How London became the money-laundering capital of the world

In Blog by Ian Fraser16 Comments

July 15th, 2012

By Rowan Bosworth-Davies

Speaking on the Marr Show on BBC One on March 23rd, the former Daily Telegraph editor and historian Max Hastings said a “senior central banker” recently told him that London is now considered to be the “money-laundering capital of the world”.

Hastings was discussing the shooting of a Russian banker in London. The remark was all the more pertinent since Russia is now said to be controlled by a ‘gangster culture’ and because of the large number of Russian oligarchs and other business people who now live and work in the UK. A lot of these people carry criminal baggage, but the authorities seem entirely comfortable with the idea they should reinforce London’s position as the world’s “funny” money hub.

How did this state of affairs come about when, on paper at least, the UK has some of the strictest anti-money laundering legislation in the world?

The answer, I believe, lies in the fact that our many laws and regulations have never been effectively enforced by financial regulators, and banks and other financial institutions know they can get away with paying lip service to the rules.

Only this year has the Financial Services Authority managed to bring a money laundering charge against a UK-based financier, and he is a very small fish indeed. In an insider trading case against Richard Anthony Joseph, the FSA added two money laundering charges. It charged him with eight counts of insider dealing and two counts of money laundering.

The charges follow Joseph’s arrest in May 2010. The interest in the case is not in the insider dealing per se but in the addition of charges of money laundering. Although the FSA has had the power to prosecute this offence for some time, it has rarely, if ever, used it.

There is a world of difference between having rules which are meant to be obeyed, and doing everything within one’s power to avoid providing any meaningful form of compliance with the rules. The purpose of the regulations is to make it as difficult as possible for people who have acquired their money illicitly, anywhere in the world, to find a safe haven in the international banking system.

So there are rules and regulations which impose a burden on banks and financial institutions requiring them to ensure that before they accept money from a client, that they have a clear picture of its provenance, that they know as much as possible about their clients, their businesses, the sources of their funds, and if they have held high political office, to make sufficient enquiries to ensure that the monies being deposited are not in fact the proceeds of international aid payments which have been stolen from the country’s Treasury.

These rules are routinely flouted by the financial institutions.

They will say that they have large compliance departments, with many staff dedicated to ensuring that such situations do not arise, and in many senses, they are telling the truth. The problem is that they are not telling the whole truth. In 2011, The Financial Services Authority conducted an investigation into London banks and found that three-quarters of them were not doing enough to verify the sources of some customers’ wealth. The probe shed some light on a system that is failing to stop the flow of corrupt money, a problem that continues to have disastrous consequences for millions of people. Predictably, the regulator did not name the banks that had ignored the rules, nor gave any indication they would do so.

Predictably, the FSA also failed to take any public action against any of these institutions for this egregious flouting of the rules. They could have brought prosecutions against them for failing to implement the relevant regulations, but they did not do so. This is typical of the regulatory response to flagrant wrong-doing in our banking sector, and it is looked upon by the banks and their employees as a sign of immense weakness, which they feel able to exploit at every opportunity.

The compliance regime is undermined by the calibre and quality of people employed by the banks to implement the anti-money laundering regulations. Repeatedly, in discussions with recruitment consultants I am told that the kind of person being sought to fill a particular role is a ‘low-level’ employee with minimal length of service. They are looking for someone with a couple of years’ experience who might be capable of filling a new position, but they don’t want to pay any real money for anyone with any skills, real experience, or more importantly, the sense of independent knowledge to be able to stand up to the commercial people and say, ‘you can’t do that’!

You only have to look at the salary levels paid to compliance officers and then compare them to the salaries paid to traders and business getters, to see the huge discrepancies in functional importance the banks place on compliance. At a Group Compliance Director level, you may be seeing six figure salaries, but these are rare. The vast number of employees in this function are being paid peanuts compared to the business side of the organisation.

Another problem with the British mentality towards compliance is the over-emphasis on ‘process’ as compared with ‘effective enforcement’. The compliance function is awash with processes and procedures, they have manuals full of them, but all they are doing is seeking to demonstrate to any regulator that, if asked, they complied with the process.

But any process that is not rigorously tested and then analysed by a skilled and experienced person will be worthless. I once did a pre-Arrow review for a major global bank of their anti-money-laundering function. They had processes and procedures written down in manuals, provided at vast expense by the consultancy arm of one of the ‘Big Four’ accountancy firms. When I tested how the staff were applying these processes, I found a huge lacuna in their areas of knowledge. To make matters worse, they had no-one with any ‘grey hair’ sitting in the middle of the web, holding all the ends of the processes, in order to ensure that they were being effectively implemented.

If we have a regulatory agency that repeatedly refuses to enforce the anti-money laundering regulations, and is sufficiently inept to accept that the level of compliance being provided by the banks and other financial institutions can be performed using a ‘tick box’ mentality, it provides a key part of the answer as to why London is now the money laundering capital of the world.

This is typical of the British attitude towards any kind of financial regulation. It is as if governments of whichever persuasion, have swallowed the canard that if they are seen to be heavy-handed towards the banks, then this will in some way deprive the UK of some hidden special advantage.

So, we have regulations which only get enforced at the margins, and which the major players ignore at whim. Yes, from time to time the regulators do seek to fine the banks for the worst examples of their egregious behaviour, but fining a bank is nothing more than an HP commitment as far as the bank is concerned. All it does is dilute their profitability, harming the shareholders not the executive perpetrators, which is reflected in even less tax being paid on their profits. If they are not named and shamed, as is routinely the case, then there is no reputational risk attached to the penalty either, and no stigma is applied.

As with so many other areas of financial wrong-doing, it seems the banks have seen off the regulators yet again, and the only loser would appear to be the UK financial services’ arena which is now, apparently, the venue of choice for every international crook’s dirty money. We must prepare ourselves to witness more Russian-style assassination attempts on our streets, as the organised criminals who deposit their money with the even better organised criminals in the banking sector, continue to see London as the money laundry of choice.

This article was written by Rowan Bosworth-Davies and first posted on his blog on March 26th 2012. It is reused with permission. Since then, it has emerged that HSBC faces a $1 billion penalty in the United States for weak anti money laundering controls by the US government. At a hearing in Washington this Tuesday, the US Senate Permanent Subcommittee on Investigations is poised to deliver a blistering attack on the London-headquartered bank’s anti-money laundering systems and controls, highlighting its role in transactions tied to Iran, terrorist financing and drug cartels. In a Reuters Special Report published July 13th 2012, Carrick Mollenkamp and Brett Wolf have detailed how the bank’s Delaware-based anti-money laundering hub pays lip-service to tackling the problem of money laundering.