in The
Times on 22 November 2004, European
lawyers are becoming increasingly anxious
UK about the forthcoming Third EU Money
Laundering Directive (‘Third Directive’). The
Council of Bars and Law Societies of the
European Union is reported to have stated
News that it considers the Third Directive will
undermine the confidential relationship
between a lawyer and his client. It is also
feared that it will also seek to regulate the
way the relationship is established and
impose an obligation in certain
circumstances to terminate the relationship
and alert the authorities.
Further, the article suggested that the Third
Directive will infringe basic human rights
and impose ‘excessive burdens’ on the
professions and financial institutions to
identify their clients. Banks will be required
to establish and maintain global registers of
‘politically exposed persons’ (‘PEP’) with a
view to monitoring or excluding their
business. The definition of a PEP is broad,
encompassing close family members or
associates of individuals who are or have
been entrusted with prominent public
functions. The article highlights the further
compliance costs for the financial sector in
complying with the PEP rules. Jeremy
Customs success in drug
trafficking and money
laundering case
The Assets Recovery Agency’s Proceeds of
Crime update dated 9 December 2004
reported that one of Jamaica’s most sought
after criminals was jailed at Blackfriars
Crown Court on 10 November 2004 for
laundering £1.7 million from the proceeds
of drug trafficking, following an HM
Customs & Excise investigation. Customs
Minister and Paymaster General to the
Treasury, Dawn Primarolo, said:
‘The success of this investigation has dealt
a major blow to drugs trafficking groups
who target the UK. Customs has prevented
serious crimes from being financed. By
tackling money laundering, we are cutting
off the lifeblood of criminal networks.’
The defendant arrived in the UK on 12
January 2004 for an operation. After
2
Thorp, a director for the BBA, questioned
how easy it would be for banks to comply
with the obligation stating:
‘…it is one thing to ask whether someone is
on a UN sanctions list but how do you
define close associate?’
The article also referred to a challenge by
the Belgian Bar in August 2004 to a
previous EU money laundering Directive, in
which it asked the Belgian constitutional
court whether the directive violated the
principles of independence and
professional secrecy of lawyers. The article
stated that the Third Directive will require
those caught within its scope to notify the
authorities where they suspect or have
reasonable grounds for suspecting money
laundering by their client. In this aspect,
the Third Directive does not differ from the
existing UK regime set out in POCA. The
Third Directive will also bar a lawyer from
informing his client that he is being
investigated for money laundering and from
acting without first conducting an extensive
due diligence. The Council of Bars has
strongly rejected the latter proposal, stating
that ‘under no circumstances should the
state dictate for whom a lawyer may or may
not act’.
convalescing, he booked into a top London
hotel and was put under surveillance by
Customs officers throughout his stay.
During this time, he met with associates to
launder the proceeds of cocaine trafficking
between Jamaica, the Netherlands and the
UK. He was arrested in February 2004
carrying over £69,000 in his pockets and in
a suitcase. The cash was seized under
POCA and he and an associate were
arrested. Both men were charged with
conspiracy offences under POCA. On 17
September, the defendant was bailed and
attempted to flee the UK. He was
discovered in the back of a van at the
Channel Tunnel terminal in Folkestone. The
first defendant was jailed for seven years
six months and his accomplice for five
years.

SARs given low priority by
the Police
On 18 November 2004, the Law Society
Gazette reported that a review of asset
recovery under the Proceeds of Crime Act
2002 (‘POCA’), conducted by the chief
inspectors for the Constabulary, the Crown
Prosecution Service and the Magistrates
Court Service, revealed that police
authorities have given little weight to
suspicious activity reports (‘SARs’). The
report indicated that, although an extremely
high level of SARs were made in 2003/04,
only a small number of them were
considered to have had ‘obvious
investigative merit’. The review also
suggested that processing SARs was seen
as time consuming and resource-intensive.
Whilst the review acknowledged that SARs
were useful tools and that there were
‘pockets of excellence’ in the regime, it
conceded that complying with POCA was
laborious and expensive for financial sector
bodies, which also wanted reassurance
from law enforcement agencies that they
were properly exploiting the reported
information. Accordingly, the chief
inspectors have appealed to NCIS to issue
HM Treasury clarifies
paragraph 2(2) of the Money
Laundering Regulations 2003
On 23 November 2004,
HM Treasury published
a response to a
request for clarification
of paragraph 2(2) of
the Money Laundering
Regulations 2003
(‘MLR’).
The Royal Institute of Chartered Surveyors
had questioned whether paragraph 2(2)
applied to chartered surveyors who acted to
resolve third party disputes. The Treasury
responded on 16 November as follows:
guidance to police forces to improve
awareness and use of potential money
laundering intelligence.
According to the article, the deputy chief
constable of Warwickshire Police, Roger
Aldridge, said:
‘POCA is a detailed piece of legislation
which needs significant training to achieve
full integration into mainstream policing.
The Police Service is committed to using
the Act to its full capacity.’
The Gazette article also referred to the
amount of time, energy and expense
required by lawyers to produce what the
article described as ‘relatively meaningless
reports’. The article referred to law firms
investing in bespoke client identification
teams which carried out re-identification of
well known and long term clients. The
article concluded by suggesting that the
Government should take heed of
comments by the Law Society president
who has called for a period of calm
analysis of the effects of the legislation.
‘The MLRs give effect to the Second Money
Laundering Directive. This Directive was
silent on the activity of third party dispute
resolvers such as adjudicators, arbitrators
and mediators. To the extent that such
people do not otherwise fall within
regulation 2(2) of the MLRs, it was not our
intention to catch them.’
However, the Treasury did stress that it was
not their function to interpret legislation,
rather this is the role of the courts.
Accordingly, the Treasury recommended
that legal advice be sought. In addition, the
Treasury suggested that a consultation by
individuals with European counterparts
could prove beneficial.
The Treasury has invited representatives of
the Royal Institute of Chartered Surveyors
and the National Association of Estate
Agents to join the Money Laundering
Advisory Committee, a forum where key
organisations review the efficiency and
effectiveness of the MLRs.
A Regulatory bulletin from DLA Piper
Russia to
join Financial
Action Task
Force
It was reported in an article in Moscow
News on 27 December 2004, that the
Russian Federation would soon take part
in the activities of the Financial Action
Task Force (‘FATF’). According to the
article, Russia’s Prime Minister Mikhail
Fradkov signed a decree on 23
December which provided that the
Federal Service for Financial Monitoring,
together with the Russian Foreign
Ministry and Finance Ministry, will
participate in the work of the FATF.
Each year, members of the FATF pay a
contribution of between 13,000 and
15,000 to the FATF and Russia has
instructed its Finance Ministry to pay
their contribution by redistributing
savings from the 2004 budget.
In a follow up article on 12 January
2005, Moscow News reported that, for
the first time, a Russian delegate
attended a FATF session as an observer.
The delegation was headed by Russian
Federation First Deputy Finance Minister
Viktor Zubkov. According to the article,
the FATF European work group reported
that the efforts made by Russia’s
Financial Monitoring Committee, Central
Bank and the rest of the Russian
banking system to prevent legalisation of
illegally earned capital deserved ‘top
marks’. During the session, the Russian
delegation asked that the sanctions
imposed on Ukraine in December 2004
be lifted. A unanimous vote passed the
recommendation, although Ukraine
remains on the list of non-cooperative
countries and territories.
The article reported that Russia could
stand a chance of becoming a full FATF
member as early as June 2005 but
before doing so, it must resolve a
number of domestic financial issues. A
team of FATF experts are planning to
visit Russia in April 2005, in order to
consider the anti-money laundering
measures that have been adopted. In
particular, it is envisaged that they will
spend time getting to know the
operations of the banks, insurance
companies and various Government
agencies, such as the Prosecutor
General’s Office and Interior Ministry.
3
 Money Laundering

EU and International News

Swiss bankers criticise

anti-money laundering
efforts of the City of London
In an article on swissinfo.org published on Mr Mirabaud also described the exchange
15 November 2004, Pierre Mirabaud, of information between authorities in
President of the Swiss Bankers different countries as a ‘farce’. He said:
Association, described the City of London
as a ‘money laundering paradise’. The ‘Any investigations [into wrongdoing] by the
article reported Mr Mirabaud’s comments authorities are fruitless because the
to a Swiss newspaper, ‘Berner Zeitung’, in [British] banks do not really know their
which he attacked British trust law as the clients.’
culprit. He argues that by permitting
Mr Mirabaud claimed that the position in
persons administering a trust to remain
Switzerland, where Swiss banks know their
anonymous, the London banking
customers well, enabled Mr Mirabaud to
community was able to practise banking
vigorously defend his country’s banking
secrecy.
secrecy laws. By contrast, Mr Mirabaud
The British Bankers Association (‘BBA’) are attacked British banks for failing to comply
reported to have viewed Mr Mirabaud’s with the detailed ‘know-your-customer’
comments ‘with interest’. In defending the requirements, consequently hindering any
London banking sector, a spokesman for attempt by authorities to investigate illegal
the BBA said that ‘Banks have stringent transactions.
and enforceable anti-money laundering
procedures in place and regulators require
banks to undertake detailed “know-your-
customer” checks’.

4

Joint Money Laundering
Steering Group issues
guidance on the Child Trust
Fund Scheme
On 18 November 2004, the Joint Money
Laundering Steering Group (‘JMLSG’)
issued guidance on the money laundering
aspects of the Child Trust Fund scheme
(‘CTF’), which will begin in April 2005. The
scheme provides for:
(a) a Government payment of £250 from the
Inland Revenue to all children born after
1 September 2002;
(b) an additional £250 payment for children,
whose families are on Child Tax Credit
with a household income below
£13,480.
The Inland Revenue will have issued the
first tranche of about 500,000 vouchers on
17 January 2005. The voucher can then be
used by a person with parental
responsibility (the Registered Contact or
‘RC’) to open an account for the child with
an approved CTF product provider of their
choice.
In assessing the potential money
laundering implications, the JMLSG
consider that the CTF be classed as a
particularly low risk product for the
following reasons:
“The Inland Revenue will have issued the first
tranche of about 500,000 vouchers on 17
January 2005.”
(i) A CTF account can only be opened
upon production of a voucher issued by
the Inland Revenue or by the Inland
Revenue itself.
(ii) A maximum of £1,200 can be paid into
the CTF in any given year.
(iii)Except in exceptional circumstances,
the assets can only be withdrawn by the
child when they reach the age of 18.
(iv)If the CTF account is not opened within
12 months from the date of issue of the
voucher, the Inland Revenue will open
the account on behalf of the child.
The JMLSG stated that submission of the
voucher or receipt of instruction from the
Inland Revenue to open a CTF account will
be deemed as acceptable evidence of the
identity of the child. However, financial
organisations should carry out sufficient
identity checks on a child once they seek to
access the account at the age of 18.
The JMLSG also considered that the RC
may be an applicant for business under the
Money Laundering Regulations 2003. To
avoid any breach of the Regulations, it
recommended that the identity of the RC
be verified unless he or she is an existing
A Regulatory bulletin from DLA Piper
customer of the relevant firm. Financial
institutions may choose to accept the
production of the voucher as satisfactory
evidence of the identity of the RC as well
as the child for the following reasons:
(A)The Inland Revenue conducts its own
anti-money laundering and fraud checks
in relation to the voucher.
(B)The RC will always be the person
deemed to have parental responsibility
for the child and will usually be one of
the parents of the child.
(C)The CTF belongs to the child, who will
only be able to access the funds at 18.
(D)Firms will be required to send account
opening information and an annual
statement of account to the RC.
The JMLSG also commented that there was
no need for any identity checks to be
carried out on third parties making
payments into the CTF. However, financial
institutions should consider whether a
suspicious activity report should be
submitted, where attempts are made by a
third party to deposit sums which are
significantly higher than the maximum
amount.
5
 Money Laundering
Joint Money Laundering
Steering Group issues Guidance
Notes on ‘Equivalence status’
In December 2004, the JMLSG issued a guidance note entitled
‘Equivalence status of other countries or territories and those with
material deficiencies as at December 2004’.
The guidance note explains that under
article 3.9 of the Second EU Money
Laundering Directive (‘Second Directive’)
and regulation 5(2) of the Money Laundering
Regulations 2003 (‘MLR’), identification
evidence is not required where the applicant
for business is itself a credit or financial
institution that is subject to national legislation
implementing the Second Directive, or based
in a country whose law contains ‘equivalent
requirements’ (Second Directive wording) or
‘comparable provisions’ (MLR wording) to
those contained in the Second Directive.
If a country meets this requirement, then it
is known as having ‘equivalence status’ to the
UK. Similar exemptions for such countries are
also contained in the FSA Money Laundering
Sourcebook.
However, the JMLSG notes that such status
will only be available under this narrow
exemption from the basic identification
obligations and cannot be used to avoid any
wider customer identity checks as required to
meet the obligations under POCA and the
MLR. Further, the JMLSG also emphasises
that equivalence status only indicates that ID
procedures are in existence. It does not
provide a safe harbour from the need to have
appropriate customer due diligence (‘CDD’)
and know your customer (‘KYC’) and risk
management measures in respect of all
customers.
The guidance identified the following countries
that HM Treasury determined as having
‘equivalence status’:
EU Member States — Since all member states
of the EU are required to enact legislation in
accordance with the EU Money Laundering
Directives, ‘equivalence status’ applies. In
addition, some states are members of the
Financial Action Task Force (‘FATF’), and of
those, most have committed themselves to
implementing the Forty Recommendations, a
more stringent standard than the Second
Directive. The current list is as follows:
• Austria (FATF member), Belgium (FATF
member), Cyprus, Czech Republic,
Denmark (FATF member), Estonia, Finland
6
(FATF member), France (FATF member),
Germany (FATF member), Greece,
Hungary, Ireland (FATF member), Italy
(FATF member), Latvia, Lithuania,
Luxembourg (FATF member), Malta,
Netherlands (FATF member), Poland,
Portugal (FATF member), Slovakia,
Slovenia, Spain (FATF member), Sweden
(FATF member) and UK (FATF member).
EEA Member Countries — All EEA countries
have undertaken to implement the EU Money
Laundering Directives and some are
members of FATF. As with EU Member States,
variances can be expected in the nature of
the implementation in their local laws. The
current list is as follows:
• Iceland (FATF member), Liechtenstein,
Norway (FATF member) and Switzerland
(FATF member).
UK Crown Dependencies — All UK
Dependencies have undertaken to implement
anti-money laundering legislation which is
broadly equivalent to the EU Money
Laundering Directives. A number of
recommendations made by IMF evaluators in
2003 are currently being implemented to
bring these territories in line with the FATF
revised recommendations. The current list is
as follows:
• Isle of Man, Guernsey and Jersey.
Non-EU FATF Member Countries — Whilst all
FATF member countries undertake to
implement the Forty Recommendations as
part of their membership obligations,
implementation is not mandatory. The JMLSG
suggests that some of the newer FATF
members were admitted primarily because of
their strategic importance within a region and
whose anti-money laundering strategies are
still in their infancy. The current list is as
follows:
• Argentina, Australia, Brazil, Canada, Hong
Kong, Japan, Mexico, New Zealand,
Russian Federation, Singapore, South
Africa, Turkey and the USA.
The JMLSG report then highlights that whilst
there are a number of countries which HM
Treasury do not consider fall within UK
‘equivalence status’, they are not necessarily
countries whose standards of due diligence
are lower than the UK. The JMLSG
recommends that since standards vary
significantly, financial institutions should carry
out their own assessment on:
(a) non-FATF countries; and
(b) the Gulf Co-operation Council – This is an
unusual entity in that it is itself a FATF
member whilst its own members (Bahrain,
Kuwait, Oman, Qatar, Saudi Arabia and the
United Arab Emirates) are not. Whilst the
GCC’s members have undergone FATF-
style mutual evaluations, they have not yet
enacted legislation containing equivalent
provisions to the Money Laundering
Directives and should, therefore, be
assessed in the same way as for other
non-EU/non-FATF countries. The report
suggests that a risk-based approach is
necessary when carrying out this
assessment.
Irrespective of whether a country has
‘equivalence status’ or not, the JMLSG
proposes that firms ‘maintain an appropriate
degree of ongoing vigilance concerning
money laundering risks’. The risk profile which
the financial institution may use can be based
on the firm’s own experience or market
intelligence. However, firm’s should bear in
mind that ‘the higher the risk, the greater the
due diligence measures’.
The guidance includes details of international
assessments which have been carried out on
countries and territories with ‘equivalence
status’ and stresses that particular attention
should be paid to assessments undertaken by
bodies such as the FATF and IMF.
Finally, the JMLSG guidance focuses on Non-
Cooperative Countries and Territories
(‘NCCTs’). It noted that since 2001, no new
jurisdictions have been added to the NCCT list
and as at November 2004 there remain only
six countries on the list – Cook Islands,
Indonesia, Myanmar (Burma), Nauru, Nigeria
and the Philippines.

Money laundering
scandal for the Government
On 4 November 2004, The Times reported
that an email leaked to the Shadow Culture
Secretary had caused great embarrassment
for Tessa Jowell, the Culture Secretary. The
email, which was sent from Gideon Hoffman,
head of gaming policy at the Department for
Culture, Media and Sport to representatives
of a number of American casino operators,
allegedly referred to a request for material
on the forthcoming Third EU Money
Laundering Directive.
According to the article, the email was
raised by Michael Howard in Prime
Minister’s Questions, who said:
Serious Organised Crime and
Police Act 2005 set to change
anti-money laundering legislation
On 6 January 2005, Mondaq.com
published an article on the forthcoming
Serious Organised Crime and Police Act
2005 (‘SOCPA’) which highlights the
relevant changes which are to be made to
the Proceeds of Crime Act 2002. SOCPA
will replace NCIS with the Serious
Organised Crime Agency. According to the
article, the new legislation will largely
concentrate on changes in criminal law, for
example increased police powers of stop
and search, provisions relating to racial and
religious hatred and new magistrate
powers to make financial reporting orders
for up to five years.
However, SOCPA will make various
amendments to money laundering
legislation, including amending virtually
every section of Part VII of POCA 2002.
The main changes are as follows:
• One of the many complaints from the
professions is that the money laundering
requirements, in particular suspicious
activity reports, are too laborious. The
article indicates that lawyers tend to
write long letters when reporting
suspicious activity rather than use the
‘What we know is that the Government has
been offering concessions on money
laundering to the operators of those
casinos and the Secretary of State tried to
cover it up.’
The Prime Minister dismissed the
suggestion as ‘ridiculous’, stating that he
did not accept that Michael Howard had
shown that there were ‘concessions offered
on money laundering to casino operators’.
A spokesman for Ms Jowell denied that the
email offered special favours or considered
relaxing the rules on money laundering for
optional official forms. This not only
takes up their time, but the time of the
National Criminal Intelligence Service
(NCIS) when recording the information
on its database. According to the article,
it takes the NCIS on average only two
minutes to scan and transfer the
information received on the official
forms, compared with 45 minutes that
are needed to disseminate a letter. The
new Act will seek to amend ss 334 and
339 of POCA to make the use of official
forms mandatory. It further intends to
impose a fine for failure to use the forms
without reasonable excuse. Suspicious
transaction reports will also need to
include, where known, details of the
identity of the person suspected of
money laundering and the location of
the suspect property.
• Section 330 of POCA, which requires a
person to report a suspicion even
though the identity of the suspect and
the location of the property are not
known, will be amended to remove this
obligation in those circumstances. The
article gives the example of where a
shopkeeper client informs his lawyer that
A Regulatory bulletin from DLA Piper
the American casino operators. In a
statement, the Department for Culture,
Media and Sport said:
‘There is no question of the Government
seeking exemptions on behalf of any
casino operators that would water down the
effectiveness of money laundering policy –
crime prevention is one of the statutory
objectives of the Gambling Bill.’
he has been a victim of shoplifting by
unknown persons.
• Sections 327-332 of POCA provide that
an activity which would be illegal if
undertaken in the UK would be deemed
criminal even though it was legal in the
country where it was carried out. The
article gives the example of the
legitimate earnings of a Spanish
bullfighter, which would be regarded as
criminal property in the UK, since
bullfighting is an illegal activity here.
These sections are to be amended to
remove the need to make a report in
these circumstances.
• Section 331 of POCA provides a
solicitor with a legal privilege exemption
in certain circumstances, but not for his
MLRO. The SOCPA will provide a
parallel exemption for the MLRO.
• A de minimis reporting threshold for
banks and deposit takers, in relation to
accounts maintained by them, will be
introduced by way of a new s 339A.
This will not, however, apply to lawyers
and other professionals undertaking
relevant business.
7
 This material was originally published by LexisNexis UK March 2005.
This newsletter is not intended to be relied upon as a definitive statement of the law and specific advice should always be
sought on any particular topic. The information stated is believed to be correct as at 16 March 2005

For further information please contact Daren Allen, Partner, London Office
Tel: 020 7796 6824 Fax: 020 7796 6839 Email: daren.allen@dlapiper.com

This newsletter was previously published in March 2005 under the company name DLA Piper Rudnick Gray Cary.

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