Select Committee on International Development Minutes of Evidence

Examination of Witnesses (Questions 173 - 179)




  173. Can I first of all welcome you all to the Committee this morning and thank you for coming. I also thank you for your written submissions you have made to us, which we have been studying in some confusion, I am afraid. Corruption is a new subject to us, but it is a very important one because the evidence given to the Committee is that corruption is the biggest inhibiter of foreign direct investment in third world countries and that unless we can tackle the question of corruption we are not going to be get foreign direct investment in those countries. Foreign direct investment is the engine of development, and, therefore, without them we are not going to be able to realise the international objectives of reducing poverty by half by the year 2015. So, to us, as a Committee, the International Development Committee, this is a very important discussion that we are going to have this morning and one which lies at the heart of the attack on poverty. That is our remit and our concern about this issue. We, of course, are very much concerned with what we call corruption, that is money laundering as the result of corruption, therefore, bribery and that kind of operation, in third world countries, and, indeed, in this country. You, of course, in your various ways are concerned with the money laundering for a number of other purposes like drug traffickers and so on. So, we need to know about actions that you are taking, because, of course, what we are primarily interested in is involved with what you do on other fronts. You will find, I think, in our questions that some are specifically directed to one of your organisations or the other, and others overlap. Because there are so many organisations involved in this, we would like your comments from your perspective as we go along. Can I start off the questions, and we can develop things as they emerge? One of the worries that we have is that there is no real assessment that we can find of what the scale of money laundering is in the United Kingdom. None of the evidence that we have taken from the Treasury or anyone else has elicited an answer to that question. So we would like to ask, how and why do the proceeds of corruption arrive in the United Kingdom, and which financial institutions and sectors are the most attractive to money launderers? How big a problem do the Joint Money Laundering Steering Group, the FSA—Financial Services Authority—and the National Criminal Intelligence Service perceive money laundering to be? I have tried to avoid using acronyms. This is a subject which is absolutely inundated with acronyms and nobody really knows what they are talking about if we do not spell them out. I wonder who would like to start that. Perhaps the FSA—there is me using the acronym immediately—would like to start on that, and that would be Mr Thorpe, perhaps?
  (Mr Thorpe) Indeed, it is, Chairman. Thank you very much for the opportunity to kick off. I apologise for the acronyms and if I slip into that habit please call me to attention. I would like to point out that we are not the Foods Standards Agency, though often we wish we were. I should start by recognising, with the Committee, that this is a relatively new area for many of us. I do not believe we, or any of the predecessor organisations to the FSA, have appeared in front of this Committee before. We do come to this with something of an incomplete brief, and we are trying to develop our response to, probably, a wider set of concerns. If I may, we are possessed, under the new legislation—which was passed earlier this year and which is yet to be in power—with the Financial Crime Objective. I will not go into the details of that, but part of that covers the money laundering brief. So we come with a slightly narrower prospective than this Committee. Some of the questions you started with, Chairman, unfortunately are questions which we are asking ourselves, and one of the things we have inherited from the past is a rather incomplete picture of the various institutions and their responses to money laundering. I trust the Committee members will appreciate that we have a domain that covers regulated institutions. They are institutions who have gone to the trouble of choosing to be regulated. Almost by definition, they are not people who are most keen to avoid the scrutiny of government or its agencies. We cover, amongst that broad sweep of institutions, banks, insurance companies, asset managers, brokers and a whole host of smaller entities, and there is no composite view of how extensive the problem of money laundering is in respect of that wide stretch of institutions. We have slightly more information about the banking side because there has been more work done there. Tim Sweeney is here, as you know, on behalf of the British Bankers' Association, and maybe he can speak to that more extensively, but I can give you some thoughts on that. We have declared our ignorance in a rather public way recently by undertaking a survey of a cross-section of the institutions that we are inheriting, very much to try and be able to determine how extensive the arrangements in place for money laundering detection might be, how aware institutions that we regulate in this country are of the issues relating to money laundering, and how prepared they are to repel the enthusiasms of money launderers who might wish to use those institutions. That survey went out two or three weeks back, and it will be early in the New Year before we start to see the results for that. We are looking rather prospectively as to how we respond to this new Financial Crime Objective and how we better reinforce our current responsibilities and new responsibilities in respect of money laundering, and we are not possessed of sufficient information at this stage to know how that will be. In respect of your quite understandable desire to put some perspective on the extent with which institutions are blessed with money laundering problems, I think my fellow witnesses will probably be able to give you some specifics in respect of their areas, but we are looking primarily at systems and controls in institutions. That has been our focus to date and has primarily been constrained to banks. In that regard, our experience is that there are a relatively small number of institutions, against the total we regulate—I think last year something in the region of 40 institutions out of the banking community of 400 or so—where there were issues relating to their systems and controls. That is not evidence of money laundering, but it is evidence that there is some problem with the systems that will detect money laundering. We are, again, still some distance from providing you with hard details about the use that is being made of United Kingdom institutions in respect of money laundering. I am afraid it then becomes problematic to then describe how attractive these institutions might be, or the United Kingdom markets might be, to those who would wish to launder the proceeds of crime, or indulge in other forms of financial crime. The only thing I can observe in this regard, Chairman, is that London and the United Kingdom markets generally represent one of the biggest financial centres in the world, and there is enormous flow of capital through our markets. The markets are renowned for their accessibility, for their professionalism and for their capacity to absorb volume. It is slightly trite, but I think it has been borne out by the experience that we do have, that if you are in the business of trying to hide needles, you look for large haystacks, and the blessing, or curse, that United Kingdom markets have is that they present a very large haystack. That, for us, means that we have a substantial amount of preventative work to do, looking at systems and control, but it also means it is extremely difficult to pin down details of activity which it is deliberately engaged in to obscure and to hide. In terms of detail in respect of different sectors, I could offer my colleagues.

  174. Perhaps Tim Sweeney first. You are being regulated, are you not, at the present time by the FSA?
  (Mr Sweeney) We are.

  175. The FSA is going to bring in friendly societies, building societies, what else?
  (Mr Thorpe) Lawyers and accountants, actuaries—a personal favourite of mine—credit unions, all banks, all insurance companies, insurance advisers, stock brokers, anybody involved in any form of financial activity is likely to be called, and recently a series of products, pre-paid funeral plans, long-term care and mortgages have been added to our list, so those engaged in those would also be brought.

  176. Wow.
  (Mr Thorpe) We have no evidence, I might add, Chairman, that those pre-paid funeral plans are engaged in money laundering.

  177. Unlikely customers. Mr Sweeney, do you know what the extent of the money laundering is? I do not suppose that you do. You do not go in for it, presumably?
  (Mr Sweeney) Not personally, Chairman. I do not want to spend a lot of time passing the ball, but you may find our colleagues will have a better view than I will. I am here this morning with two hats. One is as representative of the Joint Money Laundering Steering Group, which is the group of trade associations which come together in order to provide guidance, and also the British Bankers' Association of which I am Director-General. You asked three questions: How much? How does it get here? Who is the most vulnerable? If I start with the third of those and recognise that undoubtedly my sector is one of the most vulnerable and one of the most interesting to the money launderers. That is partly because we deal in cash, but it is partly also—to pick up one particular point that Phillip Thorpe made—that the first version of the guidance notes was introduced in 1990 and the UK regulatory system, the Treasury, and also the banking sector, has done a huge amount of work on money laundering prevention. The guidance notes in the United Kingdom regulatory structure are widely regarded as best practice in many parts of the world. Because of that and because of the size of our market place—that Phillip Thorpe also referred to—it is undoubtedly a good thing in the money launderers scale of "good practice" to pass money through London. That means that we expect that there will be flows through London, they will be heavily disguised because the whole objective of money laundering is to try to avoid detection. We do recognise that we are vulnerable and that is why we give so much attention to it. How much? My view is that it is, by definition, an impossible question, because not until you have stopped it will you be certain how much. There will be an element which is not detected which is passing through and is impossible to measure. I have seen estimates which extrapolate . . . the level of detected crime and the proceeds are extrapolated from the amount of crime you think you are detecting. I regard those as wholly spurious. We start from the proposition that it does not actually matter how much it is. If there is any, that is too much and we ought to be doing what we can to prevent it. In terms of your second question: How does it arrive? The answer is: In a variety of fashions. A lot of it will pass through London through the correspondent banking relationships, where one bank opens an account with another bank and uses that account to pass it through. That gets it through the London chain and gets the London stamp of respectability without having to go through all the problems of opening accounts, knowing your customer etc., which is the defence against money laundering. That means that the relationships between regulatory authorities in different jurisdictions and relationships between financial institutions in different jurisdictions is a fundamentally important way of combating money laundering.

  178. According to the Swiss Federal Banking Commission who have been looking at the Abacha funds at Swiss banks—they published this report on 30 August 2000—it puts Britain as the foremost flow of the money laundered funds from Abacha, and the origin, they say, is US$123 million that a number of banks in Britain are involved with, and the destination of this money, 219 British banks are involved. So, in the Swiss Federal Banking Commission's view, there is a great deal of money going through Britain, as you have both said, but you do not know what the figure is?
  (Mr Sweeney) I have no way of verifying those numbers. In principle it does not surprise me that there are heavy flows through London. The issue will be whether those flows are detected by the systems and controls that Phillip Thorpe was referring to, and whether they are reported on under the suspicious reporting of transactions to NCIS. We also do have to bear in mind the sophistication of money launderers. Some money launderers do wander in with cases of cash, but many are extremely sophisticated and very good at hiding their funds. That is what they do. If funds are coming through London with a very respectable provenance, it may well be that they will pass through undetected, and it might be obvious to the other side. The simple fact that they pass through London does not mean there is any culpability on London, but, equally, when you run one of the largest financial centres in the world, and one of the most respectable and one of the most accepted, the fact that large flows of all sorts of money passes through is not of itself a surprise.

  179. Tony Worthington wants to come in, and Andrew Rowe, but I think we ought to hear from the National Criminal Intelligence Service first, if you would not mind. Can you give us your perspective on this, as to what the quantity is and where it comes from?
  (Mr Abbott) Thank you very much, Chairman. Can I start by talking about criminals and criminality briefly, because you are looking at issues around criminals and criminality by virtue of corruption? Criminals are motivated by profit and risk. They are looking for high profit and low risk, and if they do get caught, the lowest possible penalty. They are also extremely innovative. Criminals do run like big business, but ignore all the rules, of course. They use the latest communications, they use the latest ways of doing business, they are fast moving and they will exploit globalisation, they will exploit reductions in trade barriers. Things that are developed for all the right reasons will be exploited by criminals. To directly answer your questions as best I can: How much? Of course, the secretive nature of money laundering almost prevents that from being answerable. However, some organisations have given it a shot. The International Monetary Fund announced, a couple of years ago, that money laundering accounts for between 2 and 5 per cent of the gross domestic product of the world.

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