Criminals, Terrorists, drug traffickers, corrupt politicians and officials, driven by profit, utilize a country’s financial system to launder their ‘dirty’ money and to move and camouflage it in other types of assets. Financial system also provides a tool for genuine trade and investment opportunities and this system is misused by terrorist and organized criminals to attain their ideologies. Fully understanding the gravity of the situation, UK has taken efforts to deny access to the financial system by terrorist and organized criminals and have taken concrete steps to weaken their network.
The UK Money Laundering Regulation emphasizes that all business units should ensure to apply effective controls which can assist to recognize and prevent efforts to move illicit funds into the UK’s financial system. UK government is turning the financial system against terrorists and criminals and UK’s anti-money laundering and anti terrorist finance measures is being implemented mainly to safeguard the security as well the UK’s economy.
The most of the data’s for this research have been compiled from the secondary sources like from the website of UK’s treasury department, articles published in the renowned journals and newspapers. This research mainly focuses in to the current UK legislations to prevent money laundering, its cooperation in the international scenario to deter the dirty money activities and also the future actions to be initiated by UK government to cleanse their economy from the dirty money.
WHAT IS MONEY LAUNDERING?
Money laundering is the ‘conversion or transfer of property, knowing that such property is derived from criminal activity, for the purpose of concealing the illicit nature and origin of the property from government authorities’ (EC Directive, 1990). So, any crime that generates significant profit may possibly create a need for money laundering. Typically, money is laundered by physically or electronically moving it from one country to another and hiding its origin through creating complicated financial transactions.
The concept of money laundering is such a wide one, covering a lot of areas – from the financial, social, up to the political arena. The metaphor of money laundering is ‘cleaning of money.’ It involves the practice of engaging in specific financial transactions, done with the purpose of hiding the identity, source and/or destination of money. Now money laundering has become a main operational strategy of underground economy.
Today, the term money laundering covers any financial transaction that leads to the generation of any value or asset, as a result of an illegal act. This illegal act could be false accounting or tax evasion. Since, its concept has become very complicated now, as the same is practiced by individuals, small or large business, corrupt officials, members of the organized crime (such as drug dealers or mafia) and even of corrupt states and intelligence agencies.
This is carried out through a network of shell companies, which are all based in offshore tax havens. The ever increasing popularity of money laundering has since become a heated subject in legal, economic, and political area. In recent years, many offenders were held for mobilizing drug syndicate funds, organizing crime groups, and financing terror attacks.
In short, money laundering is a process where illegally-earned money pumped into the nation’s legitimate financial system. It results in disguised financial asset so that they can be deployed with out detection of illegal activity from which it originated. Thus, money laundering helps to transform the ill-gotten funds through criminal activities into a country’s legitimate financial system. Money laundering process is providing a legal platform to terrorists, drug dealers, arms dealers and other criminals. If the money laundering is left unchecked, it would erode the integrity of the nation’s financial systems.
Drug traffic alone engenders tens of billions of dollars a year and the exact amount can not be quantified. Other than narcotics profits, it also includes money laundering through tax evasion and trade frauds, arms smuggling and organized crime, medical, insurance and bank frauds. The methods of money laundering range from compound financial transactions, carried out through the net work of shell companies, webs of wire transfers and currency smuggling. No sooner, the law enforcement is aware of the new method of money laundering technique and initiates action to disturb the activities, the launderers resort with yet another, more sophisticated method.
It is estimated total money laundered globally in a year is ranged between $ 500 billion and $ 1 trillion. FinCEN ( Financial Crimes Enforcement Network estimates that over $ 750 billion in illicit funds is transferred world wide annually of which $ 300 billion is laundered in US alone which is equivalent to total gross sales of two world leading automobile producers like Ford and General Motors in 1996.
Financial Action Task Force or FATF reported that drug trafficking as the single largest source of illegal proceeds and human trafficking, illegal arms trade and terrorism jointly ranks second in this category. Drug consumer nations such as US, Europe, Canada, Latin America, Caribbean off shore banking nations and transit countries such as Colombia, Mexico and panama are all used by the money launderers to stage their illicit operations. Narcotic money laundering alone accounts for about 80% of US money laundering prosecutions
Billions of dollars in small denomination of US currency are laundered and converted into Mexican or Colombian “pesos” or Italian Lira in the hands of drug mafias. The method of changing the street-level drug proceeds into cash involves three layers: deposit of the dirty money into the financial system, layering where the laundered money now in the financial or banking system to camouflage its origin and ‘integration’ where the laundered funds are ploughed back to the economy and become identical with that of legitimate funds.
Money Laundering laws generate a heap of data that law enforcement may not have the time to go through it. It was reported that between 1987 and 1995, banks entered 77 million transactions into the SAR data base and out of that only 3000 money laundering investigations were initiated and finally there were about 580 convictions. According to IMF, drug dealers launder gigantic sums of money about $1.5 trillion per year.
- LITERATURE REVIEW:
This paper mainly investigates how money laundering process in UK affects its economy , what are the all the steps taken by the UK government to combat the intrusion of ‘dirty’ money into the UK financial system , what is the impact of the money laundering if it is unchecked , what harm it will do to the economy and what are all its repercussions and how the government mechanism is turned against the dirty money infiltration , what is the current legislation and legal remedies for combating the dirty money’s effect on UK economy and what are the future actions to be implemented by the UK government in combating the entry of dirty money in the UK’s financial segment .
It also analyses what are the modes adopted by the money launderers to safeguard the ill-gotten funds in UK and how UK government is actively engaged in detecting and dissuading such activities. It also analyses how UK integrates itself with EU legislation of money laundering and also studies how international laws on anti money laundering is being strictly adhered by UK and its cooperation with other countries by forwarding them feedbacks and extension of help for tracing money laundered in UK from the member countries.
Finally this research concludes what are all the additional steps to be taken by the UK government in controlling and combating the intrusion of dirty money into UK financial system.
- VICIOUS CYCLES OF MONEY LAUNDERING:
- MODERN MONEY LAUNDERING PROCESS:
To hide the source of the income from illicit dealings, launderers first place the money in legitimate financial institutions. Somebody carry out this by transferring funds into the account of a partner who has issued him or an invoice for services or products never have been delivered.
Next, the collaborator adds a misleading layer of complexity to the process by wire-transferring those funds, in a relative secrecy, to a bank account in a loosely regulated “offshore” jurisdiction. The account holder then lends the money to the fraud who the paid the sham invoice. In the final step, the first fraudster integrates his money into the economy by purchasing legitimate assets or a real estate with a huge amount and difficult-to- trace but illegally earned –cash.
- HOW MONEY LAUNDERING IN UK AFFECTS ITS ECONOMY:
As per Mike Adlem, who is an expert in investigating financial crime, UK has successfully recovered about £ 46 million out of total £ 250 million laundered in UK. But one may astonish to know that cost of recovering £ 46 million laundered was more than £ 400 million! Britain is spending more than 10 times than the money recovered from laundering. One has to imagine the ramification of pork-barrel spending on paltry amount so recovered. 
Organized crime results in economic and social harm which has been estimated at £ 20 billion to communities in UK each year. UK has made a record recovery of £96.8 million from criminals in 2005-06 and has frozen about 200 bank accounts linked to terrorist suspects.
As per FT Fraud Report of October, 1997, ‘The Black Economy in the UK is generally estimated by reliable sources to amount to approximately 7% of UK’s GDP. Further, pervasive narcotics have established a distinguished place in UK’s economy and it is estimated that about 40% of the currency bills in circulation in UK are polluted with narcotics.
The dirty money takes disguise in the form of cash deposits in UK banks that too from the world’s poorest countries like Ethiopia, have raised the eyebrows of the UK economic observers.
The funniest part is that UK’s aid to these poor countries has dwarfed against the deposits from these countries in UK banks. No doubt, this dirty money might be originated from corruption and money laundering activities from the so called poor countries. UK bank cash deposits from Africa and South America increased more than from $ 115 billion [£ 61 billion] in 2005 to $ 368 billion in 2006. Due to massive corruption and money laundering in poor countries, there is exodus of capital from third world poor countries which will definitely have impact on welfare of the world’s most susceptible people.
According to the New Economics Foundation, deposits have risen conspicuously over the last five years from the so called downtrodden countries with inflows from Ethiopia rising 103 %, from Cameroon surging 516% and Nigeria up by 47% Though UK aid budget have risen considerably between 2000 and 2004 but $ 6.4 million deferred out constituted an iota of the deposits from the so called poor countries mentioned above.
Money laundering is said to be carried primarily by real estate business, casinos, jewelers, yacht brokers, car brokers and according to the new amendments made in UK in 2004, money launderers are entitled to five-year jail terms and fines worth of millions of pounds, if they engage with new clients without adequate proof of identity like permanent residential address like passport, or picture driving license for transaction involving any cash transaction of more than £ 10,000. [Money Laundering Regulations 2003, UK] The Act also specifies stringent penalties like jail terms up to 14 years or an unlimited fine.
One of the modus operandi practiced in UK is to post the ‘dirty money into a Channel islands bank account and then buy valuables or property in the UK. Royal Scotland Bank, UK was fined £ 750,000 by Financial Services Authority [FSA] in 2002 for allowing terrorists and criminals to open accounts and letting anyone in UK’s financial system. Further, Abbey National was fined for £ 2 million pounds in 2003 by the FSA on the charge of insufficient client verification checks on new business. 
UK home office estimated that money laundered through the UK is worth £ 18 billion per year. 
Further, the armed gang in Britain’s biggest robbery during February, 2006 faces a colossal task to use the robbed cash without being caught due to anti-fraud regulation as it makes extremely difficult to sneak much of the robbed money into the British economy. However the robbers were having certain advantage that it is logistically impossible for the Bank of England to replace the whole currency as it happened after the 2004 Northern Bank robbery in Belfast as the Northern Bank issues its own notes.
The only option for the gang is to transport the money to a foreign country where they can bribe the officials where controls are lax, even get the customs department certificate intimating that the source of money has been explained and then the bank will take it with out asking any questions and then launder the money back to UK through sham companies established abroad. One has to analyse how the UK economy will be underpinned if the stolen money from UK is laundered back to UK from abroad.
Money laundering tool is being used by terrorist also mainly to carryout their objectives. As a critical tool in the strategy for the war on the terrorism is to dissuade or dismantle the financial network employed by terrorists. After September 11 attack in U.S, “About $ 141 million of terrorists’ assets have been frozen across 1450 bank accounts globally. In the aftermath of September 11 attack, UK also has frozen about 100 organisation’s assets and over 210 individuals which value stood around $ 100 million.
As said already, money laundering generates over £ 20 billion of social and economic harm in the UK each year. The UK’s economy is affected by cost of prevention and insurance, cost of impact of the crime and cost in running the criminal justice system. This includes the following:
- Use of illicit drug that result in premature death , drug related crime , expenditure on security , violence associated with use of drugs , health and social care expenditure ,and cost of criminal justice .Further , Class A drug use causes harm amounting to £ 12.7 billion per year .
- Human smuggling and trafficking and its impact on immigration services costs the UK £ 2.1 billion per year.
- Excise smuggling cause tax revenue loss and loss to UK business profit.
- Bogus VAT claims which also known as “missing trader ‘fraud were estimated to amount up to £ 1.9 billion in 2005.
UK government is of the opinion that most series form of organized crime alone create:
- An illicit turnover of about £ 15 billion per year.
- Money laundering through the regulated sector of about £10 billion per year ; and
- “Capital formation” by criminals –that is, investment in assets is about £ 5 billion of which is exported to overseas.
For organizing terrorist attack, money laundering has become necessary to meet out the following expenses like to promote a militant ideology, to arrange for travel, to pay operatives and their families, to train new members, to acquire weapons and stage attacks.
In 2006, the first Financial Reporting Order was placed on notorious drugs baron Abdullah Baybasin, and he was convicted to 22-year jail sentence and he has to send reports of his finance to SOCA [Serious Organized Crime Agency] for the next fifteen years.
In on ongoing investigation by the Metropolitan Police Service’s Money Laundering Investigation Team led to forfeiture of cash £ 1,568,117 and this was recovered from series of safe deposit boxes and various addresses in London and Nottingham and it was given to understand that the money belonged to a person living in Thailand and four suspects involved were arrested in connection with money.
- FINANCIAL CONTROLS APPLIED BY INDUSTRY AND FINANCIAL
INSTITUTIONS IN UK:
The UK Money Laundering Regulations stresses that all business units should ensure to apply effective controls that assist to recognize and prevent efforts to move illicit funds through UK’s financial system and has suggested to implement controls which are as follows:
- To verify the identity of the customers.
- To maintain proper financial records for five years.
- Adequate training to staff
- To make sure that suspicious activities are reported.
- Around 200,000 suspected activities report (SAR) are reported annually in UK. The total value of underlying transactions may therefore be in £ 3 – 7 billion ranges. Out of these, 2,100 SAR’s were noted as being of possible terrorist interest in 2005.
- The number of terrorist finance production order issued by the National Terrorist Financial Investigation Unit was increased by 22% in between 2005 and 2006.
- ACTIONS INITIATED BY THE UK GOVERNMENT AGAINST MONEY LAUNDERING:
- Power to attach the illegal assets so as to strip criminals and terrorist of funds and divert the recovered funds for the action against the money laundering and to compensate victims.
- Impose heavy penalties on those who handle and encourage laundering of illicit funds.
- Dismantling of lenient financial institution on which they rely.
- Reclaiming or Freezing illicit funds –restraining the money launderer’s capacity to prolong their operations.
- UK government has introduced “Anti-Money Laundering Strategy “document to mainly tackle the crime and terrorism to safeguard its security, liberty and prosperity.
- UK government has created the Joint Terrorist Analysis Center and the annual “Threat Assessments “of organized crime, made by the Serious Crime Agency [SOCA].
- UK was instrumental in forming the Financial Task Force [FATF] to develop a set of international AML /CTF to be followed consistently by all countries. Further, UK also acts as an observer to six of the eight FATF regional bodies around the globe.
- The 2006 Lander Review of the Suspicious Activity Report system figures out the vital role of feedback from all stakeholders.
- In 2005, the UK’s Financial Intelligence Unit handled 366 requests for information from other countries and the FSA’s enforcement division handled 282 requests for assistance from overseas regulators.
- Recent progress in Nigerian money laundering investigations has seen up to £1,200.000 returned and £ 500,000 in the process of being returned.
- In order to strengthen the existing portfolio of powers to dismantle the finances of serious money launderers and criminals, UK government has recently brought forward plans for a new type of flexible civil order, capable of being imposed against individuals or organizations, whereby a court would work to a civil standard of proof to conclude that a proposal effort was a must and proportionate way of minimizing the threat from organized crime.
- In the effort to combat money laundering activities in UK, Companies House help has been roped in to assist the law enforcement and to ensure that the potential data is available to tackle crime and terrorism and to facilitate the Company House to make use of the SAR.
- To combat money laundering activity , UK government has set up ‘The Money Service Business [MSB] as an integral part of UK financial service industry .The new system has made a record remittance around £ 2.3 billion in remittance to the developing world each year at low cost to UK consumers.
- The UK Treasury department is bringing forward a legislation to enable simplified due diligence and reliance by the end of the 2007, resulting in estimated savings up to £ 20 million per year.
- LEGAL ACTIONS INITIATED BY THE UK GOVERNMENT AGAINST MONEY LAUNDERING:
- UK government has introduced legislation to merge the Assets Recovering Agency and SOCA so as to make further inroads into the criminal economy.
- The Proceeds of Crime Act [POCA] extends international standard so as to deliver one of the most influential legal tools against money laundering. POCA now recognises single set of money offences applicable through out UK and now law enforcing agencies is no longer to demonstrate to show that the illicit money was derived from one particular kind of crime.
- UN [United Nations] and FATF [Financial Action Task Force] requirements are implemented through European Union legislation to make sure a level playing field between Member States.
- New Financial Reporting Orders were introduced in the Serious Organized Crime and Police Act 2005 to craft a Financial Reporting Order [RFO].
- INITIATIVES TO COMBAT MONEY LAUNDERING BY UK GOVERNMENT IN NEAR FUTURE:
- UK’s compliance with FATF [Financial Action Task Force] Recommendations is currently undergoing an evaluation, the result of which will be published in summer 2007.
- The third Money Laundering Directive was agreed and will come into effect in December, 2007.
- The Third EU Money Laundering Directive deep-rooted, risk-based principles in EU law. The directive will be implemented in the UK by the end of 2007.
- The Serious Crime Bill, currently before Parliament, includes provisions to facilitate data sharing where this is currently blocked by legislation. The bill facilitates sharing information on suspected frauds between the public and private sector, and also puts the National Fraud Initiative on a statutory footing.
- DETAILS REGARDING CRIMIAL ASSETS RECOVERY:
A record number amount of £ 96.5 million was recovered in 2005-06 and a target for 2006-2007 is set for £ 125 million .Rebalancing the Criminal Justice System set out a target to double the recovery to £ 250 million in 2009-2010 with a longer term target of £ 1 billion. The details of the recovery are illustrated in the following graph:
- UK’S THREAT ASSESSMENT:
- The UK Threat Assessment [UKTA]. This offers best picture of the trouble, prepared by law enforcement, intelligence and policy organizations and is updated annually.
- The National Intelligence Requirement [NIR] – This explains the gaps in current knowledge, prioritized according to enforcement, intelligence and policy organizations, and is updated annually.
- The UK Control Strategy – This offers a summary of how the UK should retaliate tactically to the concern and gaps outlined in the UKTA and NIRs.
- a series of ‘Programmes of Activity’- These co-ordinate activity targeted at particular threats in the UKTA including all relevant partners .[from the law enforcement , government , private sector and regulators]
- The emergence of SOCA, the UK’s capacity to take a coordinated approach to tackle the issue has been augmented.
- FUTURE CHALLENGES AND RECOMMENDATIONS:
Most of the Government expects the private sector to prevent, detect, and report money laundering. This has resulted in an increase for the demand for the professional expertise in creating effective controls. Business community, Law enforcement, regulators expects professional should help in protecting the international economy from the perils of the money laundering.
The money laundering problem is ever increasing and has the following attributes:
- Volume of the International Money Laundering is estimated at $1.50 trillion.
- K’s Gross domestic product is estimated at $1.30 trillion.
- A low estimate of global money laundering volume is estimated as $530 million.
In other words, the highest estimated international turnover of money laundering is equal to gross domestic product of U.K. Likewise; the lowest estimated international turnover of money laundering is equal to Spain’s domestic product.
If money laundering is left unchecked, it can deplete a Nation’s economy by altering the demand for cash, exchange rates to be more volatile and making interest rates to soar and resulting in high inflationary trend in the country where criminal elements are freely allowed to tread. Money laundering has been established as a bad element for the economy as it siphons away of billions of dollars a year from regular economic growth and pretense a real danger at a time when financial health of every country inflicts damage to the stability of the global market.
UK government is turning the financial system against terrorists and criminals, anti-money laundering and anti terrorist finance measures to safeguard the security as well the UK’s economy.
Now, the ball is on the courts of law makers and law enforcers of UK and they should exercise the fullest use of the financial powers now available where there is opportunity to lessen harm further. Thus, UK government agencies should vigorously continue their financial fight against crime and terrorism to protect the public and UK’s economy. The role of the risk based approach in delivering an effective and proportionate challenge to money laundering and terrorist finance is to be pursued by all the stakeholders and to make it a strategic priority for the UK government in the years ahead.
The UK Government should ensure that all stakeholders who are subject to AML/CTF controls have enough guidance available to assist them. UK government will bring forward new improved measures to root out abuse of the MSB [Money Service Business] sector aggressively and effectively and particularly HMRC [ HM Revenue & Customs] –which acts as both law enforcement agency and as supervisor in relation to the sector will be publishing an action plan by June 2007 with benchmark indicators of successes , explaining how activities and resources will be directed towards offering a greater prevention ,detection and disruption of money laundering and terrorist finance in the sector.
In order to strengthen the existing portfolio of powers to dismantle the finances of serious money launderers and criminals, UK government has recently brought forward plans for a new type of flexible civil order, capable of being imposed against individuals or organizations, whereby a court would work to a civil standard of proof to conclude that a proposal effort was a must and proportionate way of minimizing the threat from organized crime
UK government is planning to implement steps to fortify further linkage between asset freezing, other counter-terrorist finance measures and the Government’s wider counter-terrorism under the CONTEST strategy. UK government is to use its presidency of the FATF to examine the challenge that is facing by global AML/CTF architecture and to increase the effectiveness of the FATF in an ever-increasing and changing complex world. UK government will also be required to work with and alongside the FSRB’s, given their prime role as regional champion for AML/CTF reform.
15: LIST OF ABBREVIATION:
FinCEN – Financial Crimes Enforcement Network
FATF – Financial Action Task Force
FSA -Financial Services Authority
SOCA -Serious Organized Crime Agency
FATF – Financial Task Force
AML/CTF -Anti Money Laundering and Counter-Terrorism Financing.
MSB – The Money Service Business
POCA – The Proceeds of Crime Act
UN – United Nations
UKTA -UK Threat Assessment
NIR -The National Intelligence Requirement
 “The Financial Challenge to Crime and Terrorism “Retrieved March 16, 2007 from http://www.hm-treasury.gov.uk
 Tom Bawden, “UK’s bid to trace dirty money is ‘pathetic’. Times, 15, March, 2005.
 Phillip Thornton, [May 2006], “Meles Zenawi and Co, in huge money laundering and corruption: UK report” – www.ethiomedia.com.
 Katherine Griffiths, [18 Dec 2002] “RBS fined £750,000 for lax money laundering controls’, Independent, The [London].
 James Rossiter, [February, 2004] “Money-laundering rule changes ‘will trip up UK firms’, Evening Standard [London].
 Richard Freeman –Wallace, [March 2005] “Getting to Grips with Dirty Money ‘, The Journal, P.32.
 “Big Job Using Stolen Money “, Western Mail, February 24, 2006, p.9.