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Find here the second keynote speech delivered at Taxlinked’s Beyond Borders conference in Barcelona back in October of this year.

Dr. Nicholas Ryder, a Professor in Financial Crime at UWE Bristol’s School of Law, talked to us about the 5th Anti-Money Laundering Directive and how it’s not fit for purpose particularly when it comes to regulating and monitoring virtual currencies and crypto assets.

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And here are some of the presentation’s main highlights!

On the Profit-Reporting Model for Financial Crime

Nicholas Ryder: “If we look in a little bit more detail at the UN provisions, what we can see is that the UN has clearly adopted what we call a profit-reporting model. So within the AML framework, the key objective of the preventative measures is to identify the proceeds of profits of crime. So if you were to take your classic Hollywood film where your gangster or your money launderer will deposit a million pounds in the bank, essentially the profit-reporting model is looking to actually tackle that form of financial crime. However, in 2018, we published a paper, which began to question the effectiveness of these reporting obligations imposed across the European Union and by the FATF recommendations…the key question of the presentation is: Is that fit for terrorism financing?”

On Terrorism Financing & Anti-Money Laundering Reporting

Nicholas Ryder: “Terrorism finance is reverse money laundering. So this is where a terrorist will use clean money and make it into dirty money, so it is in complete contrast of the way a traditional money laundering person will actually operate. But what you have to bear in mind is that the international provisions…are geared towards looking for the proceeds of profits of crime.”

“One of the best examples that I can give you of that not working is how 9/11 was financed. Khalid Sheikh Mohammed, currently detained in Guantanamo Bay by the Americans, sent several wire transfers to Suncrest bank in Tampa Bay, all over the $10,000 threshold imposed by the 1970 Bank Secrecy Act. Those transactions were identified by the bank as part of their currency transaction-reporting regime. So if a transaction is above a certain financial threshold, the bank has to report those to FINCEN. In the 2000s, FINCEN received over 1.3 million currency transaction reports—a needle in the haystack… So you can see clearly how the AML reporting model is not fit for purpose for tackling terrorism financing.”

On the Major Problems with the UK’s Terrorism Financing Legislation

Nicholas Ryder: “In the UK, we call them Defense Against Terrorist Financing Suspicious Activity Reports (DATF SARs)… But the regime is littered with problems. For example, how do you define suspicion? According to one Court of Appeal decision, it is a mere gut instinct. I was a lawyer, I'd like the law to give us clarity and examples, but what does that mean? A mere gut instinct? Does that mean a Welshman comes into the bank; you think he's a bit suspicious, I’ll report him?”

“The quality of SARs. If you talk to UK companies who are involved in this—the major banks, in particular—they will be very familiar with the obligations but they’re loose with something called defensive reporting, where if they don't submit the reports, they're going to get fined. The bank will get fined and the MLRO will be fined. This is what we call credible deterrence. So the UK’s Financial Conduct Authority will fine the bank and also the money laundering reporting officer (MLRO). Even if there's no evidence of money laundering at all.”

“Compliance costs are a massive issue. The banks would argue that the regime is very disproportionate; it's very unfair. I'd agree with that. And what's intriguing is FATF would like the UK to submit more and more suspicious activity reports. They don't think there's enough. So you have a situation where FATF want the UK to have more and more SARs submitted. The National Crime Agency is struggling with the number of SARs submitted because of these particular queries. So you have lack a definition of suspicion, defensive reporting, increased compliance costs, and the actual quality of information.”

On JMLIT and Its Limitations

Nicholas Ryder: “So is there a solution? Well, I would suggest that there is and that is called JMLIT, which is the Joint Money Laundering Intelligence Task Force. And this looks to adopt a different exchange of information process where it's voluntary. There's no legal obligation to report like in relation to some tax issues; it simply is voluntary. So what you end up having is what's called a super suspicious activity report or a super SAR.”

“Now JMLIT covers 98% of all UK bank accounts. And to show how this works, within 12 hours of the London Borough market terrorist attack in 2017-2018, the police were able to identify the credit card used to purchase the actual hire van, and that it wasn't a broad terrorist cell. Now, that is the only example JMLIT have released in terms of national security, I'm assuming, but that to me illustrates what the benefits could be of this particular exchange of information that is voluntary. So because of having this exchange of information, JMLIT has acted in over 60 arrests of 1000 investigations and 2000 bank accounts have been shut down with links to and allegations of money laundering, corruption, bribery and also fraud.”

“However, there's a slight problem. It doesn't apply to all sectors. It doesn't apply, for example, to the property sector. And, of course, the property sector in the UK has strong allegations about money laundering, which are very well documented by several other projects. It doesn't apply to law firms. It doesn't apply to financial advisors. So what I've concluded in this paper is that JMLIT needs to be expanded to incorporate maybe some more reporting entities like law firms, like IFAs, like estate agents. But I'd even go bolder and say, why don't we use social media platforms? If you can now make payments via Facebook Messenger, which opens up to billions of potential transactions, even if you don't submit a SAR, if you could exchange the information of a person—I appreciate that there are concerns raised about privacy, I understand that—but this might give you a more holistic understanding of the would-be money launderer and/or terrorism financing.”

Happy reading!