A Fair Cop

A simple guide to money laundering, confiscation and corruption

The development of the Anti-Money Laundering regime since the founding of the FATF thirty years ago, has created a global regime built around Financial Intelligence Units, Money Laundering criminal offences and national coordinating committees that respond to peer Evaluations. All credit to the FATF and the thousands of people who have made this happen and who are currently striving to make the regime “operationally effective”.

The European Union Directive

Unfortunately, both the FATF regime and the 5th Directive have separated the prevention of money laundering from enforcement against money launderers and, to some degree, separated theory from reality.

Let’s start with the EU 5th AML Directive which states:

“…the objective of this Directive, namely the protection of the financial system by means of prevention, detection and investigation of money laundering and terrorist financing”

Unfortunately, this objective is limited to “prevention, investigation and detection” but stops short of including the chronological activities that should follow, namely prosecution and confiscation. This is at odds with Article 44 of the Directive, which suggests that confiscation statistics should be collected as part of the way Member States “review the effectiveness of their systems to combat money laundering”. The connection in the Directive between anti money laundering and confiscating the proceeds of crime is not as clear as it could be and this has caused confusion.

Design fault

The definition of money laundering in the 5th Directive does not contain the words “money” or “laundering”. This is because money-laundering investigators do not investigate either “money” or “laundering” (and never have). This has been creating confusion since the original definition was agreed in 1988 at the United Nations Convention in Vienna.

The lack of understanding of the UN definition was transferred into national laws all around the world. National legal draftsmen and women around the world tried to bolt on an extra “money laundering” offence, failing to understand that the act of money laundering is an integral part of every crime motivated by financial gain. The result is a legal tangle that has made prosecution of international money laundering and the confiscation of the proceeds of crime across borders virtually impossible. The awkward truth is that the investigation, prosecution and confiscation side of “anti-money laundering” has been a comprehensive failure except for a handful of jurisdictions and in a disappointingly small number of international cases.

There’s no money or laundering in Money Laundering

It is reasonable to ask at this point, if money-laundering investigation doesn’t concern “money” or “laundering” what does it concern? Well the original 1988 definition (which is still unchanged) describes an all-encompassing activity that is integral to all acquisitive crime, i.e. the “acquisition, concealment or transfer of property”. At the time, there was a realisation among policy makers that criminals were starting to make very large amounts of profit from crime and that this was not being investigated or confiscated. It was also distorting the integrity of the financial system. The wide scope of the definition was intended to address an already large and growing problem. Fortunes from drug dealing and corruption were being paid into the financial system unchecked. Something had to be done.

A legal nightmare

Converting the international definition into national law has proved very difficult but it was not for lack of trying. In the UK, 15 years of legal tinkering were tried before the Proceeds of Crime Act, 2002 successfully converted the Vienna definition of money laundering into national law.[1] The problem is that money laundering is integral to all acquisitive crimes. It is therefore impossible to add it as an additional acquisitive crime. It is not a separate crime but the drafters tried to write it that way. As most countries already have a definitive Criminal Code the drafters felt they had to create a separate crime that was different to all the ones that were already listed. Thus, they inserted arbitrary thresholds and esoteric financial activity into money laundering definitions. It was tricky, but they did it anyway, creating riddles, wrapped in mysteries, inside enigmas[2]; meaningless crimes that defy investigation and prosecution that had been made up to meet an international requirement that was not understood.

The definition of money laundering

The fact we are on the 5th Directive indicates a policy failure of a fundamental nature and perhaps the failure stems from this misunderstanding of the definition of money laundering. So here is the definition (as at 1st June 2019) as set out in Chapter 1, Section 1, Article 1:

“For the purposes of this Directive, the following conduct, when committed intentionally, shall be regarded as money laundering:

(a) the conversion or transfer of property, knowing that such property is derived from criminal activity or from an act of participation in such activity, for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in the commission of such activity to evade the legal consequences of that person’s action;

(b) the concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property, knowing that such property is derived from criminal activity or from an act of participation in such activity;

(c) the acquisition, possession or use of property, knowing, at the time of receipt, that such property was derived from criminal activity or from an act of participation in such activity;

(d) participation in, association to commit, attempts to commit and aiding, abetting, facilitating and counselling the commission of any of the actions referred to in points (a), (b) and (c).”

Money laundering in action, the First Offence

When faced with a legal definition of this length it is useful to apply a scenario to see what sort of conduct is covered. Let’s get right back to basics; all the way back to the beginning in fact. In the Book of Genesis, Eve was in the garden chatting to the snake:

Snake: “Did God really tell you not to eat fruit from any tree in the garden?”

Eve: “We may eat the fruit of any tree in the garden except the tree in the middle of it, God told us not to eat the fruit of that tree or even touch it. If we do we will die.”

Snake: “That is not true, you will not die. God said that because he knows that when you eat it you will be like God and know what is good and what is bad”.

Eve saw how beautiful the tree was and how good its fruit would be to eat and she thought how wonderful it would be to become wise. So she took some of the fruit and ate it and she gave some to Adam and he also ate it.[3]

Applying this scenario to Article 1 it appears that when Eve took the fruit her conduct matches that described in Article 1 (c).

When Eve took the fruit, she became a money launderer. Note that there is no money in money laundering, just property, in this case at least one fruit. This assumes that defying God’s instruction is criminal activity and that Eve’s own acquisition and use of the property is covered in the same way as if she had received it from someone else.

A Second Offence

Eve did not, however, stop at taking the fruit; she ate it too, thereby committing the second kind of money laundering as defined in Article 1 (b). This conduct, eating the fruit, comprehensively disguises the true nature of the property and any rights pertaining to it. She could also have lied of course, if asked, and said that the fruit was not from the tree in the middle of the garden but from one of the other trees. The Directive does not say that the disguise or concealment has to be effective, cunning or even successful. If Eve had not been naked she could simply have popped the fruit in her pocket, where it would have been concealed. Just to bring us back into the modern world for a moment, if someone nips into a bank with a bag of cash they stole from another bank and they simply don’t mention its provenance, this is money laundering. In order to prevent this type of conduct Customer Due Diligence was invented, whereby bank staff ask about the origins of money being deposited.

Third Offence

Not content with just two offences of money laundering Eve then gave some of the forbidden fruit to Adam. This conduct is covered by Article 1(a); transfer of the property, knowing its criminal origin, for the purpose of disguising it. Adam, at the point of receipt, knew the fruit’s origin and, as God had directly told him not to eat the fruit, he could hardly escape the consequences. Adam therefore committed Article 1 (c) when he acquired the fruit, followed swiftly by Article 1 (b), when he ate it.

Summary of offences

To summarise: Eve committed 1(c), acquisition; 1(b) concealment and then 1(a) transfer. Adam committed 1(c) and 1(b). Committing any one of these is now a crime according to the UN Convention.

The remaining conduct, envisaged by the Directive’s Article 1(d), was committed by the snake. The snake’s tempting of Eve is covered by the Directive’s wording: “counselling the commission of any of the actions referred to in points (a), (b) or (c).” Other conduct is also envisaged under Article 1(d) but in fairness to the snake it would be a stretch to accuse it of “participation in, association to commit, attempts to commit and aiding, abetting, facilitating”.

Summary of investigation

When it comes to investigating and detecting, God’s omnipotence is a distinct advantage when compared to the resources of today’s police and prosecutors. Here’s how his investigation went:

In the evening of the day when they had eaten the forbidden fruit God found Adam and Eve hiding in the garden:

God: “Did you eat the fruit that I told you not to eat?”

Adam: “The woman you put here with me gave me the fruit and I ate it”

God to Eve: “Why did you do this?”

Eve: “The snake tricked me into eating it”.

The importance of circumstantial evidence

It seems that there was no honour amongst thieves even then. No honour amongst money launderers I should say. Of course, God didn’t need to get the confession; that is just there to help us, mere mortals, understand what has gone on. God knew what had happened through omnipotence and through observable factual circumstances. In this case a couple hiding their nakedness with some fig leaves. The UN conventions[4] establish that circumstantial evidence can be adduced as evidence of money laundering conduct.

Serious consequences

My main point in matching the Directive’s definition to a simple story is to show that the money laundering definition describes something very ordinary. It is not a product of complex financial manoeuvrings, but this appears to have been the assumption by legal drafters around the world. In short, they tried to describe money laundering as some kind of weird financial magic instead of routine criminal activity. In doing so they unintentionally created a myth that money laundering itself is complex and difficult to understand, when in fact it was just their definitions that were so.

As we proceed towards implementing the 5th AML Directive it would be good to analyse why the first four failed. There may be many reasons but I put forward two. One is explained above and national AML committees could usefully spend time considering what the money laundering definition actually says and how their law currently addresses the “acquisition, concealment or transfer of property that is the proceeds of crime”. Many Criminal Codes and jurisprudence can confiscate criminal cash but are quite incapable of confiscating an apartment bought with that cash. I have explained this hierarchy of confiscation here.

Misallocation of resources

Secondly the Directive, perhaps bravely, attempts to ring-fence public expenditure on anti-money laundering thereby unintentionally depriving investigators and prosecutors of resources. Article 32(3) is a call to properly fund Financial Intelligence Units. This states that each national Financial Intelligence Unit “shall be provided with adequate financial, human and technical resources in order to fulfil its tasks.”

No FIUs can permanently freeze or confiscate criminal assets or convict anyone of anything. They just analyse money-laundering activity up to the point where a crime is detected and then hand the information over to criminal investigators for asset tracing and confiscation. The police and prosecutors responsible for this are not in the FIU but in national Asset Recovery Offices. The Directive is silent about resources for them.

This is how crime is allowed to pay

Worse still, the EU Confiscation Directive of 2014, which covers Asset Recovery Offices is also silent about resources. The implication that has been drawn by all Member States is that FIUs need adequate resourcing but AROs (and other competent authorities) do not. The result is that money laundering is analysed to the point of detection by adequately resourced FIUs and then sent for investigation by desperately underfunded teams. There, the effort to tackle money laundering is quietly shelved by competent but under resourced authorities.

In Genesis, God was adequately resourced and punished Adam, Eve and the snake. In the real world, we have eaten the forbidden fruit, discovered “what is good and what is bad” and decided to stop short of doing something effective about it. There is a flaw in the plan and that flaw is the missing Article in both the 5th AML Directive and the Confiscation Directive, the one that should read:

“The ARO and supporting competent authorities shall be provided with adequate financial, human and technical resources in order to fulfil their tasks.”

It doesn’t have to be this way.

The EU and the FATF have both separated the money from the crime, with fatal results for the recovery of the proceeds of crime. They have created well-resourced institutions that monitor criminal money that are, in practical terms, completely disconnected from crime, criminals, policing and prosecutors. Crime and the proceeds of crime are completely severed from each other. The legislation is separate, the statistics are published separately, the committees meet separately, the operational planning is separate.

From a financial professional’s perspective, it is completely obvious that the competent authorities should want to confiscate the proceeds of crime and indeed the handful of law enforcement financial investigators and prosecutors wholeheartedly agree. But for the vast majority of criminal justice professionals, especially at a senior level, confiscation is an imposition, an extra bolt-on, written into law with a complete disregard for the reality of criminal justice objectives and processes. Consequently, a perfectly sensible idea to stop crime from paying, has been shelved in Europe and across the world.

Solutions

Money laundering is integral to all acquisitive crime. The FATF need to recognise that the artificial separation of the proceeds of crime from crime, in their own recommendations, publications, structures, mutual evaluations and strategy is central to the problem. The EU should recognise that the Directive to support the FIUs has the direct consequence of starving the AROs and other competent authorities.

Most importantly the FATF and the EU need to recognise that the competent authorities are not merely under resourced to confiscate assets, nor are they merely indifferent to confiscation. They are, in fact, opposed to the confiscation of criminal assets. They see it as extra work that is not integral to their objectives. They have been encouraged in this belief by the FATF which has, historically, recommended that extra offences be added to Criminal Codes and Statutes, when they should have been integrated into existing crimes.

You may wonder how I know this. It has been my job to speak to senior law enforcement officers (and prosecutors) about confiscation of criminal assets, across the world for the last ten years. That is what they told me.

A version of this article was first published in the excellent Money Laundering Bulletin from Informa in 2015. My thanks to Timon Molloy for agreeing to allow me to update and publish this and other articles.


[1] For example: Criminal Justice Acts 1988 & 1993, the Drug Trafficking Act 1994 and the Proceeds of Crime Act 1995

[2] Churchill’s explanation of Russian foreign policy in 1939

[3] Sunrise good news bible, Collins, 2004

[4] Article 3(3) of the UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances and Article 6(f) of the United Nations Convention against Transnational Organized Crime. Article 28 United nations Convention against Corruption.

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