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Press Extract: Due Diligence & Financial Markets.
Money Laundering is a growing problem in world money markets, particularly in stock exchanges. Peter Lilley explores the inherent problems
It was Al Capone who observed that he was surprised that so many people turned to crime when there are so many legal ways to be dishonest. Mr Capone would have been familiar with both the theory and practice of money laundering as the term - and the process of money laundering - originated in the United States in the 1920s. Criminal gangs then were trying to do much the same as today: disassociate the proceeds of their criminal endeavours from the activities that generated them. To do this they took over businesses with high cash turnovers- such as launderettes and car washes. The criminals then proceeded to mingle the cash from nefarious activities with legitimate income, thus creating a logical commercial reason for the existence of large sums of cash.
The financial world has moved on substantially in the intervening years - however it is open to question whether the response to (or understanding of) money laundering has developed at the same pace. The London Stock Exchange is, just like any other international financial forum, a magnet for money laundering: which is conservatively estimated to be worth £1.5 trillion per year. The very simple reason for this is because it is an effective vehicle to wash funds. Examples are:
• Criminal funds transferred into alternative financial instruments, ownership of shares and bonds
• Brokerage firms taking washed or partially washed funds that are then used to buy shares or other financial instruments
Research has shown that 80% of all money laundering transactions involve an international component: certainly criminals have fully embraced the new global marketplace. This creates additional problems as criminal money arriving to be invested in the stock exchanges is more likely to come from another reputable financial centre than a country with discernible links to organized criminal activity. The increased globalization of financial marketplaces also throws up other difficulties, such as criminals establishing a trading account in the office of a financial institution in one country and then having it transferred to London.
Another more extreme method to utilize stock exchanges as a money laundering vehicle is through listed companies being nothing more than a laundering operation themselves. The now infamous YBM Magnex International Inc was delisted by the Toronto Stock Exchange in December 1998. A US class action suit claimed that YBM's "only successful business is the laundering of criminal proceeds". Red flags have already been raised about the money laundering possibilities inherent in the listing of dotcom companies with no track record and unsustainable market valuations.
The current regulatory regime that highlights identification procedures, record keeping, internal reporting systems and staff training can effectively combat money laundering only if it is applied on a coherent basis in a serious and effective way with a true understanding by those in the market of what they are trying to fight and why. Critical to the success of the UK anti-money laundering regime is the disclosure of suspicious transactions (and clients) to NCIS (National Criminal Intelligence Service).
In 199,9 of 271 member firms of the London Stock Exchange, 18 made disclosures - 6.6% of the total. This compares unfavourably with almost 77% of building societies that made disclosures in the same period but favourably with the 0.1% of accountants in the United Kingdom that made a disclosure.
But disclosure of suspicious transactions and/or clients can only be successful if relevant staff are trained to identify "red flags" of money laundering activity. It is not possible to list all of these within the confines of this article.
It is doubtful whether any organization can rely on the due diligence/KYC checks carried out by another firm: this is particularly relevant when clients are referred from one party to another. In the end, it is your organization that has responsibility (and culpability) for such checks.
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