Examination of Witnesses (Questions 173
TUESDAY 21 NOVEMBER 2000
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 FSAFinancial Services Authorityand
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 FSAthere
is me using the acronym immediatelywould 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 legislationwhich
was passed earlier this year and which is yet to be in powerwith
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 regulateI
think last year something in the region of 40 institutions out
of the banking community of 400 or sowhere 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, actuariesa
personal favourite of minecredit 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.
(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 alsoto pick up
one particular point that Phillip Thorpe madethat 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 placethat
Phillip Thorpe also referred toit 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
banksthey published this report on 30 August 2000it
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.