Presentation by Dr Nicholas Ryder Professor in Financial
Presentation by Dr Nicholas Ryder Professor in Financial Crime Head of Global Crime, Justice and Security Research Group Tuesday 15 th October 2019 “The Fifth Money Laundering Directive - a step too far? ”
Abstract • The aim of this presentation is to provide a critical analysis on the aims and scope of the Fifth Money Laundering Directive (5 MLD), • The presentation briefly identifies the amendments that the 5 MLD makes to the Fourth Money Laundering Directive (4 MLD) and • It focuses on the regulation of virtual currencies and appraises the likely impact of 5 MLD with specific regards to terrorism financing.
Contents 1. Global Anti-Money Laundering (AML) Strategy 2. Key Institutions and provisions: i. United Nations ii. The European Union iii. The Financial Action Task Force 3. 4 MLD 4. 5 MLD 5. Regulation of virtual currencies 6. Case Study – Terrorism Financing in the United Kingdom 7. Findings
Global Anti-Money Laundering Strategy • This can be divided into eight parts: Implementation of international legal AML instruments, Recognition and implementation of international best practices and industry guidelines, The adoption of a risk based strategy, Creation of AML authorities, Criminalisation of money laundering, Mutual legal assistance, Preventative measures and Confiscation of the proceeds of crime (Ryder, 2012)
The United Nations 1. Vienna Convention (1988) i. Criminalised money laundering of proceeds of drug trafficking 2. Palermo Convention (2000) i. Criminalised money laundering of serious criminal offences 3. Corruption Convention (2003) i. Criminalised the laundering of the proceeds of bribery and corruption • These focus on the proceeds of crime, • Referred to as the profit reporting model (Ryder, 2018), • Fit for purpose to tackle terrorism financing?
The United Nations • United Nations Office on Drugs and Crime: • responsible for carrying out the Global Programme against Money-Laundering, Proceeds of Crime and the Financing of Terrorism, • Set up in 1997, • A wide range of objectives and • Developed model legislation.
The European Union • Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime (1990), • the Warsaw Convention (2005), • Six Money Laundering Directives (1991, 2005 , 2015, 2018 and 2018) and • Fit for purpose to tackle terrorism financing?
The Financial Action Task Force Established in 1989, Produced a set of 40 recommendations are not legally binding, Sanctions can be imposed on countries that fail to follow the recommendations, • Remit extended to include terrorist financing since 9/11 (9 Special Recommendations) and • Extended in February 2012 to include bribery and corruption. • •
4 MLD • The aim of 4 MLD was to improve the EU’s efforts to tackle money laundering and terrorism financing, • To ensure that the EU achieved the international standards of the FATF, • Member States required to implement 4 MLD by June 26 2017, • Removed the automatic right to exempt certain customers or investors from due diligence checks and • extending due diligence to domestic politically exposed persons.
4 MLD • Required corporations and legal entities, trusts and other similar structures to maintain adequate, accurate and current information on their beneficial ownership and • Under 4 MLD, beneficial ownership could be extended to those who have as little as 25% a stake in a body.
5 MLD • The Directive seeks to improve transparency and the preventative framework to counter the increasing threat posed by money laundering and terrorism financing, • Member states are obliged to implement 5 MLD by January 2020 and • Importantly, 5 MLD covers includes a number of areas that were not within the scope of 4 MLD.
5 MLD • Areas covered include: • The regulation of virtual currencies and pre-paid cards to prevent terrorism financing, • Measures to increase transparency regarding beneficial ownership and trusts, • Improvements to the safeguards covering transactions both to and from countries deemed to be a high risk and • Ensuring that centralised national bank and payment account registers or central data retrieval systems are accessible in all member states.
5 MLD • Defined cryptocurrencies as “a digital representation of value that can be digitally transferred, stored or traded and is accepted… as a medium of exchange”, • Cryptocurrencies are subject to the counterterrorist financing and anti-money laundering obligations at outlined in 4 MLD and it • provides that Financial Intelligence Units are granted the power to obtain the addresses and identities of owners of virtual currency to tackle the anonymity provided for users of cryptocurrencies
Regulation of virtual currencies • Financial Action Task Force • Acknowledge threat posed by virtual currencies: “create new opportunities for criminals and terrorists to launder their proceeds or finance their illicit activities” “there is an urgent need for all countries to take coordinated action to prevent the use of virtual assets for crime and terrorism”.
Regulation of virtual currencies • FATF recommended that: • “All jurisdictions should urgently take legal and practical steps to prevent the misuse of virtual assets … applying risk-based AML/CFT regulations to virtual asset service providers”. • FATF revised Recommendation 15, which includes new definitions of ‘virtual assets’ and ‘virtual asset service providers’.
Regulation of virtual currencies • The United Kingdom: • ‘Crypto. UK’ have developed a voluntary code of conduct • “in line with anti-money laundering regulations … [and its] members commit to undertaking due diligence checks on platform users to protect against illegal activity, including the financing of terrorism”. • This is based on self-regulation within the cryptoasset, which is insufficient. • Cryptoasset providers are under no statutory obligation to report any suspicious activity via a DATF SAR to the NCA.
Case Study – Terrorism Financing • Terrorist financing has been referred to as ‘reverse money laundering’, which is a practice whereby ‘clean’ or ‘legitimate’ money is acquired and then funnelled to support terrorism.
Sources of terrorism financing • State Sponsors of terrorism: • Sudan, Iran, Syria and North Korea • Iran rejected new counter terrorist financing law (November 2018) • Private terrorist moneys may be classified into two categories : • legitimate, • and unlawful funds.
Sources of terrorism financing • • • Corporate donations, Non-profit organisations, Drug trafficking, Extortion, Organised retail theft, Kidnappings for ransom, Oil refining, Misapplied charitable donations, Islamic non-remittance systems, Sale of conflict diamonds and Cryptocurrencies.
Virtual currencies and financial crime • The transition from traditional sources of terrorism financing towards online sources has been facilitated by the ease at which would-be terrorism financiers are able to access the internet: • UN estimated that 47% of the global population were able to gain access to the internet via a variety of mechanisms, • 90% of the UK population have internet access and • By 2019, over two thirds of the global population will have access to a mobile device. • Therefore, any person who has access to the internet could be a terrorism financier.
Virtual currencies and financial crime 1. Association between cryptoassets and financial crime: i. Silk Road, ii. Liberty Reserve, iii. Western Express International and iv. Danske Bank.
Virtual currencies and financial crime
Virtual currencies and terrorism financing
Virtual currencies and terrorism financing
The United Kingdom • Terrorism Act 2000 (s. 19) • DATF SARs seek to provide financial intelligence (FININT) • Regime littered with problems: Interpretation of suspicion, Quality of SARs, Compliance costs, Quality of information provided and Defensive reporting.
The United Kingdom • Problems recognised by Home Office, Law Commission and Financial Action Task Force, • Hopelessness of DATF SARs is illustrated by their inability to provide FININT that could be used to prevent acts of terrorism, • “retrospective SARs are less helpful in terrorism financing cases” (Law Commission, 2018, 57).
The United Kingdom • There are three weaknesses: • cryptoassets do not fall within the regulatory remit of the Financial Conduct Authority, • cryptoassets providers do not fall within the scope of the DATF SARs regime and • the system of the supervision and regulation of cryptoassets is inadequate and it has been hindered by a start stop policy.
Solutions? • • • Is Joint Money Laundering Intelligence Taskforce the way forward? Seeks to improve the sharing of information between reporting entities and law enforcement agencies, Positive results, JMLIT has become a global forerunner in its efforts to improve the exchange of information, Social media monitoring could assist with the voluntary exchange of information and would represent a far more cost effective mechanism than extending DATF SARs regime.
Findings • UK needs to hastily brings forward legislative measures to include this funding mechanism within the scope of the DATF SARs regime. • There is no doubt that terrorism financing via social media platforms, the ‘Dark Web’ and heavily encrypted mobile devices is an unprecedented problem, • The ability of any Facebook user to transfer money to a ‘friend’ is almost impossible to police,
Findings • This research advocates the extension of the information sharing platform, JIMLT, to include social media providers and • The inclusion of social media platforms within this exchange of information model would represent a bold and innovative step into the regulatory unknown and it would go some way to redressing the current loopholes and uncertainty in the scope of the DATF SARs regime.
- Slides: 30