ScamsMar 1 2021

More to be done to tackle money laundering in UK

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More to be done to tackle money laundering in UK
Credit: Mikhail Nilov via Pexels

While the purchase of a luxury flat or country bolthole through an offshore shell company is a favourite of money launderers, investor awareness of property-based laundering has elevated following recent high-profile cases.

Flying under the radar are other interests of the high-net-worth individual. Lack of regulation, light enforcement or only an emerging understanding of risk means that these areas are attracting a flow of wealth into the UK, some of which is illegitimate. 

Fundamentally, money laundering is the use and handling of property with a known or suspected criminal source.

The UK’s third national risk assessment of money laundering, published in December 2020, identified fraud and tax evasion as the most common type of underlying crime – but bribery, modern slavery, trafficking and, increasingly, cybercrime are also prominent generators of criminal proceeds.

Regardless of the commercial savviness of the wrongdoer, the enduring challenge is how best to paper over the origin of the funds so that they can be used within the legitimate economy. 

Education and luxury goods

One such way that the introduction can occur is through the payment of fees and donations to elite private schools.

Foreign politically exposed persons are drawn to the UK for its safety, the sophisticated professional services on offer and, in many cases, the opportunity to educate their children at top schools.

A person’s PEP status always attracts a risk of background bribery and corruption, but understanding this and other money laundering risk factors, such as third-party payments, use of shell companies in paying fees and high-risk jurisdictions, varies widely across private schools.

Schools are not under the same regulations as professionals such as lawyers, estate agents and tax advisers, but they too are vulnerable to contact with money launderers.

Private education is worth billions to the UK economy and some schools will have been unwitting recipients of illicit wealth. The situation is sufficiently serious that in October 2020, the National Crime Agency issued an amber alert for bribery and corruption red flags in the independent school sector.

At the same time, it reported that 52.3 per cent of non-British children in UK independent schools have parents that are non-UK based. This figure suggests that there is likely to be complacency in some schools when fees arrive from an overseas account. 

Another hidden area of money laundering is the luxury goods market. High-value dealers – defined as businesses that take cash payments in the sum of €10,000 (£8,700) or more – have been subject to anti-money laundering regulation for some time.

This, however, is a very broad category of business and understanding of money laundering is inconsistent. Family-owned car dealers, high-end wine merchants, jewellers, collectibles businesses as well as major luxury brands and top-end department stores are all grouped together.

Dealers in luxury goods are at risk not just because certain items can easily be sold for ‘clean’ money, but because the purchase of coveted items – from Swiss watches to extravagant cars – are status symbols in the criminal world. 

Compliance

Experience shows that small dealers can struggle in their development of anti-money laundering procedures and compliance oversight.

As an example of this, in the last 18 months, HM Revenue & Customs has taken enforcement action against a specialist car dealer for anti-money laundering breaches. However, businesses that trade in smaller goods should also take care.

Customer-facing staff, including in shops with niche clientele, should be aware of the need for due diligence when a customer with deep pockets walks through the door.

Jewellery, in particular, has a high money laundering risk as precious gems and gold are easily portable and can be sold quickly, albeit at a small loss. Iconic handbags, such as those by Hermes and Chanel, have also been recognised as a better investment than the stock market.

Such items attract wealth, including that acquired through illegal means. However, the anti-money laundering obligations only bite on a dealer when an item is bought with cash.

Few retailers would take steps to know who their customer is when a high value item is purchased by card or bank transfer.

There can be no criticism as it is not required of them. But, as a result, suspect wealth may be used to pay for a luxe item and the retailer would be none the wiser. 

The world of fine art also has a money laundering exposure. This, in large part, is due to its entrenched culture of secrecy and discretion. Some of the world’s most venerable art dealers are based in London.

The use of intermediaries to facilitate purchases on behalf of a buyer located overseas is commonplace – as is the establishment of special purpose structures registered offshore to conceal ownership.

This may be driven by a legitimate desire for privacy rather than a dark motive, but, regardless, the beneficial owner of an artwork is typically difficult to trace.

For the person engaged in dishonesty or other criminal activity, this suits them perfectly. It is a matter of public record that the proceeds of the Malaysian 1MDB fraud were allegedly used to purchase masterworks.

Several years on, efforts by law enforcement to seize prized pieces by greats such as Monet and Warhol are continuing. 

Persons involved in wrongdoing take advantage of the culture of secrecy in the art world and buy and sell artwork with relative ease, a form of layering criminal proceeds.

Although in the UK those involved in the art market have recently been made subject to anti-money laundering obligations, the latest national risk assessment recognised that there is “still a lack of complete understanding of the mitigations and vulnerabilities” when it comes to art.

Furthermore, dealers and auction houses in countries such as the US are not subject to anti-money laundering requirements. 

Learning curve

It is no surprise that private schools and the newly regulated are still a way from developing a full understanding of money laundering. Assessment of risk, knowledge of techniques and refinement of safeguards is an ongoing process.

For the uninitiated who are used to selling a product a certain way, it can be a steep learning curve. Training of frontline employees so they can identify risk factors specific to that sector is critical.

A question also arises as to whether it is worth considering anti-money laundering regulation applying more broadly to businesses involved in the sale of high-value items, even when cash is not involved.  

Alongside this, there is a need to encourage reporting of suspicions internally and to the National Crime Agency where appropriate, notwithstanding the culture of discretion in the world of high-end interests. There is a legal obligation to do so.

In 2019-20, the National Crime Agency reported that only 370 suspicious activity reports were submitted by high-value dealers, down 23 per cent compared to the previous year.

Although it may be that fewer businesses are accepting cash, the decrease is surprising when considering that demand for luxury goods is continuing and the risk of money laundering through gold, jewellery and cars remains.

Although there may be cultural norms when it comes to high-end sales, businesses involved cannot afford to turn a blind eye. 

Anita Clifford is a barrister and principal associate at Bright Line Law