Berwin Leighton Paisner LLP reporting on the case state that Mr and Mrs Shah (the “Claimants”) were customers of the Bank. Between 20 September 2006 and 28 February 2007, the Bank delayed the execution of four separate payment instructions given by the Claimants, including an instruction to transfer approximately US$28 million. The reason for the delay was that the Bank held a suspicion that the funds in the Claimants’ account were criminal property and it had therefore made an authorised disclosure to SOCA seeking consent to make the payments. In each case, whilst the Bank was waiting for a response from SOCA (SOCA has 7 working days to respond), the Bank told the Claimants that it was complying with its statutory obligations but declined to provide any further information to the Claimants or their solicitors. Once consent had been given, the Bank complied with the payment instructions except for one instruction which the Claimants had previously cancelled.

The Claimants lodged a claim against the Bank for breach of contract contending that the Bank’s failure promptly to carry out the payment instructions and to explain the reasons for not doing so had caused them substantial losses (over US$300m) in Zimbabwe. It was alleged that, upon hearing rumours that Mr Shah was suspected of money laundering in the UK, the Zimbabwean authorities became suspicious, froze and then seized Mr Shah’s assets.

At trial the court was required to consider the following key questions:

Did the Bank suspect money laundering? and
Did the Bank have a duty to provide information about the delay?

Mr Justice Supperstone of the Queen’s Bench Division rejected the Claimants’ claim in its entirety.

The findings related to high-risk people, especially those whose political positions meant they were vulnerable to corruption. Coutts clients include the Queen, pop stars and sports personalities. It is owned by Royal Bank of Scotland.

Coutts agreed to settle at an early stage in the process. It said it was confident that its anti-money laundering processes were now robust.

“Since the FSA first raised its concerns, we have implemented a number of improvements to prevent any recurrence of these failings,” said Rory Tapner, chief executive of the wealth division of Royal Bank of Scotland. “We remain committed to ensuring that our systems and controls are robust and counter the risk of financial crime in all the markets in which we operate.”

The fine followed the FSA’s visit to Coutts in October 2010 as part of its review into how banks were managing situations in which there was a high risk of money laundering. The regulator said that Coutts had failed to check the source of funds when prospective new clients tried to open accounts. It also failed to check up on any intelligence about its existing or prospective clients and had not kept information on those clients up to date.

The FSA said there had been deficiencies in nearly three quarters of high-risk customers’ files.

“Coutts’ failings were significant, widespread and unacceptable,” said Tracey McDermott, the FSA’s acting director of enforcement and financial crime. “Its conduct fell well below the standards we expect and the size of the financial penalty demonstrates how seriously we view its failures.”

Some commercial electronic verification companies may contact you stating that all client due diligence verification must now be done electronically making paper copies no longer acceptable. This is just a marketing ploy and is not correct in any shape or form.

The law and guidance on conducting client due diligence remain as set out in the Money Laundering Regulations 2007 and issued guidance  You should continue to make your judgments based on the risk assessment of the client and/or the services they offer.

The Regulations are clear that verification of a customer’s identity maybe by documents, data or information, or even a combination of different types of evidence. Newly released FATF Recommendations do recognise the use of technology in conducting business and the need for technology to be involved in the customer due diligence process. This is not at the expense of more traditional methods.

We, at BTC Corporate & Compliance are great believers in electronic verification; however it is just one of many tools available to the regulated firm, which they can use in the given circumstance. This is one reason why we do not commit firms to contracts and minimum usage when using our electronic verification services.

Serious tax crimes have now been added to the list of predicate offences. The smuggling offence has also been clarified to include offences relating to customs and excise duties and taxes. These changes mean that financial institutions and other regulated business types need to be on the lookout for suspected tax evasion by their clients. This was an area of concern during the consultation phase as many felt that the many, if not most, private sector regulated businesses  lacked the requisite expertise to detect tax crimes and that the playing field remains far from level creating an inequality and further burden for businesses faced with the task of digging out possible criminality. Whereas many countries did not may tax crime a reportable offence, all countries will now need to ensure that tax crimes are included in their anti-money laundering legislation to track down the proceeds of fiscal offences.

Another area of contention surrounds the identification of beneficial ownership. Despite the intention of clarifying and simplifying the requirement to identify ultimate beneficial owners (UBOs) the corporate veil remains. The new requirements for nominee directors and shareholders to disclose their status to the company registry, or be licensed, will start to reduce the risks in relation to the camouflaging of ownership.

The FATF have finally included domestic politicians in their definition of PEPs removing what was a somewhat ridiculous anomaly. The focus has increased globally with the risk of corruption high on the agenda of the G20. Non-conviction based asset forfeiture now also features on the agenda.

The former nine Special Recommendations on Terrorist Financing are now incorporated into the main 40 Recommendations reflecting the close connection between terrorist financing and anti-money laundering measures. A new addition of proliferation financing has been added to assess countries’ compliance with targeted financial sanctions of UN Security Council Resolutions that focus on the financing of proliferation activities, specifically targeting Iran and North Korea.

The revised standards are a first step and countries now need to implement their recommendations into law with the new standards being incorporated into evaluations by February 2013. In the UK we would expect the fourth European Directive in be in place by this date, followed closely by our own revised Money Laundering Regulations.

The long awaited revised FATF Recommendations on International Standards on Combatting Money Laundering and the Financing of Terrorism and Proliferation was finally published on 16 February. Following several rounds of consultation the revised Recommendations contain no real surprises in the publishes outcome, but a lot of disappointment has been aired by various groups who feel that the FATF has not gone far enough to tackle corruption and tax evasion despite the FATF’s best intentions.

Serious tax crimes have now been added to the list of predicate offences. The smuggling offence has also been clarified to include offences relating to customs and excise duties and taxes. These changes mean that financial institutions and other regulated business types need to be on the lookout for suspected tax evasion by their clients. This was an area of concern during the consultation phase as many felt that the many, if not most, private sector regulated businesses  lacked the requisite expertise to detect tax crimes and that the playing field remains far from level creating an inequality and further burden for businesses faced with the task of digging out possible criminality. Whereas many countries did not may tax crime a reportable offence, all countries will now need to ensure that tax crimes are included in their anti-money laundering legislation to track down the proceeds of fiscal offences.

Another area of contention surrounds the identification of beneficial ownership. Despite the intention of clarifying and simplifying the requirement to identify ultimate beneficial owners (UBOs) the corporate veil remains. The new requirements for nominee directors and shareholders to disclose their status to the company registry, or be licensed, will start to reduce the risks in relation to the camouflaging of ownership.

The FATF have finally included domestic politicians in their definition of PEPs removing what was a somewhat ridiculous anomaly. The focus has increased globally with the risk of corruption high on the agenda of the G20. Non-conviction based asset forfeiture now also features on the agenda.

The former nine Special Recommendations on Terrorist Financing are now incorporated into the main 40 Recommendations reflecting the close connection between terrorist financing and anti-money laundering measures. A new addition of proliferation financing has been added to assess countries’ compliance with targeted financial sanctions of UN Security Council Resolutions that focus on the financing of proliferation activities, specifically targeting Iran and North Korea.

The revised standards are a first step and countries now need to implement their recommendations into law with the new standards being incorporated into evaluations by February 2013. In the UK we would expect the fourth European Directive in be in place by this date, followed closely by our own revised Money Laundering Regulations.

The cost of money laundering and underlying serious crime is very large, estimated between 2 and 5% of global GDP. The revision will enable national authorities to take more effective action against money laundering and terrorist financing at all levels – from the identification of bank customers opening an account through to investigation, prosecution and forfeiture of assets. At the global level, the FATF will also monitor and take action to promote implementation of the standards.

The revised FATF Recommendations now fully integrate counter-terrorist financing measures with anti-money laundering controls, introduce new measures to counter the financing of the proliferation of weapons of mass destruction, and they will better address the laundering of the proceeds of corruption and tax crimes. They also strengthen the requirements for higher risk situations and allow countries to take a more targeted risk-based approach.

Giancarlo Del Bufalo, the President of the FATF, said:

“Adoption of the revised Recommendations demonstrates countries’ shared commitment to fight money laundering, terrorist financing and the financing of the proliferation of weapons of mass destruction.”

“The revised Recommendations include requirements for stronger safeguards in the financial sector, strengthened law enforcement tools and improved international cooperation.”

The main changes are:

Combating the financing of the proliferation of weapons of mass destruction through the consistent implementation of targeted financial sanctions when these are called for by the UN Security Council.

Improved transparency to make it harder for criminals and terrorists to conceal their identities or hide their assets behind legal persons and arrangements.

Stronger requirements when dealing with politically exposed persons (PEPs).

Expanding the scope of money laundering predicate offences by including tax crimes.

An enhanced risk-based approach which enables countries and the private sector to apply their resources more efficiently by focusing on higher risk areas.

More effective international cooperation including exchange of information between relevant authorities, conduct of joint investigations, and tracing, freezing and confiscation of illegal assets.

Better operational tools and a wider range of techniques and powers, both for the financial intelligence units, and for law enforcement to investigate and prosecute money laundering and terrorist financing.

For more information on the FATF Recommendations, please visit the publication page on www.fatf-gafi.org/recommendations

HM Treasury (HMT) have published the results of their consultation on the UK’s implementation of European Union (EU) Regulations 44/2009 and 45/2009, requiring Currency Exchange Offices and Money Transmitters to have procedures in place selectively to check euro notes and coins using an approved method.

Following the consultation, the Government has decided to create a new criminal offence for failure to comply with the checking requirements of the EU regulations in relation to counterfeit euros.

You can read the full report by following the link below.

UK enforcement measures for EU Regulations 44/2009 and 45/2009 on counterfeit euros on the HMT website (Opens new window)

With the agreement of Richard Braysher of 2 High Road, Eastcote, Pinner, Middlesex, HA5 2EW, the Investigation Committee made an order that the member be severely reprimanded, fined £5,000 and pay costs of £1,280 with respect to a complaint that:

1 Between 28 September and 3 March 2010 Mr Braysher failed to comply with written assurances he had given on or about 28 September 2006 following a Quality Assurance Visit that he would:

Under the Money Laundering Regulations 2007:
a. have procedures in place to perform on-going client due diligence;
b. attend external training on the money laundering regulations and;
c. undertake a compliance review.

The Court of Appeal in London ruled on 13 October that HSBC Private Bank did not have to disclose the identity of employees who had made internal reports which had led to suspicious activity reports (“SARs”) being filed with the authorities unless there was a firm suggestion on bad faith on their part.

The judgment is the result of satellite litigation arising from the more famous 2010 case of Shah v HSBC, in which the Court of Appeal ruled that parties which had suffered loss as a result of SARs being filed were entitled to demand proof from the regulated institution responsible that the suspicion on which the SAR was founded existed.

On the particular facts of the original case, the High Court ordered HSBC to identify the employees by function, but not by name. The Shahs appealed the court’s refusal to order the disclosure of the names of the employees, and HSBC cross- appealed against the court’s finding that its obligation to make standard disclosure required their names to be revealed in the first place (with the names only being protected by PII, and not as of right).

The Judgement of the Court of Appeal
Within HSBC there were three stages of AML reporting:
1. The relationship manager with a particular client would report any AML suspicion to the compliance department;
2. The compliance department would report the matter internally to the MLRO;
3. The MLRO would then, if appropriate, file an SAR with SOCA.

HSBC had disclosed a series of memos, internal reports, and similar documents. With the exception of the MLRO, the identity of all employees concerned had been redacted; they were identified only by the department (client relationship, compliance or MLRO) that they worked for. The documents did however reveal the information based on which the MLRO formed his suspicion.

The Test for Disclosure

The court found that the redacted identities of the employees concerned was not material on which HSBC relied to prove its case. As a result, the relevant question was: is the material either material which would adversely affect HSBC’s case or material which would support the Shahs’ case?
In answering the question it was important to remember that the issue remaining in the wider case of Shah v HSBC after the previous decision of the Court of Appeal was a narrow one: did HSBC have a genuine suspicion at the time when the SARs were filed? Accordingly, the Shahs did not put forward a positive “case”; they simply sought to test the bank’s case that it did have such a suspicion. For that reason, the court ruled that the only circumstance in which the employee identities would be disclosable was if they adversely affected HSBC’s case.
The Shahs had stated that two employees of HSBC (“Ms S” and “Mr J”) might have had the motivation to make an internal AML report in bad faith. One had asked for a loan from Mr Shah and been refused; the other had received an abusive email from him after a transaction had been delayed. The Shahs submitted to the court that if any of the anonymous employees concerned in making an internal report turned out to be Ms S or Mr J, they might be able to allege bad faith.

Refusing disclosure, Lord Justice Lewison commented:
The more I listened to the explanation of why the claimants wanted the names, the more convinced I became that, to use the familiar cliché, this was a fishing expedition… [the Shahs] did not say that even if Ms S’s name was revealed as one of the sources [the Shahs] would be able to assert bad faith; merely that they might be able to do so. Even that possibility was only tentatively advanced. It is all speculation and surmise.

The court concluded that, absent a firm suggestion of bad faith by the Shahs, HSBC was entitled to withhold the identity of the staff concerned as being irrelevant to the matter under dispute. For that reason, the bank did not have to rely on the doctrine of public interest immunity.
Conclusion

This important judgment provides reassurance to employees of firms in the regulated sector of England and Wales that their identities will be protected if they make internal AML reports, unless there is a firm suggestion that in doing so they acted in bad faith. It also makes clear that there is no absolute requirement to disclose the identity of the MLRO who makes an external SAR, although as a regulated firm is now required to show that it had suspicion if its reporting is challenged, it may be that it will be necessary for the MLRO (if no one else) to come to court and explain why he made the report that he did.

Former ATT President

As a result the Treasury has announced that stocktakers who do not carry out bookkeeping or other accountancy services will be exempt from the Money Laundering Regulations (MLR) 2007 from Saturday 1 October 2011.

This means that they will no longer need to register with HMRC.

This decision also supports the Government’s policy of reducing regulatory burdens on businesses.

HMRC continue to encourage stocktakers to be diligent and report suspicious activity to the Serious Organised Crime Agency (SOCA). More information can be found at www.soca.gov.uk.

Stocktakers who offer bookkeeping or other accountancy services will stay on HMRC’s register.

From Monday 3 October 2011 HMRC will be writing to the stocktaking businesses already registered with them to give the opportunity to de-register for MLR.

If you do not receive a letter from HMRC but wish to deregister, you should write to the registration team to let them know. Your letter should include details of your registration number and the reason you wish to deregister.

The address for applications to deregister is:

MLR Registration Team
7th Floor Central
Alexander House
Southend on Sea
Essex
SS99 1AG