The Disruption of International Organised Crime (International and Comparative Criminal Justice)

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THE DISRUPTION OF INTERNATIONAL ORGANISED CRIME

This book is dedicated to my loving parents, Fong and Sok Fan my caring brother, José my wonderful husband, Ben

The Disruption of International Organised Crime An Analysis of Legal and Non-Legal Strategies

ANGELA VENG MEI LEONG University of London, UK

© Angela Veng Mei Leong 2007 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the prior permission of the publisher. Angela Veng Mei Leong has asserted her right under the Copyright, Designs and Patents Act, 1988, to be identified as the author of this work. Published by Ashgate Publishing Limited Gower House Croft Road Aldershot Hampshire GU11 3HR England

Ashgate Publishing Company Suite 420 101 Cherry Street Burlington, VT 05401-4405 USA

Ashgate website: http://www.ashgate.com British Library Cataloguing in Publication Data Leong, Angela The disruption of international organised crime : an analysis of legal and non-legal strategies. (International and comparative criminal justice) 1. Transnational crime - Prevention 2. Organized crime Prevention I. Title 364.1'06 Library of Congress Cataloging-in-Publication Data Leong, Angela, 1977The disruption of international organised crime : an analysis of legal and non-legal strategies / by Angela Leong. p. cm. -- (International and comparative criminal justice) Includes bibliographical references and index. ISBN 978-0-7546-7066-7 1. Organized crime. 2. Transnational crime. 3. Money laundering. 4. Terrorism--Finance. 5. Commercial crimes. I. Title. II. Title: Disruption of international organized crime. K5240.L46 2007 345’.02--dc22 2007021821 ISBN-13: 9780754670667

Printed and bound in Great Britain by MPG Books Ltd, Bodmin, Cornwall.

Contents List of Cases List of Statutes and Statutory Instruments Foreword – Barry A.K. Rider Preface List of Abbreviations 1

Introduction Aims and Significance Chapter Analysis

2

Organised Crime: Definitional and Theoretical Analysis Paradigms of Organised Crime Organised Crime as Nationwide Conspiracy Organised Crime as Ethnic Groups Elite Criminals: State-Organised Crime Professional Criminals: White-Collar Crime Disorganised Illegal Business: Enterprise Theory Organised Crime: A Global Phenomenon Organised Crime – Terrorist Nexus Conclusions

3

Criminal Finance: Money Laundering and Terrorist Financing Money Laundering What is Money Laundering? Why Choose Money Laundering? Traditional Money Laundering Process Different Channels for Money Laundering The Scope of the Problem Terrorist Financing Sources of Funding Laundering of Terrorist Funds Detecting and Tracing of Terrorist Funds UK Domestic Measures Against Criminal Finance Money Laundering Offences Terrorist Money Laundering Rules and Regulations: Detection and Prevention of Money Laundering

ix xv xix xxi xxiii 1 2 3 7 7 9 10 12 13 14 17 20 25

29 30 30 32 32 35 40 42 43 44 45 47 47 48 51

vi

4

5

The Disruption of International Organised Crime

International Measures Against Criminal Finance United Nations Council of Europe European Union Financial Action Task Force International Monetary Fund and World Bank Egmont Group Interpol, Europol and World Customs Organisation Private Measures Against Criminal Finance Wolfsberg Group Basel Committee on Banking Regulation and Supervisory Practices European Banking Federation Conclusions

55 55 57 57 58 61 62 62 63 63 64 65 66

Traditional Law Enforcement Response to Organised Crime Development of the Law Enforcement Structures in the United Kingdom What is Policing? Functionality of Policing Police v Military Traditional and Non-Traditional Policing Law Enforcement Response to Organised Crime Understating the Problem of Organised Crime National Response and Inter-Agency Approach to Organised Crime Control International Initiatives to Organised Crime Control Terrorism as a National Security Matter Special Branch Security Service Secret Intelligence Service Government Communications Headquarters Conclusions

69 69 69 70 72 73 77 77

Traditional Legal Response to Organised Crime Criminalising Specific Offences as Organised Crime: The American Experience Racketeering Influenced and Corrupt Organisations Act 1970 Conspiracy Legislation in Other Countries Criminalising Membership of an Organised Crime Group Legal Framework on Organised Crime Control in the United Kingdom Criminalisation of Criminal Finance Money Laundering: The Criminal Law Dimension The Confiscation Regime Conclusions

91

78 81 83 84 85 87 87 88

91 91 97 98 99 102 102 104 110

Contents

6

7

8

Controlling Organised Crime: The Traditional Criminal Justice System Adequacies of the Law Enforcement Structures Historical Response to Organised Crime Changing Attitude of Law Enforcement Agencies Multi-Agency Approach Complexity of Multi-Agency Cooperation Adequacies of the Criminal Legal Framework Limitations of the Money Laundering Legislation Limitations of the Confiscation Regime Investigation, Prosecution and Trial Process Adequacies of the Money Laundering Regulatory Regime Regulations and Rules: Detection and Prevention of Money Laundering Limitations of the Anti-Money Laundering Disclosure Regime Conclusions

vii

113 113 113 114 115 117 118 119 120 121 123 123 129 135

Controlling Organised Crime: The New Perspectives Innovative Assets Recovery and Disruption Strategies Assets Recovery Agency Confiscation Regime under POCA 2002 Civil Recovery and Forfeiture Proceedings under POCA 2002 Taxation Powers under POCA 2002 Money Laundering Offences under POCA 2002 Wider Investigative Powers under POCA 2002 Proactive Approach to Combating Organised Crime The Role of Intelligence: Comparison between the United Kingdom and the United States Reforming Criminal Trials: ‘Plea Bargaining’ and Queen’s Evidence Cooperation of Witnesses: National Witness Protection Programme Private Security Conclusions

137 137 139 140 143 149 151 160 164

Legal Implications and Efficacy of ‘Disruption Strategies’ Legal Implications of ‘Disruption Strategies’ European Convention for the Protection of Human Rights and Fundamental Freedoms Human Rights and Financial Services Regulation Civil Recovery Powers and Human Rights Challenges Confidentiality and Duty of Disclosure Defamation and Third Party Liability Money Laundering Regulations and Data Protection Act Civil Recovery and Taxation Powers: Are They Working? Evaluation of the Civil Recovery Regime Reasons for Variances Evaluation of the Taxation Regime

181 181

165 174 175 177 178

181 183 184 186 190 191 193 195 195 196

The Disruption of International Organised Crime

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9

Is the Risk-Based Anti-Money Laundering Strategy Sufficient? Anti-Money Laundering Strategy Risk-Based Approach: Role of the Financial Services Authority Conclusions

198 198 199 203

Conclusions and Policy Implications: The Way Forward Proceeds of Crime Act 2002: A Wake-Up Call Lessons Learnt for Further Improvements Serious Organised Crime Agency: A 21st Century Strategy Conclusions and Policy Implications

205 205 207 209 211

Bibliography Index

219 239

List of Cases Adams v Cape Industries Plc [1991] 1 All ER 929 108 Agip (Africa) Ltd v Jackson [1992] 4 All ER 385 135 Agosi v United Kingdom [1987] 9 EHRR 185 Air Canada v United Kingdom [1995] 20 EHRR 150 185 Ali Shipping Corporation v Shipyard Trogir [1999] 1 WLR 314 186 Annesley v Earl of Anglesea [1743] LR 5 QB 317 186 Arcuri v Italy [2001] Application No. 54024/99 185 Assets Recovery Agency v Green [2005] EWHC 3168 (Admin) 145 Attorney-General v Blake [2001] 1 AC 268 186 Attorney-General v Observer Ltd [1990] 1 AC 109 186 B v Avon and Somerset Constabulary [2001] 1 WLR 340 184 Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2000] 4 All ER 221 30, 134 Bank of Credit and Commerce International SA v Ali & others (No 2) [1999] 4 All ER 83 30 Bank of Scotland v A Ltd [2001] WCA Civ 52 189 Barclays Bank Plc v Taylor [1989] 3 All ER 563 189 Berd v Lovelace [1577] 21 ER 33 187 Berger v Pierce 933 F 2d 393 [6th Cir 1991] 97 Bowman v Fels [2005] EWCA Civ 226 188 Brandenburg v Seidel 859 F 2d 1179 (4th Cir 1988) 97 Brown v Scott [2001] 2 WLR 817 183 Butler v United Kingdom [2002] Application No. 41661/98 185 Butt v HM Customs and Excise [2001] EWHC Admin 1066 185 C v S [1999] 2 All ER 343 189 Campbell and Fell v United Kingdom [1984] 7 EHRR 165 184 Chief Constable of Merseyside Police v Lee Hickman and Lynne Marie Preston [2006] EWHC 451 (Admin) 148 City and County of San Francisco v Philip Morris 957 F Supp 1130 (ND Cal 1997) 97 Commissioners of Customs and Excise v Duffy [2002] EWHC 425 147 Connelly v Director of Public Prosecutions [1964] AC 1254 185 Customs and Excise Commissioners v Han and another and other appeals [2001] STC 1188 185 Diamonds Plus Inc v Kolber 960 F 2d 765 (8th Cir 1992) 95 Director General of Fair Trading v Pioneer Concrete (UK) Ltd [1994] 3 WLR 1249 128 DPP v Scarlett [2001] 1 WLR 515 109

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DPP v Williams and O’Hare [1994] 98 Crim App R 206 173 Director of Assets Recovery Agency v Singh [2005] EWCA Civ 580 146 El Ajou v Dollar Land Holdings Plc [1994] 2 All ER 685 135 Engel v The Netherlands [1976] 1 EHRR 647 184 Equifax Europe Ltd v the Data Protection Registrar (unreported 28 June 1991) 192 Ferrazzini v Itlay [2001] STC 1314 198 Finers v Miro [1991] 1 WLR 35 187, 188 Firestone v Galbreath 976 F 2d 279 (6th Cir 1992) 97 Georgiou v United Kingdom [2001] STC 80 198 Goldsmith v Customs and Excise Commissioners [2001] 1 WLR 1673 185 Gora and others v Customs and Excise Commissioners [2003] All ER (D) 208 185 Grantham and Mann v American Safety Products 831 F 2d 596 (6th Cir 1987) 97 Grogan v Platt 835 F 2d 844 (11th Cir 1988) 97 HJ Inc v Northwestern Bell 492 US 229 [1989] 94 Hoang v France [1993] 16 EHRR 53 159 Holmes v Securities Investor Protection Corp. 503 US 258 [1992] 97 Hussein v Chong Fook Kam [1970] AC 942 153 Initial Services Ltd v Putterill [1968] 1 QB 396 186 James & Son Ltd v Smee [1955] 1 QB 78 152 James v Meow Media Inc 90 F Supp 2d 798 (WD Ky 2000) 97 Johnson v Whitehouse [1984] RTR 38 109 K Ltd v National Westminster Bank Plc [2006] EWCA Civ 1039 153, 189 King v United Kingdom (No.2) [2004] STC 911 198 King v Walden [2001] STC 822 198 Lancaster Community Hospital v Antelope Valley Hospital 940 F 2d 397 97 (9th Cir 1991) Lightening Lube, Inc v Witco Corp. 4 F 3d 1153 (3d Cir.1993) 95 Lingens v Austria (No.1) [1982] 4 EHRR 373 159 Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 135 Lister v Perryman [1870] LR 4 HL 521 109 Liverpool CC v Irwin [1977] AC 239 186 Lord Saville of Newdigate v Harnden [2003] NI 239 184 M v Italy 70 DR 59 [1991] 185 Mahon v Rahn (No. 2) [2000] 4 All ER 41 191 Mann v Nash 16 TC 523 197 McDonough v National Home Insurance Co. 108 F 3d 174 (8th Cir 1997) 95 McIntosh v Lord Advocate [2001] 3 WLR 107 108, 185 Mendelovitz v Vosicky 40 F 3d 182 (9th Cir 1994) 97 Midwest Grinding Co Inc v Spitz 976 F 2d 1016 (7th Cir 1992) 94 Minister v Smith [1927] AC 193 197 Moore v Eli Lilly & Co 626 F Supp 365 (D Mass 1986) 97 Osman v United Kingdom [1999] 29 EHRR 245 176 P v P [2003] EWHC 2260 188 PC and Lindsay Woodward and Hiscox v Commissioners of Inland Revenue 16 TC 43 197

List of Cases

xi

Phillips v United Kingdom [2001] Crim LR 817 108 Pedrina v Chun 97 F 3d 1296 (9th Cir 1996) 97 R (Director of the Assets Recovery Agency) v Belton [2005] NIQB Ref No. COGF5334 185 R (Director of the Assets Recovery Agency) v Charrington [2005] EWCA Civ 334 185 R (Director of the Assets Recovery Agency) v He & Cheng [2004] EWHC 3021 (Admin) 185 R (Director of the Assets Recovery Agency) v Keenan [2005] NIQB Ref No. COGC5362 146 R (McCann and others) v Crown Court at Manchester [2001] 4 All ER 264 184 R (Mudie and Another) v Dover Magistrates’ Court [2003] QB 1238 185 R v A and B [1999] 1 Cr App R (S) 52 174 R v Ali and Others [2005] EWCA Crim 87 158 R v Allen [2001] UKHL 45 183 R v Atobrah [2005] EWCA Crim 3321 106 R v Bakewell [2006] EWCA Crim 2 142 R v Barnham [2005] EWCA Crim 1049 105, 106 R v Barwick [2001] Crim LR 52 105, 106 R v Benjafield [2002] 2 WLR 325 108 R v Butt [1999] CLR 414 159 R v Central Criminal Court, ex parte Francis & Francis [1989] 1 AC 346 187 R v Clarke [1969] 53 Cr App R 438 154 R v Clymore 515 F Supp 1361 [1981] 171 R v Colle [1992] 95 CAR 67 159 R v Comiskey [1991] Crim LR 484 105, 106 R v Cuthbertson [1980] 2 All ER 401 104, 105 R v Da Silva [2006] EWCA Crim 1654 153 R v David Lee Jones [2006] EWCA Crim 933 142 R v Derby Magistrates Court, ex parte B [1995] 4 All ER 526 187 R v Dickens [1990] 2 QB 102 107 R v Director of Public Prosecutions, ex parte Kebilene and Others [2000] 2 AC 326 159 R v El-Kurd [2001] Crim LR 234 (CA) 119, 158 R v Flahiff [1998] 123 CCC (3d) 79 (Que. C.A.) 164, 174 R v Gabriel [2006] EWCA Crim 229 142 R v Gibson [2000] Crim LR 479 155, 159 R v H [2003] 1 All ER 497 184 R v Haisman, Lant and Miller [2003] EWCA Crim 2246 106 R v Harmer [2005] EWCA Crim 104 158 R v Hunt [1987] AC 352 159 R v Hussain [2006] EWCA Crim 2405 107 R v Hussain & Bhatti [2002] Crim LR 407 119, 154, 158 R v Jagdev [2002] EWCA Crim 1326 106 R v Johnson [1990] 91 Cr App R 332 105 R v Jones [2006] EWCA Crim 2061 142

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R v K [2005] EWCA Crim 619 109 R v Kelly [2000] Crim LR 392 106 R v King [1985] 7 Cr App R (S) 227 174 R v Knights & Maguire [2003] EWCA Crim 2222 106 R v Ko Chi Yuen [1994] HKLY 198 108 R v Lambert [2001] 3 All ER 577 159 R v Lingham [2000] Crim LR 696 106 R v Looseley [2001] UKHL 53; [2002] 1 Cr App R 29 173 R v Macmaster [1999] 1 CAR 402 154 R v Mason and Others [2002] EWCA Crim 385 173 R v McKinnon [2004] Crim LR 485 106 R v Miranda [2000] Crim LR 393 106 R v Montila [2004] UKHL 50 158 R v Omar [2004] EWCA Crim 2320 109 R v Peverett [2001] 1 Cr App R 27 174 R v Pisciotto [2002] EWCA Crim 1592 106 R v Ramzan [2005] EWCA Crim 2331 158 R v Redbourne [1993] 96 Cr App R 201 105 R v Rezvi [2002] 1 All ER 801 108 R v Ripley [2005] EWCA Crim 1453 105, 106 R v Ross [2001] 2 Crim App R (S) 484 106 R v Saggar [1997] 1 Cr App R (S) 167 174 R v Saik [2002] EWCA Crim 2936 158 R v Saik [2006] UKHL 18 158 R v Sakavickas [2004] EWCA Crim 2868 158 R v Scragg [2006] EWCA Crim 2916 142 R v Sinfield [1981] 3 Cr App R (S) 258 174 R v Siracusa [1989] Crim LR 712 135, 154 R v Smith [2001] UKHL 68 106, 186 R v Smurthwaite and Gill [1994] 98 Cr App R 437 199 R v Soneji [2005] 4 All ER 321 107 R v Stannard [2005] EWCA Crim 2717 107, 109 R v Steele and Shevki [2001] 2 Crim App R (S) 40 106 R v Turner [1970] 2 WLR 1093 174 R v Versluis [2004] EWCA Crim 316 106 R v W [1998] STC 550 (CA (Crim Div)) 186 R v Williamson [2003] EWCA Crim 644 106 Raimondo v Italy [1994] 18 EHRR 237 185 Re a Defendant, The Times, 7 April 1987 110 Re H and others [1996] 2 All ER 391 108 Re Sagger [2005] EWCA Civ 174 108 Religious Technology Center v Wollersheim 971 F 2d 364 (9th Cir 1992) 94 Reves v Ernst & Young 507 US 170 [1993] 95 River City Markets Inc v Fleming Foods West Inc 960 F 2d 1458 (9th Cir 1992) 95 Roper v Taylor Central Garages (Exeter) Ltd [1951] 2 TLR 284 152 Royal Brunei Airlines v Tan [1995] 2 AC 378 135

List of Cases

xiii

S v Millar [2001] SC 977 184 Salabiaku v France [1988] 13 EHRR 379 159 Salomon v Salomon [1987] AC 22 108 Saunders v United Kingdom [1996] 23 EHRR 313 162, 163, 164, 183, 187 Seager v Copydex Ltd [1967] 1 WLR 923 186 Sedima, SPRL v Imrex Co 473 US 479 [1985] 97 Sekhon and Others v R [2002] EWCA Crim 2954 106 Sheldrake v DPP [2003] 2 All ER 497 159 Southern v AB 18 TC 59 197 Tayeb v HSBC Bank Plc [2004] 4 All ER 1024 189 Taylor v Director of the Serious Fraud Office [1999] 2 AC 177 190 Tayab v HSBC Bank Plc [2004] EWHC 1529 189 Torquay Hotel Co. Ltd v Cousins [1969] 2 Ch 106 135 Tournier v National Provincial and Union Bank of England [1924] 1 KB 461 189 Turner v Royal Bank of Scotland Plc [1999] 2 All ER (Comm) 664 189 United States v $4,255,625.39 [1982] 551 F Supp 314 31 United States v Eight (8) Rhodesian Statutes 449 F Supp 193 (CD Cal 1978) 96 United States v Foster 868 F Supp 213 [1994] 172 United States v Kravitz 738 F 2d 102 (3rd Cir.) cert denied, 105 S. Ct. 1752 [1984] 96 United States v Navarro and Nunez-Vasquez 145 F 3d 580 [1998] 171 United States v O’Hagan [1997] 117 S Ct 2199 165 United States v One Single Family Residence 683 F Supp 783 (SD Fla 1988) 96 United States v Rooks, Cook and Patterson 1999 US App LEXIS 11045 174 United States v Salerno 794 F 2d 64 (CA2 1986) 96 United States v Singleton 144 F 3d 1343 (10th Cir 1998) 174 United States v Steinhorn 739 F Supp 268 [1990] 172 United States v Turkette 452 US 576 [1981] 97 Walsh v Loughman [1991] 2 VR 351 153 Walsh v The Director of the Assets Recovery Agency [2005] NICA 6 185 Warner v Metropolitan Police Commissioner [1969] 2 AC 256 155 Webb v United Kingdom [2004] Application No. 56054/00 185 Welch v United Kingdom [1995] 20 EHRR 247 108 Weld-Blundell v Stephens [1919] 1 KB 520 186 Western Associates Ltd Partnership, ex rel Ave Associates Ltd Partnership v Market Square Associates 235 F 3d 629 (DC Cir 2001) 94 Westminster City Council v Croyalgrange Ltd [1986] 83 Cr App R 155 152 Wymyss v Hopkins [1875] LR 10 QB 378 186

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List of Statutes and Statutory Instruments Australia Australian Crime Commission Act 2002 Criminal Assets Recovery Act 1990 European Community Banking Consolidation Directive 2000/12/EC Banking Coordination (Second Council Directive) Regulations 1992 European Convention on Human Rights 1950 Money Laundering Directive 91/30/EEC Money Laundering Directive 2001/97/EC Money Laundering Directive 2006/48/EC Hong Kong Organised and Serious Crime Ordinance (Cap 455) Society Ordinance of Hong Kong (Cap 151) International International Convention for the Suppression of Terrorist Bombings (15 December 1997; A/RES/52/164) International Convention for the Suppression of the Financing of Terrorism (9 December 1999; A/RES/54/109) International Terrorism and Unlawful Interference with Civil Aviation (October 1985; AGN/54/RES/1) United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (20 December 1988) United Nations Convention against Transnational Organised Crime (15 November 2000; A/RES/55/25) United Nations Security Council Resolution 1368 (12 September 2001; S/RES/1368) United Nations Security Council Resolution 1373 (September 2001; S/RES/1373) United Nations Security Council Resolution 1390 (16 January 2002; S/RES/1390) Ireland Criminal Assets Bureau Act 1996 Proceeds of Crime Act 1996

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Singapore Societies Act of Singapore (Cap 311) United Kingdom Anti-Terrorism, Crime and Security Act 2001 Banking Act 1987 Cinemas Act 1985 Companies Act 1985 Copyright Patents and Designs Act 1988 Criminal Attempts Act 1981 Criminal Justice (International Co-operation) Act 1990 Criminal Justice (Terrorism and Conspiracy) Act 1998 Criminal Justice Act 1987 Criminal Justice Act 1988 Criminal Justice Act 1993 Criminal Justice and Police Act 2001 Criminal Justice and Public Order Act 1994 Criminal Law Act 1977 Customs and Excise Management Act 1979 Data Protection Act 1998 Drug Trafficking Act 1994 Drug Trafficking Offences Act 1986 Financial Services Act 1986 Financial Services and Market Act 2000 Forfeiture Act 1870 Freedom of Information Act 2000 Human Rights Act 1998 Immigration and Asylum Act 1999 Insolvency Act 1986 Insolvency (Northern Ireland) Order 1989 Intelligence Services Act 1994 Interception of Communications Act 1985 International Criminal Court Act 2001 Local Government (Miscellaneous Provisions) Act 1982 Misuse of Drugs Act 1971 Money Laundering Regulations 1993 Money Laundering Regulations 2003 National Loans Act 1968 Northern Ireland (Emergency Provisions) Act 1996 Northern Ireland Act 1998 Police and Criminal Evidence Act 1984 Powers of Criminal Courts Act 1973 Prevention of Terrorism (Temporary Provisions) Act 1989 Prevention of Terrorism Act 2005 Proceeds of Crime (Northern Ireland) Order 1996 Proceeds of Crime Act 2002

List of Statutes and Statutory Instruments

Proceeds of Crime Act 2002 (Cash Searches: Code of Practice) Order 2002 Proceeds of Crime Act 2002 (Recovery of Cash in Summary Proceedings: Minimum Amount) Order 2002 Regulation of Investigatory Powers Act 2000 Road Traffic Act 1988 Security Service Act 1989 Security Service Act 1996 Serious Organised Crime and Police Act 2005 Taxes Management Act 1970 Terrorism Act 2000 Trade Marks Act 1994 Video Recordings Act 1984 United States Omnibus Crime Control and Safe Streets Act 1968 Organised Crime Control Act 1970 Racketeering Influenced and Corrupt Organisations Act 1970 Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT Act 2001)

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Foreword It is not always particularly pleasurable to write a foreword to a book. Often one perhaps does not know the author, let alone their work, particularly well and, in the nature of things, usually the book that one is ‘forwarding’ is still in manuscript. However, in the present case, I consider the task not only an honour, but a pleasure. Dr Angela Leong is one of the most able and perceptive criminologists of her generation. She has combined the skills that are perhaps best found in the applied social sciences, to analyse, and perhaps more importantly profile, the development of organised crime and the way in which it may be best disrupted. In this process, she is able to bring to bear, in a unique way, her additional skills as a lawyer and an investigator. The result makes compelling and useful reading. While, depending upon one’s definitional preference, organised crime is as old as Satan’s conspiracy, it is only relatively recently criminologists, let alone lawyers, have taken any real interest in the topic. In countries such as the United States and Italy, but surprisingly not Japan, that have long and colourful traditions of organised crime, there has been occasional academic interest, but most has tended to the theoretical rather than the applied. Indeed, now that we have to actually develop intelligence and other interdictive procedures on the basis of models in part refined from the academic literature, we are discovering just how little application was on these musings. The study of organised crime as a specific phenomenon was not only rare, but even discouraged. Rather like economic crime, it was beyond the ken of most dedicated criminologists, particularly given restricted access to information and the desirability of an inter-disciplinary approach. Of course, the lawyers are at best only interested on a case by case basis and rarely engage with other than the immediate. In the result, organised and economic crime are not well developed in academic or research terms. There is little knowledge and even less expertise. As one who has also worked in and around a number of governmental agencies, in many jurisdictions, over the year, ignorance is not a preserve of the academy. The misunderstandings as to the nature and dynamics of organised crime control, has led to the fashioning of inappropriate weapons and responses. These have imposed almost intolerable burdens on many aspects of legitimate life and had precious little results in curbing the entrepreneurial zest of the traffickers and exploiters. Indeed, in many instances we have simply succeeded in transferring risk and responsibility to those who do nothing other than pursue proper and lawful activities – whether in the financial sector or elsewhere. The application of these largely failed approaches to terrorists, particularly of the kind that trade under the banner of Islam, has proved to be a manifest failure. Consequently, a work, such as that by Dr Leong, where a dispassionate yet well informed analytical discussion is presented not only on

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the structural and institutional issues of control, but on the efficacy of intervention particularly predicated on the financial assets of such organisations, is not only timely but overdue. Dr Leong prepared much of this work as a researcher based at the Institute of Advanced Legal Studies, University of London. However, she has drawn heavily on her work, in a similar capacity at the University of Hong Kong and as a researcher for the Treasury Select Committee of the House of Commons. Her applied knowledge is derived from her experience as an accredited financial investigator for the Asset Recovery Agency and as a lawyer working on major corruption cases referred by the Government of China. In most of this activity, I have had the honour and privilege to work closely with her. The result of her efforts, which she alone rightly deserves credit, is a testament to her perception and understanding of the disruption of serious crime. It is a contribution that stands alone. Professor Barry A. K. Rider Jesus College Cambridge 6 February 2007

Preface The purpose and aim of this book is to examine whether the deviant structures of organised crime, which are capable of operating transnationally, can be dealt with through traditional mechanisms that work within national jurisdiction and to suggest a paradigm for effective national strategies in the context of international concern in combating serious organised crime. This book also provides a detailed and comparative study of the legal and administrative control mechanisms against organised crime and will further contribute to the current understanding of the subject. In addition to the academic analysis, I am able to draw upon my experience as an accredited financial investigator for the Assets Recovery Agency and as a lawyer working on major corruption cases referred by the Government of China in illustrating and discussing relevant issues from a practitioner’s point of view. Relevant legislation is discussed in the context of the broader institutional framework focusing on enforcement and policy issues. This book is an analysis of law and practice, and is aimed at researchers, law enforcement community, compliance officers, policy makers and regulators who have a concern with organised crime, money laundering and terrorist financing. I am grateful to my family for their patient and loving support throughout the writing of this book. Thanks are also due to Professor Barry Rider for his valuable ideas and advice. Collection of material for this book ceased in February 2007. Attempts have been made where possible to flag up potential future changes. Dr Angela V. M. Leong 2 March 2007

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List of Abbreviations ACPO AML ARA ATCSA BBA BCCI BERR CABA CARA CARIN CHIS CICFA CJA CPR CPS CTR DCA DEA DMC DPA DTA DTOA DVLA DWP EBF ECB ECHR

EHRR EPA EU FATF FBI FCO

Association of Chief Police Officers Anti-Money Laundering Assets Recovery Agency Anti-Terrorism, Crime and Security Act 2001 British Bankers Association Bank of Credit and Commerce International Department for Business, Enterprise and Regulatory Reform1 Criminal Assets Bureau Act 1996, Republic of Ireland Criminal Assets Recovery Act 1990, New South Wales Camden Asset Recovery Inter-Agency Network Covert Human Intelligence Sources Concerted Inter-Agency Criminal Finance Action Group Criminal Justice Act Civil Procedure Rules Crown Prosecution Service Cash Transaction Report Department of Constitutional Affairs Drug Enforcement Administration, United States Data Management Centre, Economic Crime Branch at NCIS Data Protection Act 1998 Drug Trafficking Act Drug Trafficking Offences Act 1986 Driver and Vehicle Licensing Agency Department for Work and Pensions European Banking Federation Economic Crime Branch at NCIS European Convention on Human Rights (also known as Convention for the Protection of Human Rights and Fundamental Freedoms) European Human Rights Reports Northern Ireland (Emergency Provisions) Act 1996 European Union Financial Action Task Force Federal Bureau of Investigation Foreign and Commonwealth Office

1 The Department for Business, Enterprise and Regulatory Reform is previously known as the Department of Trade and Industry (DTI).

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FFIN FID FIU FSA FSMA GCHQ GDP HMCE HMIC HMRC HRA IMF JARD JMLSG KPI KYC LEA LTTE MI5 MLR MLRO MOU MPSB NCCTs NCIS NCS NIM OCDETF OCTF OECD OFC PACE PIRA PIU POCA PSNI PSP PST PTA RAIF RART RCS RIC RICO RIPA SAR

The Disruption of International Organised Crime

Financial Fraud Information Network Financial Intelligence Division Financial Intelligence Unit Financial Services Authority Financial Services and Markets Act 2000 Government Communications Headquarters Gross Domestic Product Her Majesty’s Customs and Excise Her Majesty’s Inspectorate of Constabulary Her Majesty’s Revenue and Customs Human Rights Act 1998 International Monetary Fund Joint Asset Recovery Database Joint Money Laundering Steering Group Key Performance Indicator Know Your Customers Law Enforcement Agency Liberation Tigers of Tamil Eelam UK Security Service Money Laundering Regulations Money Laundering Reporting Officer Memorandum of Understanding Metropolitan Police Special Branch Non-Cooperative Countries and Territories National Criminal Intelligence Service National Crime Squad National Intelligence Model Organised Crime Drug Enforcement Task Force Organised Crime Task Force Organisation for Economic Co-operation and Development Offshore Financial Centre Police and Criminal Evidence Act 1984 Provisional Irish Republican Army Performance and Innovative Unit, the UK Cabinet Office Proceeds of Crime Act 2002 Police Service of Northern Ireland Payment Services Provider Public Safety and Terrorism Sub-Directorate, Interpol Prevention of Terrorism Act Recovered Assets Incentive Fund Regional Asset Recovery Team Regional Crime Squad Regional Intelligence Cell Racketeer Influenced and Corrupt Organisations Act 1970 Regulation of Investigatory Powers Act 2000 Suspicious Activity Report

List of Abbreviations

SFO SIS SOCA SOCPA STR TACT USA PATRIOT Act VAT

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Serious Fraud Office UK Secret Intelligence Service (also known as MI6) Serious Organised Crime Agency Serious Organised Crime and Police Act 2005 Suspicious Transaction Report Terrorism Act 2000 Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act 2001 Value Added Tax

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Chapter 1

Introduction Organised crime is no new phenomenon and various legislative acts and strategies have been developed in different countries trying to control and prevent organised crime. Yet, the threat and harm caused by organised crime seems to increase as a result of globalisation1 and technology innovation. In the United Kingdom, ‘broad estimates put the economic and social costs of serious organised crime, including the costs of combating it, at upwards of £20 billion a year.’2 The traditional criminal justice system has tried to interdict criminal organisations by pursuing the proceeds of drug trafficking and serious fraud through tracing and seizing of such funds. Nevertheless, the value of property and money confiscated has been very small compared to the amount of money deployed to training and investigations. Furthermore, organised criminals tend to launder money through offshore jurisdictions where there is the assurance of absolute confidentiality and the registration fee or cost of opening a deposit account is relatively low. They also seek to operate through different underground banking or ‘hawala’ systems. This can be very destructive to the formal banking and financial systems when ‘dirty’ money is laundered into ‘clean’ money and enters the conventional financial or banking institutions. Terrorists commit similar ordinary crime to acquire funds in order to secure their objectives and they too launder the money in a similar manner. As a result, organised crime and terrorist enterprises become virtually indistinguishable with wealth as the lifeblood of criminal syndicates and ‘a means to an end’ for the terrorists. However, a substantial proportion of terrorist financing comes from legitimate donations, contributions from supporters (such as religious charities or political groups) and legitimate businesses, thus making the task of distinguishing legitimate from illegitimate funding so difficult. In fact, anti-money laundering strategies should be collaborated with counter-terrorism measures. Various legal and policy efforts, such as the International Convention for the Suppression of the Financing of Terrorism signed by 132 nations in 1999, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT Act 2001), the Proceeds of Crime Act 2002 and the Serious Organised Crime and Police Act 2005, have been enacted to identify, 1 For the purpose of analysis in this book, globalisation refers to the increasing global connectivity, integration and interdependence in the financial, economic and technological spheres where there is the emergence of worldwide financial markets, increasing freedom of exchange of goods and capital as well as rapid advances of information technology and increasing information flows around the world. 2 Serious Organised Crime Agency, The United Kingdom Threat Assessment of Serious Organised Crime 2006/7 (SOCA London 2006 July).

2

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freeze, seize and forfeit the funding of organised criminal and terrorist activities. However, there are practical difficulties in implementing the apparent international legislation due to the diversity in the legal definition of money laundering and terrorist financing across countries with different values systems, especially in regard to civil liberties. Besides, certain provisions of the international legislation might conflict with the national legislation which will tend to limit the scope for international cooperation. Furthermore, the increasing security measures, including enhanced due diligence and transactional verification, will boost the cost of dealing with the United States and other western countries. As a result, those developing and third world countries would not be able to reach the western banking and financial systems causing more transactions going underground which may adversely affects the global economy and will further destabilise the world economy. Aims and Significance This book provides a detailed and comparative study of the legal and administrative mechanisms in the control of organised crime, particularly focusing on the issue of criminal funding. Relevant legislation is discussed in the context of the broader institutional framework focusing on enforcement and policy issues. This book is an analysis of law and practice aimed at scholars, researchers, law enforcement community, compliance officers, regulators and policy makers who have a concern with organised crime, money laundering and terrorist financing. The main objective of this book is to examine whether the deviant structures of organised crime, which are capable of operating transnationally, can be dealt with through traditional mechanisms that only work within national jurisdiction, and if so, how it might be possible to develop effective national and international strategies in dealing with this matter. This book highlights some of the strengths and weaknesses in the present methods of control. It reviews the social, political and economic characteristics of traditional organised crime and also illustrates the development of non-traditional disorganised criminal structures. The historical response of the law and the law enforcement in the control and interdiction of organised crime is discussed. The adequacies of the traditional criminal justice system in addressing the threat posed by organised crime are examined. Monitoring of fundraising for organised crime is of utmost importance and the vulnerability of financial and nonfinancial institutions being used as a channel for money laundering is analysed. The creation of legal and non-legal mechanisms outside the traditional criminal justice system as well as the implications of ‘disruption strategies’ is explored.3 The roles of law enforcement officers, tax investigators, financial intelligence officers, compliance officers, lawyers and accountants in enforcing both civil and criminal sanctions on organised crime are considered. This book also provides an understanding of the rationale behind the Serious Organised Crime Agency and its objectives which are necessary to appreciate how this new approach will impact on the law enforcement

3 Legal mechanisms are those mandated by the legislation and have legal authority whereas non-legal mechanisms are not mandatory by law.

Introduction

3

arena. There is a strong need for a wide understanding of the risks, the complex legal and institutional frameworks and the regulatory regimes in relation to serious organised crimes and money laundering. This book will further contribute our current understanding of the subject and suggest a paradigm for effective national strategies in the context of international concern in combating serious organised crime. This book is derived from in-depth research and the methodology adopted is essentially that of a criminologist in constructing a policy analysis in the control of organised crime. A considerable amount of published materials has been written in the area of the subject discipline (that is, law, criminology, social and political studies, economics and international affairs) on some aspects of my area of research. However, little has been put in context with other disciplines and there is virtually no academic analysis of the institutional aspects in relation to the interdiction of organised crime. There is a substantial amount of unpublished materials, some of which are classified materials, that pertains to the subject area of my research and in particular the institutional aspects. Having worked as a researcher for the Treasury Select Committee of the House of Commons, an accredited financial investigator for the Assets Recovery Agency and a lawyer working on major asset tracing cases for the Government of the People’s Republic of China, I am able to draw from my experience and develop privileged perspectives on issues related to this book. Secondary sources, including archives, law enforcement agency publications, government policies, legislation and case laws, are critically analysed. Collection of material for this research ceased in February 2007 and any subsequent changes in legislation and case law have not been incorporated in this book. Chapter Analysis We need to know what it is that we are fighting against before any useful discussions or policy recommendations can be derived. Chapter 2 provides the traditional definitions of organised crime and explores the problem and confusion in defining this phenomenon. It also illustrates the development of non-traditional disorganised criminal structures. Different theories in explaining the origins, organisational structures and activities of organised crime are reviewed in this chapter. Traditionally, organised crime and terrorism are treated as two completely separate phenomena. However, there is a growing awareness that the contemporary organised criminals and terrorists may not be that distinct, rather they are converging and becoming almost indistinguishable, especially in relation to the methods for securing their sources of funding and safeguarding the proceeds of criminal ventures. Chapter 3 explains the concepts of criminal finance, money laundering and terrorist financing. The money laundering process and the different channels used by money launderers are discussed. The vulnerability of financial institutions, offshore financial centres and other professionals being used by organised criminals and terrorist groups is analysed. The development of relevant legislation, regulatory regimes and professional bodies in combating money laundering and terrorist financing at both national and international levels is also reviewed.

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The next two chapters focus on how the traditional criminal justice system in the United Kingdom addresses and tackles the subject of organised crime.4 Chapter 4 reviews the response of law enforcement agencies in dealing with the threat of organised crime. This chapter examines the growth and functions of traditional and non-traditional policing in addressing organised crime. While organised crime is treated as a problem of internal security, terrorism is always a matter of national security. Nevertheless, terrorism has become more of a law enforcement matter as the terrorists tend to shift to organised criminal activities for the necessary funding. Since organised crime has become more transnational, the concept of inter-agency and multi-agency approach for combating this problem is also considered in this chapter. Chapter 5 analyses how traditional criminal law in the United Kingdom deals with the incrimination of organised crime. Depending on the scope of the problem, various anti-organised crime legislation and approaches have been established in different countries. Some legislation focuses on criminalising the act of the crime, while others criminalise the membership of certain groups. The experience of the United States and other countries in establishing and implementing anti-organised crime legislation is discussed. The history and development of money laundering, forfeiture and confiscation provisions in the United Kingdom are also examined. In Chapter 6, the effectiveness of the traditional criminal justice system in addressing and combating the threat posed by organised crime is analysed. The attitude of law enforcement agencies towards the problem of organised crime has changed gradually. The structure of law enforcement has also altered to accomplish the different strategies and policies. Various task forces and national agencies against organised crime have been established in the last decade throughout the United Kingdom and cross-agency cooperation is the approach adopted today. The adequacy of the traditional criminal legal framework, including the investigation, prosecution and trial processes, is examined. In addition, considerable amounts of legislation, rules and regulations have been enacted in the United Kingdom to deal with money laundering and terrorist financing. It is clear that no single industry or government can win the war on organised crime alone, a cohesive approach in both the public and private sectors are vital. But how far should corporate responsibility extend in patrolling organised crime, or whether it is worthwhile to increase the burden of compliance on the finance industry are issues discussed in this chapter. With globalisation and technology innovation, organised crime has evolved rapidly and accelerated to a more international level, which calls for more radical anti-organised crime mechanisms. It is essential to recognise that criminal law is not the only weapon in the war against organised crime. Chapter 7 provides the new perspectives outside the traditional criminal justice system in the interdiction of organised crime. The focus is on innovative proactive strategies and intelligence-led approach in disrupting organised criminal activities. The whole new arena of civil recovery and taxation proceedings is introduced in the United Kingdom under the 4 For the purpose of analysis in this book, ‘traditional’ refers to the Pre-POCA era when the controlling of organised crime in the United Kingdom is mainly dealt with under the criminal law.

Introduction

5

Proceeds of Crime Act 2002. The Act consolidates, updates and reforms the money laundering provisions into one single legislation. It also widens the powers for police, customs and civilian officers in confiscation, civil recovery and money laundering investigations. Other measures (such as plea-bargaining, Queen’s evidence and witness protection programmes) are introduced under the Serious Organised Crime and Police Act 2005 to facilitate the cooperation of witnesses in organised crime trials. The importance of intelligence in disrupting organised criminal groups cannot be denied. The issues on how to fully utilise intelligence under the new regime and to what extent intelligence could be drawn into the evidential structure are explored. The legality of undercover operations and the concern of entrapment are also examined in this chapter. The United Kingdom gives further effect to rights and freedoms guaranteed under the European Convention for the Protection of Human Rights and Fundamental Freedoms by enacting the Human Rights Act in 1998 and the Regulation of Investigatory Powers Act in 2000. However, the intrusive and disruptive nature of the new powers introduced under the Proceeds of Crime Act 2002 has raised concerns of breaches in human rights and civil liberties. The obligation of confidentiality and the duty of disclosure under the new financial services regulatory regime also attract concerns among professionals, banks and financial institutions. Chapter 8 considers the implications and consequences of ‘disruption strategies’ in law and the tensions that are thrown up through the increasing use of non-traditional mechanisms. The apprehension of the compatibility of the new provisions with the requirements of domestic and international human rights law is discussed. The efficacy of the new regimes under the Proceeds of Crime Act 2002 and the adequacy of the risk-based anti-money laundering strategy are also evaluated. Chapter 9 reviews the lessons learnt from the asset recovery strategy under the Proceeds of Crime Act 2002 and examines the rationale behind the concept of the Serious Organised Crime Agency. This chapter includes some of the recent developments in the criminal justice system for tackling serious organised crime. It also highlights the policy implications for devising effective national strategies in the context of international concern in combating serious organised crime.

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Chapter 2

Organised Crime: Definitional and Theoretical Analysis We need to know what it is that we are fighting against before any useful discussion or appropriate instruments can be derived. This chapter analyses the definitions of organised crime and explores the problem and confusion in defining this phenomenon. The different definitions also yield different theories and analysis of the fundamental structure of the phenomenon, which results in varied policy recommendations for governments and international organisations. The question of how ‘organised’ is organised crime is considered and the development of non-traditional disorganised criminal structures is also discussed in this chapter. Paradigms of Organised Crime Al Capone, Meyer Lansky and Lucky Luciano are well-known organised crime figures in the United States and have been the subjects of books and films. Though the term ‘organised crime’ is frequently used, it remains controversial because of the definitional debates about the origins, organisations and activities of organised crime, which are often clouded by the Mafia mystique. Various models, such as Cressey’s Cosa Nostra Model,1 Albini’s Patron-Client Model,2 Smith’s Enterprise Model,3 Ianni’s Kinship Network Model,4 Chambliss’s Crime Network Model5 and Haller’s Partnership Model,6 are developed to understand the organised crime phenomenon. Different definitions are offered by politicians, law enforcement officials and scholars.

1 DR Cressey Theft of the Nation: The Structure and Operations of Organised Crime in America (Harper & Row New York 1969). 2 JL Albini The American Mafia: Genesis of a Legend (Meredith Corporation United States 1971). 3 DC Smith ‘Paragons, Pariahs, Pirates: A Spectrum-Based Theory of Enterprise’ (1980) 26 Crime and Delinquency 358. 4 FAJ Ianni A Family Business: Kinship and Social Control in Organised Crime (Russell Sage Foundation New York 1972). 5 WJ Chambliss Exploring Criminology (Macmillan New York 1988). 6 MH Haller ‘Illegal Enterprise: A Theoretical and Historical Interpretation’ (1990) 28(2) Criminology 207.

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It is important to distinguish between the structures of activity and the structures of association.7 There are uncertainties between the offence and the offender in defining organised crime, whether ‘organised crime’ is referring to an act or a group. On one hand, ‘organised crime’ seems to refer to an act, that is, a specific set of crimes such as gambling, prostitution, drug trafficking, extortion, counterfeiting, etc. On the other hand, we sometimes describe the infiltration of legitimate business by organised crime. It seems that the term ‘organised crime’, apart from referring to the act, can also be used to refer to a group or organisation such as the Mafia, Triads, Yakuza or other secret societies. Indeed, the term ‘organised’ itself is problematic: does it mean ‘well-planned’ or ‘committed by an organisation’? If it refers to an act, how ‘well-planned’ should it be before it could be called ‘organised crime’? Likewise, if it refers to a group, how big should the ‘organisation’ be? In fact, there is no set standard about what kinds of criminal act is organised crime or when a criminal group is organised.8 Therefore, some law enforcement and criminologists apply the term ‘organised crime’ to organised criminal activities and focus on defining their actual illegal activities. In other words, much emphasis has been put on ‘crime’ but little on ‘organised’. Other experts apply the term ‘organised crime’ to a group of people or an entity and they emphasise on the structure of these criminal groups. The focus then seems to be on determining the characteristics of groups or gangs participating in ‘organised crime’ instead of their activities. Due to the confusion between offence and offender in defining organised crime and the different focuses in various definitions, it is difficult to generate a universal definition of organised crime as this term may mean different things to different societies. Instead of trying to define the phenomenon, some common characteristics9 and certain attributes10 of organised crime are identified. Groups of criminals having all or most of the attributes or characteristics are referred to as organised criminal organisations. Consequently, the term is often used interchangeably with professional crime, organisational crime in legitimate business, crime organised by criminal groups, crime syndicates, criminal enterprises, Mafia, racketeers, mobs, gangs, underworld, secret societies and Triads. The definitions of organised crime are often determined by the level of targeting within an agency, for example, a local police force would work to a different definition than a national body or an international organisation. Lacking a clear and precise definition of organised crime, it is indeed difficult to determine the extent of 7 AK Cohen ‘The Concept of Criminal Organisation’ (1977) 17 British Journal of Criminology 97. 8 MD Maltz ‘On Defining Organised Crime: The Development of a Definition and a Typology’ (1976) 22 Crime and Delinquency 338. 9 Four common characteristics: variety of types of crime, organisation structure, violence and corruption are described in MD Maltz ‘On Defining Organised Crime: The Development of a Definition and a Typology’ (1976) 22 Crime and Delinquency 338, 340. 10 H Abadinsky Organised Crime (2nd edn Nelson-Hall Chicago 1985) 5–7. The eight attributes of organised crime include (1) non-ideological; (2) hierarchical; (3) limited or exclusive membership; (4) perpetuates itself; (5) willingness to use illegal violence and bribery; (6) specialization or division of labour; (7) monopolistic and (8) governed by rules and regulations.

Organised Crime: Definitional and Theoretical Analysis

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the problem as discussed in Chapter 4. However, it does not prevent the continuous efforts of the law enforcement agencies in combating organised crime. Investigative and prosecution tools, such as electronic surveillance, informants, undercover agents, use of intercept evidence in court, witness protection programme, witness immunity and special grand juries are adopted to fight against organised crime. Organised Crime as Nationwide Conspiracy The earliest attempt to define organised crime in the United States was conducted by the Chicago City Council Committee on Crime in 1915, followed by the Kefauver Committee in 1951 and the McClellan Committee in 1963. However, no specific definition of organised crime was given at those times. It was only in 1967 that the United States President’s Commission on Law Enforcement and Administration of Justice affirmed the ‘official’ position of La Cosa Nostra or Mafia and offered a definition of organised crime which described it as: A society that seeks to operate outside the control of the American people and their government. It involves thousands of criminals, working within structures as complex as those of any large corporation, subject to laws more rigidly enforced than those of legitimate governments. Its actions are not impulsive but rather the result of intricate conspiracies, carried over many years and aimed at gaining control over whole fields of activity in order to amass huge profits. The core of organised crime activity is the supplying of illegal goods and services – gambling, loan-sharking, narcotics, and other forms of vice – to countless numbers of citizen customers.11

Since then, organised crime has been identified as a nationwide, centralised, hierarchical and rationally designed criminal organisation, which is very similar to Max Weber’s ideal type of legal-rational bureaucracy. Each family is headed by the ‘boss’, followed by the ‘underboss’, ‘caporegime’ and ‘soldiers’.12 It is believed that the Mafia is alien to American society and seen as a conspiracy, whose aim is to infiltrate, corrupt and control American society. Furthermore, the Mafia is alleged to participate in all kinds of illegal activities and violence is readily used. Law enforcement believes that the problem could be solved through vigorous prosecution and incarceration of the leaders of organised crime. As a result of the widespread belief in the existence of a nationwide conspiracy, the establishment of powerful prosecution tools, including the Omnibus Crime Control and Safe Streets Act 1968, the Organised Crime Control Act 1970 and the Racketeer Influenced and Corrupt Organisations (RICO) provisions,13 is therefore justified. 11 President’s Commission on Law Enforcement and Administration of Justice Task Force Report: Organised Crime (US Government Printing Office Washington DC 1967) 1. 12 DR Cressey Theft of the Nation: The Structure and Operations of Organised Crime in America (Harper & Row New York 1969) 319. 13 The definition of RICO is found in Cap 96 s1961 United States Code. RICO is an effective weapon and has been successful in combating syndicated crime figures in the 1970s and 1980s by enabling prosecutors to arrest and convict upper-level players in criminal enterprises. Compared to the Federal Organised Crime Control Act 1970, RICO has introduced some new categories of offences in racketeering activity which is defined as involvement in

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The Disruption of International Organised Crime

A vague definition is found in the Omnibus Crime Control and Safe Streets Act 1968, which states that ‘organised crime means the unlawful activities of the members of a highly organised, disciplined association engaged in supplying illegal goods and services, including but not limited to gambling, prostitution, loan sharking, narcotics, labour racketeering, and other unlawful activities of members of such organisations’. The concept of a nationwide conspiracy is reinforced in the Organised Crime Control Act 1970, Organised crime in the United States is a highly sophisticated, diversified, and widespread activity that annually drains billions of dollars from America’s economy by unlawful conduct and illegal use of force, fraud, and corruption; organised crime derives a major portion of its power through money obtained from such illegal endeavours as syndicated gambling, loan sharking, the theft and fencing of property, the importation and distribution of narcotics and other dangerous drugs, and other forms of social exploitation; this money and power are increasingly used to infiltrate and corrupt our democratic processes; organised crime activities in the United States weaken the stability of the Nation’s economic system, harm innocent investors and competing organisations, interfere with free competition, seriously burden interstate and foreign commerce, threaten the domestic security and undermine the general welfare of the nation and it citizens.

In the United States President Reagan’s Commission on Organised Crime in 1983, other organised crime groups, including outlaw motorcycle gangs, Colombian cartels, Japanese Yakuza and Russian gangs, were added to the list besides La Cosa Nostra. However, this narrow theory of conspiracy has undermined the true nature of organised crime and restricted the law enforcement agencies to a particular type of prevention strategy. It was concluded in the 1986 President’s Organised Crime Commission Report that ‘La Cosa Nostra is by no means the only significant factor in organised crime today.’14 Organised Crime as Ethnic Groups Based on Emile Durkheim’s notion of anomie, strain theory is developed where crime can be explained by using a social and cultural explanation and that it is a natural response of certain people to pressure exerted on them by the social structure. Anomie will result when people find contradictions between the goals and the means. Since they are bound by the presence of class and status, the distribution of opportunity is unequal and deprived. The goal is emphasised but not the means, which leads to ‘the-end-justifies-the-means’ doctrine. There are five social adaptation methods for those who have inadequate means of attaining success namely conformity, ritualism,

two or more acts prohibited by the existing federal and state statutes. Offences listed in RICO include ‘any act or threat involving murder, kidnapping, gambling, arson, robbery, bribery, extortion, dealing in obscene matter, or dealing in a controlled substance or listed chemical’ and terrorism. More discussions on RICO are found in Chapter 5. 14 President’s Commission on Organised Crime The Impact: Organised Crime Today (US Government Printing Office Washington DC 1987) 34.

Organised Crime: Definitional and Theoretical Analysis

11

rebellion, retreatism and innovation.15 In addition, relative deprivation theory states that criminals, who are deprived of equal opportunities to attain the common goal of the society through legitimate means, believe that the goal justifies the means and they choose to play the game differently by using illegitimate means to achieve their aims. Thus, according to this theory, innovation by using illegitimate means to achieve their goals explains the phenomenon of organised crime. As a result, criminal justice policies should focus on providing more legitimate economic opportunities for lower classes and avoid over-promoting the goals. However, the theory of anomie does not explain why some people suffering from anomie turn to criminal innovation, while others do not. It also fails to account for middle and upper class crime.16 For example, the higher echelons of Eastern European organised crime are inherently highly educated people from middle to upper class. It is the ‘foot soldiers’ who are actually from the lower class. Building on the strain theory, it is claimed that the disadvantaged Italian communities in America enter the illegal markets for upward mobility as a result of relative deprivation, thus, organised crime is a ‘queer ladder of social mobility’.17 According to the ethnic succession theory, each successive immigrant group in America experiences strain, such as discrimination, lack of economic opportunity and blocked pathways to power. Some members choose to be innovative by engaging in illegal activities in order to achieve economic and social mobility. After they have acquired more wealth and power and have attained upward mobility, they often move out of the organised crime business when legitimate means become more available, thus, leaving a place in organised crime for successive immigrant groups.18 In other words, there is no formal organised crime group, rather it is a ‘behavioural organisation, a cultural model of organisation structured by common values, shared understandings, and an interlocking pattern of mutual obligation.’19 Organised crime resembles a social exchange network in the community based on patron-client relationship. Individuals involved in organised crime ‘do not belong to an organisation. Instead the structure of their relationship is predicated by the particular activity engaged in at any given time and the nature of the patron-client, friendship, and other forms of relationships motivating the participants. Rather than being a criminal secret society, a criminal syndicate consists of loosely structured relationships functioning primarily because each participant is interested in furthering his own welfare.’20

15 RK Merton ‘Social Structure and Anomie’ (1938) 3 American Sociological Review 672. 16 H Abadinsky Organised Crime (2nd edn Nelson-Hall Chicago 1985); H Abadinsky The Criminal Elite: Professional and Organised Crime (Greenwood Press United States 1983). 17 D Bell ‘Crime as an American Way of Life’ (1953) 13 The Antioch Review, 131. 18 FAJ Ianni The Black Mafia: Ethnic Succession in Organised Crime (Simon and Schuster New York 1974). 19 FAJ Ianni ‘The Mafia and the Web of Kinship’ (1971) 22 Public Interest 42. 20 JL Albini The American Mafia: Genesis of a Legend (Meredith Corporation United States 1971) 288.

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The Disruption of International Organised Crime

Similar results to the ethnic succession theory are found in the study of economic variables. It reviews that the use of violence is minimal in the La Cosa Nostra families. It is suggested that criminal justice policy should focus on increasing the community awareness of the social costs of organised crime because ‘an aggressive policy of law enforcement against the leaders of the group could bring to power younger leaders, more aggressive and willing to use violence.’21 On one hand, it is believed that organised crime is a rational choice for ethnic communities to achieve economic and social mobility. On the other hand, it is argued that entrance into organised crime lifestyles is an individual choice resulting from the material culture in America rather than the result of disadvantaged ethnic groups.22 Elite Criminals: State-Organised Crime In the 1960s and 1970s, the definitions of organised crime focused on describing either the actual criminal activities or the structure of criminal groups. Since the 1980s, the focus has been on the relationship between organised crime, professionals and the state. Instead of describing crime as a foreign product, organised crime is seen as an integral part of society and is defined as a coalition of racketeers, law enforcers, politicians, union leaders and businessmen, usually local or regional in scope.23 ‘The essential attribute of organised crime is a network of alliances operating a range of corrupt and illegal enterprises; people often become involved with the network through a somewhat serendipitous pattern of casual contacts in pursuit of money-making opportunities.’24 The concern on ‘state-organised crime’ is raised and is defined as ‘the most important type of criminality organised by the state consisting of acts defined by law as criminal and committed by state officials in the pursuit of their jobs as representatives of the state.’25 The conflict theorists argue that elite criminals are punished the least, while other minor crimes receive more severe punishment due to the unequal distribution of power. A strong tie is suggested to exist between public officials and organised crime. This has been evident within many, if not all, organised crime ethnic groups such as the Albanians, the Italians and the West Africans. Money means political survival and advancement, power, seats in House, legislatures or other public posts. Democracy, represented by free elections and competing political parties, means that people can express their will and have the right to vote for the candidate or party of their choice. However, in practice, large organisations and wealthy individuals provide most of the money for elections and have the greatest influence on the political process. In fact, a great deal of money goes regularly into political campaigns from organised 21 AG Anderson The Business of Organised Crime: A Cosa Nostra Family (Hoover Institution Press California 1979) 144. 22 PA Lupsha ‘Individual Choice, Material Culture, and Organised Crime’ (1981) 19(1) Criminology 3. 23 AA Block and WJ Chambliss Organising Crime (Elsevier Science United States 1981). 24 WJ Chambliss Exploring Criminology (Macmillan New York 1988) 84. 25 WJ Chambliss ‘State-Organised Crime – The American Society of Criminology, 1988 Presidential Address’ (1989) 27(2) Criminology 183, 184.

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13

crime.26 A large share of the private financing of politics in the United States is made up of secret money, unreported money, criminal money, extorted money, laundered money, foreign money and tax-free money. In addition to corrupting and capturing local law enforcement officials, organised crime is often able to control the local government because they have the money and the manpower for party work and can deliver large numbers of votes in the free elections in the United States.27 Extensive studies on organised crime have been done in different places including Nigeria, Zambia, Sweden and the United States. It is a common mistake to think that organised crime means the same thing in different places. There are actually three types of relationship between government and organised crime namely integrated, hostile and symbiotic. In Nigeria and Zambia, the managers and organisers of organised crime are government officials and they are indistinguishable, which means that organised crime, such as smuggling, gambling, money laundering, drug dealing, is integrated into governmental activities. In fact, those involved in organised crime in Nigeria and Zambia tend to be well educated and fairly sophisticated and they often avoid using violence unless necessary. The opposite is found in Sweden, where there is only little government corruption and those found to be involved in organised crime would be severely punished. Besides, members of organised crime groups tend to be less educated but local. This kind of government is said to be hostile to organised crime. In the United States, a symbiotic relationship exists between government and organised crime. Symbiosis is defined ‘as a relationship where two different types cooperate so that the survival of each is enhanced.’28 Under this situation, corruption of government officials and government agencies is more widespread. It is found that the organised criminal groups in the United States are consisted of new immigrants who are poorly educated and unsophisticated and they are more ready to use violence. In addition, organised crime in the United States is more transnational, while that found in Nigeria and Zambia is more local. Some American cities depend heavily on tourism, in addition to good hotels and restaurants, some tourists occasionally choose to have some other entertainment such as gambling, prostitution and drugs. Consequently, strong policies or zealous enforcement against organised crime would destroy businesses in these cities. Thus, the government tends to tolerate a certain amount of organised crime for the purpose of economic growth. In order to rationalise this situation, the government sometimes gives a certain kind of ‘licence’ to decriminalise particular organised crime activity. Professional Criminals: White-Collar Crime The term ‘white-collar crime’ is first employed by Edwin Sutherland to describe crime that is committed by people with a high social status and respectability in the

26 R King Gambling and Organised Crime (Public Affairs Press Washington 1969). 27 H Alexander ‘Organised Crime and Politics’ HE Alexander and GE Caiden, (eds), The Politics and Economics of Organised Crime (Lexington Books Toronto 1985) 89. 28 WJ Chambliss Power, Politics and Crime (Westview Press United States 1999) 13.

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course of their professional duties.29 However, on one hand, the definition of whitecollar crime is criticised for being too narrow as it does not include the differential associations between the ‘upperworld’ of corporations and the ‘underworld’ of criminal organisations.30 On the other hand, it is criticised for being too broad as an all-encompassing category.31 In fact, the distinction between organised crime or ‘business in crime’ and the activities of white-collar offenders is becoming less clear as organised crime often uses and abuses legitimate corporate enterprises.32 Money laundering is one of the best examples. It is argued that organised crime performs an important role in corporate enterprises and capitalist political economy by supplying illegal goods and services that are in great demand. The profit gained from the illegal businesses are laundered and deposited in banks. Organised crime also helps to suppress and control dissatisfied workers through labour racketeering. At the same time, organised crime depends on the corruption of police and government officials for survival. Usually each organised crime group allocates at least one individual to corrupt and obtain support from police and other officials.33 The term ‘corruption’, like the concept of ‘organised crime’, involves diverse processes which have different meanings in different societies. In some societies, corruption seems to be the ‘cause’ of social disorganisation, while, in other countries, corruption seems to be the ‘result’ of these changes. The four categories of corruption are bribes/kick-backs, election/campaign corruption, protection and systematic top-down corruption.34 Disorganised Illegal Business: Enterprise Theory In accordance to some theorists, the idea of a well-organised criminal conspiratorial group such as the Mafia is disputed. The Mafia in the United States is often ‘invisible’ and is described as ‘disorganised crime’. Bookmaking, numbers gambling and loan sharking businesses in New York City are no longer controlled by the Mafia but rather these illegal markets comprise of small and ephemeral enterprises.35 Similar results are found in the historical analysis of the illicit cocaine trade in New York

29 E Sutherland White Collar Crime (Holt, Rinehart & Winston New York 1949). 30 V Ruggiero Organised and Corporate Crime in Europe, Offers that Can’t be Refused (Darthmouth, Aldershot 1996) 5. 31 D Nelken ‘White-Collar Crime’ in M Maguire et al (eds) The Oxford Handbook of Criminology (2nd edn Oxford University Press Oxford 1997). 32 V Ruggiero Crime and Markets: Essays in Anti-Criminology (Oxford University Press Oxford 2000); FJ Marine ‘The Effects of Organised Crime on Legitimate Businesses’ (2006) 13(2) Journal of Financial Crime 214. 33 DR Simon Elite Deviance (5th edn Allyn and Bacon United States 1996). 34 ME Beare ‘Corruption and Organised Crime: Lessons from History’ (1997) 28 Crime, Law and Social Change 155. 35 P Reuter and J Rubinstein ‘Fact, Fancy and Organised Crime’ (1978) Public Interest 45; P Reuter Disorganised Crime: The Economics of the Visible Hand (The MIT Press Cambridge 1983).

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during the early 1900s36 and the illicit drug markets in Southwest County.37 Instead of seeking honour, the Mafia groups obtain wealth and power through entrepreneurial activities. ‘The mafioso’s ideology and lifestyle have been radically transformed by this identification with market force.’38 Indeed, ‘what is organised crime without organising some kind of criminal trade; without selling and buying of forbidden goods and services in an organisational context? The answer is simply nothing.’39 Others perceive organised criminals as mere extortionists and their major victims are illegal entrepreneurs who supply illegal goods and services. They are vulnerable to extortion because illegal business is not protected by the law and usually operates on a cash basis.40 However, it is argued that the Mafia are not extortionists but ‘a specific economic enterprise, an industry which produces, promotes, and sells private protection’41 to buyers and sellers in an ‘inscrutable market’ where transactions are unstable and trust is scarce and fragile.42 If the goods or services happen to be outlawed, then illegal enterprises will emerge to meet the demand. In this respect, there is no difference between conventional and criminal enterprises. Very often, all that changes when the business is illegal are some adjustments in modus operandi, technology and the social network that will be involved. In some cases, we have a mere re-description of practices to make them appear outside legal prohibitive provisions.43

Organised crime simply functions like legitimate businesses, but only in illicit areas, so it can be viewed primarily as an economic problem.44 Market forces create opportunities for legitimate business as well as organised crime. They are both operating according to the law of demand and supply, but only at different positions 36 A Block ‘The Snowman Cometh: Coke in Progressive New York’ (1979) 17 Criminology 75. 37 PA Adler Wheeling and Dealing: An Ethnography of an Upper-Level Drug Dealing and Smuggling Community (Columbia University Press New York 1985). 38 P Arlacchi Mafia Business: The Mafia Ethic and the Spirit of Capitalism (Verso London 1986) 119; MH Haller ‘Illegal Enterprise: A Theoretical and Historical Interpretation’ (1990) 28(2) Criminology 207. 39 PC Van Duyne ‘Organised Crime, Corruption and Power (1997) 26 Crime, Law and Social Change 201, 203. 40 TC Schelling Choice and Consequences: Perspectives of an Errant Economist (Harvard University Press Cambridge 1984). 41 D Gambetta The Sicilian Mafia: The Business of Private Protection (Harvard University Press Cambridge 1993) 1. 42 D Gambetta ‘Inscrutable Markets’ (1994) 6(3) Rationality and Society 353; D Gambetta and P Reuter ‘Conspiracy Among the Many: The Mafia in Legitimate Industries’ in G Fiorentini and S Peltzman (eds) The Economics of Organised Crime (Cambridge University Press 1995) 116. 43 N Passas ‘The Rise of Transnational Crime’ paper presented at the International Conference on Responding to the Challenges of Transnational Crime, Courmayeur Mont Blanc, Italy, 25–27 September 1998, 3 cited in L Paoli ‘The Paradoxes of Organised Crime’ (2002) 37(1) Crime, Law and Social Change 51, 56. 44 The economic perspective of organised crime is first put forth by DC Smith The Mafia Mystique (Basic Books New York 1975).

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within the spectrum of legitimacy. ‘Market dynamics operating past the point of legitimacy establish the primary context for the illicit entrepreneur, regardless of his organisational style or ethnic roots.’45 Like legitimate enterprises, illegitimate businesses adopt similar business processes which include acquiring start-up capital, recruiting staff, operational planning and training, obtaining inventory and working capital, translating inventory into stored valued by resale, saving of net revenues that are not dissipated on easy living and laundering the savings into clean money through cross-border financial movements and the use of offshore finance centres. They will also use the latest technology if it is available at a reasonable price. In addition, they will set up overseas branches just like any other global enterprises.46 The only difference is that organised crime has to maintain a certain level of secrecy due to the illegal nature of their goods and services. They might also use other illegal means such as violence, intimidation, corruption and extortion while competing in the markets. Therefore, the present view is that illegal market activities largely take place in a disorganised way.47 ‘The factors promoting the development of large-scale enterprises in the legal economy are, in fact, offset in the illegal arena by the constraints deriving from product illegality. The lasting criminal organisations that do exist and that are considered the prototype of organised crime, cannot be reduced to their economic dimension, since they pre-existed the rise of modern illegal markets and have carried out many non-economic functions throughout their existence.’48 Today’s organised crime groups are highly flexible and fluid; they interact with each other and provide services to achieve maximum profit. For example, Eastern European organised crime provides money laundering services for the Turkish organised crime groups which have dominated the importation and distribution of heroin in the United Kingdom. In fact, they adopt the forms of management structure and business organisation optimal for the markets for criminal goods and services depending on the level of secrecy and the nature of the products. Furthermore, they often merge into legitimate global enterprises to conceal to some extent their illegality, such as in the ENRON case. Due to the rapid expansion of global enterprises, law enforcement with limitations in legal jurisdictions often has difficulties in combating those organised crimes that entwined in the global enterprises. By redefining organised crime as an enterprise, there is room for policies which target at controlling the illicit trade through disruption and

45 DC Smith ‘Paragons, Pariahs, Pirates: A Spectrum-Based Theory of Enterprise’ (1980) 26 Crime and Delinquency 358, 375. 46 M Levi and T Naylor ‘Organised Crime, the Organisation of Crime and the Organisation of Business’ DTI Crime Foresight Panel Essay (2000). 47 RT Naylor ‘Mafias, myths, and Markets: On the Theory and Practice of Enterprise Crime’ (1997) 3(3) Transnational Organised Crime 1; A Balsamo ‘Organised Crime Today: The Evolution of the Sicilian Mafia’ (2006) 9(4) Journal of Money Laundering Control 373; A Wright Organised Crime (Willan Devon 2006) 14, 55. 48 L Paoli ‘The Paradoxes of Organised Crime’ (2002) 37(1) Crime, Law and Social Change 51, 88.

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regulation. This is clearly an attractive option when compared to the increasing cost of gathering evidence and the unpredictability of the outcomes of prosecution.49 Organised Crime: A Global Phenomenon Traditionally, the issue of organised crime is regarded as a concern for only a limited number of nations. However, there is a new threat of transnational organised crime in the post-Cold War period. With rapid development in information and technology, the criminals are more mobile and the illicit markets are expanding from domestic economy across national boundaries, corrupting the legitimate economy and undermining the political institutions. The phenomenon of transnational organised crime brings the attention of international organisations such as Interpol, Europol, the World Customs Organisation and the United Nations (UN).50 The expansion of European Union (EU) in May 2004 has posed greater threats of transnational organised crime due to the free movement of goods and services and broadening markets. So far, we have concentrated on the American debate on Mafia because much of the confusion over organised crime has taken place in the United States. The view on organised crime in Europe is quite different from the American image of a multinational organised crime syndicate. It is suggested that organised crime in the United Kingdom can be better understood by focusing on its local context51 and there is a tendency to avoid the notion of ‘crime corporation’.52 On one hand, the term ‘organised crime’ means lasting and hierarchical organisations, on the other hand, it refers to the small and loose enterprises trading in illegal goods and services. The data gathered by the German Federal Criminal Office shows that the criminal enterprises targeted every year are indeed relatively small size partnerships.53 The definition employed by the BundesKriminalAmt 1998 maintains, Organised crime is the planned violation of the law for profit or to acquire power, which offences are each, or together, of a major significance, and are carried out by more than two participants who co-operate within a division of labour for a long or undetermined time span using (a) commercial or commercial-like structures, or (b) violence or other means of intimidation, or (c) influence on politics, media, public administration, justice and the legitimate economy.

The same confusion and uncertainty is found in the background papers for the 1994 United Nations World Ministerial Conference on Transnational Organised Crime.

49 A Edwards & P Gill ‘Crime as Enterprise? The Case of Transnational Organised Crime’ (2002) 37(3) Crime, Law and Social Change 203. 50 N Passas Transnational Crime (Ashgate United Kingdom 1999); A Edwards and P Gill Transnational Organised Crime (Routledge UK 2006). 51 D Hobbs ‘Going Down the Glocal: The Local Context of Organised Crime’ (1998) 37(4) The Howard Journal of Criminal Justice 407. 52 M McIntosh The Organisation of Crime (Macmillan London 1975). 53 L Paoli ‘Organised Crime in Germany’ in Cliomedia (ed) The Mafia, 150 Years of Facts, Stories and Faces (Cliomedia Torino 1999).

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The Disruption of International Organised Crime Participants in criminal organisations are considered to be persons associated for the purpose of engaging in criminal activity on a more or less sustained basis. They usually engage in enterprise crime, namely the provision of illicit goods and services, or of licit goods that have been acquired through illicit means, such as theft or fraud…The activities of organised crime groups require a significant degree of co-operation and organisation to provide illicit goods and services. Like any business, the business of crime requires entrepreneurial skill, considerable specialisation, and a capacity of co-ordination, and this in addition to using violence and corruption to facilitate the conduct of activities.54

The former National Criminal Intelligence Service (NCIS)55 attempts to give the most concise and yet broadest definition to reflect the sphere of interest in the United Kingdom which states that ‘organised crime constitutes any enterprise, or group of persons, engaged in continuing illegal activities which has as its primary purpose the generation of profits, irrespective of national boundaries.’56 NCIS claims that the term ‘organised crime group’ is often used when referring to the activities of serious and organised criminals who are described as ‘those involved, normally working with others, in continuing serious criminal activities for substantial profit or gain, whether based in the United Kingdom or elsewhere’. However, the term ‘organised crime group’ can be misleading. While there are some organised crime groups similar to the traditional Italian Mafia, Colombian Cartels, Jamaican Yardies, Chinese Triads, Eastern European Organised Crime and Albanian gangs, there are other groups that are in loose networks with individuals belonging to a number of sub-groups of varying complexity, structure and length.57 Indeed, the structures of organised crime vary according to the different criminal activities. The Serious Organised Crime Agency (SOCA) claims that ‘organised crime groups generally consist of a durable core of key individuals, linked by family, childhood friendship, a shared history of lower-level criminal or gang activities, or imprisonment together. Around the core group there is a cluster of subordinates, specialist, and other more transient members, plus a network of dispensable associates…Some “groups” in the UK are, in practice, loose networks of career criminals, who come together for specific criminal ventures and dissolve once these are over.’58 54 UNESC, United Nations, Economic and Social Council ‘Problems and Dangers Posed by Organised Transnational Crime in the Various Regions of the World’, Background document for the World Ministerial Conference on Organised Transnational Crime, E/ CONF.88/2, 18 August 1994, 4. 55 The National Criminal Intelligence Service is now part of the Serious Organised Crime Agency which was established on 1 April 2006 under the Serious Organised Crime and Police Act 2005. More discussions on the Serious Organised Crime Agency are found in Chapter 9. 56 National Criminal Intelligence Service Home Affairs Committee on Organised Crime: Minutes of Evidence and Memoranda (HC Paper (1994–95) 18–II) 140, para 23. 57 National Criminal Intelligence Service UK Threat Assessment 2003 (NCIS London 2003). 58 Serious Organised Crime Agency, The United Kingdom Threat Assessment of Serious Organised Crime 2006/7 (SOCA London 2006 July) 14. SOCA defines serious organised criminals as ‘those involved on a continuing basis, normally working with others, in

Organised Crime: Definitional and Theoretical Analysis

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The Action Plan to Combat Organised Crime59 adopted by the Ministers for Justice and Home Affairs during the Dutch EU Presidency in 1997 has called for greater harmonisation in the fight against organised crime in the EU member states. Despite the various efforts in developing a joint definition of organised crime and the fact that the Europol definition must be subscribed so that some form of assessment at the EU level is possible, each of the 15 member states continues to have its own definition, adopts its own approach and strategic policy. The term ‘organised crime’ is not only largely differentiated in each member state, it also represents different phenomena. A comparative internal EU report confirms ‘the idea that organised crime in Europe is not controlled by large, monolithic and well-structured criminal organisations, but rather by small organisations and networks with multinational orientation. Furthermore, the national reports frequently referred to the adaptability of criminal organisations, in particular, where it concerns new business opportunities and situations.’60 The United Nations Convention against Transnational Organised Crime61 was adopted by the General Assembly in November 2000 where an organised criminal group is defined as ‘a structured group of three or more persons existing for a period of time and acting in concert with the aim of committing one of more serious crimes or offences established in accordance with this Convention, in order to obtain, directly, or indirectly, a financial or other material benefit.’ Furthermore, there is also growing involvement of criminal organisations in the smuggling of human beings and hi-tech crimes which are not only more lucrative but the penalties are lower than that of drug trafficking. In fact, the understanding of patterns of criminal relationships in most European countries is very patchy due to the lack of criminological research.62 Before the establishment of National Criminal Intelligence Service and National Intelligence Model (NIM), the extent of organised crime activity in the United Kingdom was understated because of the absence of a centralised body for collating and coordinating information on organised criminal enterprises. Besides, the importance of intelligence was often underplayed at both strategic and tactical levels.63 There is committing crimes for substantial profit or gain, for which a person aged 21 or over on first conviction could expect to be imprisoned for three or more years.’ 59 EU Council ‘Action Plan to Combat Organised Crime’ adopted by the Council on 28 April 1997, Official Journal of the European Communities (OJ 97/C 251/1) 1. 60 M Den Boer ‘The Fight Against Organised Crime in Europe: A Comparative Perspective’ (2001) 9(3) European Journal on Criminal Policy and Research 259, 260. 61 The United Nations Convention against Transnational Organised Crime was adopted by the General Assembly in resolution 55/25 (15 November 2000; A/RES/55/25). The UN Convention and both protocols on the smuggling of migrants and the trafficking of human beings can be downloaded at , accessed 31 January 2007. 62 M Levi ‘Perspectives on “Organised Crime”: An Overview’ (1998) 37(4) Howard Journal of Criminal Justice 335, 340; M Levi Reflections on Organised Crime: Patterns and Control (Blackwell UK 1998). 63 BAK Rider in Home Affairs Committee on Organised Crime: Minutes of Evidence and Memoranda (HC Paper (1994–95) 18–II) 193, para 3–12.

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no doubt that more cooperation within and among nations is required in combating the challenge of modern transnational organised crime. The Home Office announced the establishment of the new UK-wide Serious Organised Crime Agency (SOCA) on 9 February 2004.64 This new Agency brings together the responsibilities of National Criminal Intelligence Service (NCIS), National Crime Squad (NCS), Home Office responsibilities for organised immigration crime and the investigation and intelligence responsibilities of Her Majesty’s Customs and Excise (HMCE).65 Unlike traditional policing, the Serious Organised Crime Agency will be heavily involved in evaluating the crime sectors, identifying the threats and developing the relevant strategic plans, which will be discussed in more details in Chapter 9. Organised Crime – Terrorist Nexus Organised crime and terrorism66 have always been treated as two independent phenomena with different origins and organisations and they usually engage in different activities. Some terrorist groups are based on revolutionary claims (the Italian Red Brigades, the German Red Army Fraction, Action Directe in France, Communist Cells in Belgium, the First of October Anti-Fascist Resistance Groups ‘GRAPO’ in Spain); some on nationalist or independence claims (Irish Republican Army in Ireland, Le Front National de Libération de la Corse ‘FNLC’ in France, Euskadi ta Askatasuna ‘ETA’ in the Basque Country, the Liberation Tigers of Tamil Eelam ‘LTTE’ in Sri Lanka); some are fundamentalist terrorism (Hamas, the Algerian Groupe Islamique Armée ‘GIA’, Al-Qaida, Kach in Israel); and others are terrorism of the far right (Operation Save America ‘OSA’, the American Patriots).67 Under the instrumental approach, violence is seen as intentional, terrorism is a means to a political end and represents a strategic choice.68 It is based on the assumption that the government and the non-state organisation are engaged in a typical conflict. Terrorism is the ‘power to hurt’ in order to produce a change in the government’s political position.69 The non-state organisation using terrorism will 64 Home Office One Step Ahead: A 21st Century Strategy to Defeat Organised Crime Cm 6167 (HMSO London 2004 March). 65 Her Majesty’s Customs and Excise (HMCE) is now part of Her Majesty’s Revenue and Customs (HMRC), a new department established on 18 April 2005 which merges HMCE and the Inland Revenue. 66 Terrorism is no new phenomenon and the concept of terrorism goes back as far as the 18th century when it first became popular during the French Revolution. Yet the term ‘terror’ or ‘terrorism’ remains rather difficult to define due to its multi-faceted nature and different theories have been developed to explain this phenomenon. See AVM Leong ‘Definitional Analysis: The War on Terror and Organised Crime’ (2004) 8(1) Journal of Money Laundering Control 19 for discussions in this area. 67 Jean-Marc Sorel ‘Some Questions About the Definition of Terrorism and the Fight Against Its Financing’ (2003) 14(2) EJIL 365, 367. 68 M Crenshaw ‘The Logic of Terrorism: Terrorist Behavior as a Product of Strategic Choice’ in W Reich (ed) Origins of Terrorism: Psychologies, Ideologies, Theologies, States of Mind (Woodrow Wilson Center Press Washington DC 1998) 7. 69 TC Schelling Arms and Influence (Yale University Press New Haven, CT 1966) 1–34.

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calculate the costs of benefit or value gained from each action given the available resources and act out of anticipation of reward. This forms the basis for the analysis of surprise attack70 which compensates for weakness and explains the psychological warfare element and the indiscrimination of terrorism.71 Organisational theory focuses on the internal politics of the organisation based on the fundamental purpose of the organisation’s struggle for survival, thus, the act of terrorism is the outcome of internal group dynamics. Leaders maintain their positions by attracting more members through offering incentives and developing intense loyalties among those members, thus, entrepreneurship is an essential ingredient. The incentives for membership include social status, reputation, a sense of belonging and acceptance, excitement and material gains which give an explanation for the nationalist and separatist groups. Since political outcome is not the main concern, violence might serve a personal meaning for the individual and forms a path to individual salvation, thus religious or sacred terrorism can be explained using this approach. These organisational incentives may also vary according to internal pressures and external competitiveness; as a result, terrorist actions often appear to be inconsistent, erratic and unpredictable. In addition, terrorist actions do not necessarily aim to achieve stated political ends or directly reflect ideological values but rather depend on the incentives provided by the leaders. Organisational analysis also explains the continuous existence of terrorism despite the failure in achieving political goals. World system theory72 is based on the assumption that structural terrorism is the result of colonialism, imperialism and economic exploitation. The core nations have a strong political and military defence that enables them to maintain the international and hierarchical division of labour. These core nations exploit the semi-periphery and periphery nations through using institutional terror to maintain unequal exchange and control of technology and the means of production. The poor nations then use violence or terrorism to express their dissatisfaction and eliminate core oppression by the developed nations. According to this theory, the term ‘terrorism’ is created by the powerful nations in labelling the poor non-core nations. The powerful nations will often exclude their own behaviour and the behaviour of their allies from scrutiny, while the behaviour of non-core and non-allied nations which interferes or conflicts with the interest of the powerful core nations will be labelled as terrorism. The US claimed the Soviet Union and Libya as the primary sponsors of terrorism; however, they are reluctant to accept Syria’s participation in international terrorism.73 Traditional military theory focuses on the organisation and the training of armies as well as tactics and strategy for winning conventional warfare. War is an act of

70 RK Betts Surprise Attack: Lessons for Defense Planning (Brookings, Washington DC 1982). 71 M Crenshaw ‘Theories of Terrorism: Instrumental and Organisational Approaches’ in DC Rapoport (ed) Inside Terrorist Organisations (Frank Cass London 2001) 16, 16–19. 72 ID Onwudiwe The Globalization of Terrorism (Ashgate Aldershot 2001). 73 SE Herman ‘US Sponsorship of International Terrorism: An Overview’ (1987) 27 Crime and Social Justice 1; G Wardlaw ‘Terror as an Instrument of Foreign Policy’ in DC Rapoport (ed) Inside Terrorist Organisations (Columbia University Press New York 1988).

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force to compel one party to do the will of another, and it requires the existence of political communities with formal military organisations sanctioned to use violence for achieving the stated goals. In wars, there are rules and accepted norms of behaviour as codified in the Geneva and Hague Conventions on Warfare of the 1860s, 1899, 1907 and 1949 which prohibit the use of certain weapons (for example, chemical and biological warfare agents), impose regulations governing the treatment of captured or surrendered soldiers, and so on. By the same analogy, terrorists who view themselves as freedom fighters often claim to be representatives of a state pursuing a political goal. The major difference between terrorism and war is that terrorism is not bound by any rules of warfare or codes of conduct. It is suggested that terrorism should be viewed as a form of unconventional war within the concept of stratagem which is based on military trickery, deception and surprise.74 In other words, most conventional terrorist groups have ideological, political and religious motivation and are often fuelled by hate, their ultimate objective is not to achieve material gain, but to influence political behaviour, create psychological repercussions and generate widespread fear.75 This is very different from the motivation of organised crime which is essentially personal interest and economic gain. Relations among members are not expressed with the language of kinship as in the case of organised crime, however, they require an absolute commitment from their members with their own system of rules and mechanisms. Besides, terrorism does not follow any rules of war and all the political and ethical codes of all states are violated. Although historically some terrorist groups might have secured their finances through criminal activities, their ultimate aim was not wealth or profit. In fact, the religion of revolutionaries or terrorists, such as Sunni Taliban in Afghanistan and the extreme Shiite groups in Lebanon, opposed the use of drugs and those smoking opium were severely punished.76 Therefore, at least historically, terrorism was differentiated from other forms of organised criminal violence. In recent years, there is a growing awareness that the contemporary organised criminal groups and terrorist groups may not be that distinct, rather they are converging and becoming almost indistinguishable.77 It is believed that ‘a symbiosis between terrorism and organised crime has occurred that did not exist before.’78 Although organised crime and terrorism may not have long-term common goals, they have ‘common enemies – the authorities and the state’.79 Both organised crime and terrorism are destructive phenomena aimed at weakening the government and 74 EL Wheeler ‘Terrorism and Military Theory: An Historical Perspective’ (1991) 3(1) Terrorism and Political Violence 6. 75 P Chalk West European Terrorism and Counter-Terrorism: The Evolving Dynamic (St. Martin’s Press New York 1996). 76 B Hoffman Inside Terrorism (Columbia University Press New York 1998). 77 D Masciandara Terrorism and Organised Crime – Financial Markets and Offshore Centres (Ashgate UK 2004); Holmes, L., (ed.) Terrorism, Organised Crime and Corruption: Networks and Linkages (Edward Elgar Publishing UK 2007). 78 W Laqueur The New Terrorism: Fanaticism and the Arms of Mass Destruction (Oxford University Press New York 1999) 211. 79 W Laqueur The New Terrorism: Fanaticism and the Arms of Mass Destruction (Oxford University Press New York 1999) 217.

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resulting in disorder, instability and poverty. They both operate beyond the boundaries of legality and use fear and direct violence to influence the government, lobbyists and competitors in both legal and illegal businesses. In recent times, organised crime has become more and more politically involved, especially through corruption, since they need political parties or pressure groups to defend their interests in the long run. On one hand, the terrorist groups tend to generate funding by resorting to methods copied from organised crime; on the other hand, organised crime groups are copying the cellular terrorist structures.80 There is clear evidence of overlap between organised crime and terrorism, with one being used to fund the other in Northern Ireland.81 The present view is that criminal terrorism is ‘a special type of terrorist activity with a specific causative base, and it is necessary that special measures be taken to control and combat it.’82 ‘The leading figures in criminal terrorism are organised criminal groups, societies, and organisations of a national or transnational nature. The merging of organised crime and terrorism leads to the significant expansion of the financial, material, and purely operational capabilities of terrorist organisations, along with strengthening them structurally.’83 ‘With state-sponsors distancing themselves, terrorist groups will either develop robust organised crime components or work closely with organised crime groups. While the bulk of the terrorist groups will retain their political content, the potential for a few terrorist groups to degenerate into pure criminal groups will, nevertheless, increase.’84 It is argued that some terrorist groups have transformed into transnational criminal organisations. In fact, the degree of transformation may vary; some terrorists commit criminal acts to support political operations, while others view profit-driven criminal acts as their end. The term ‘narco-terrorism’ is used to describe the existence of drug cartels and drug trade within the terrorist groups. Narco-terrorism should not be confused with mere drug-related violence; the former is politically motivated while the latter is financially motivated.85 The terrorist organisations with their logistic skills, illegal structure and international connections are in a good position to engage in narcotics smuggling activities. ‘Ethnic-separatist groups with members and branches in a variety of countries, such as, for instance, the Tamil Tigers or the Kurdish militants, are in a favourable position to do so, for the ethnic diaspora provides the water in which the terrorist fish can move without hindrance.’86 It is well documented that 80 WA Tupman ‘Violent Business? Networking, Terrorism and Organised Crime’ in I McKenzie (ed) Law, Power and Justice in England and Wales (Praeger London 1998). 81 Home Office One Step Ahead: A 21st Century Strategy to Defeat Organised Crime Cm 6167 (HMSO London 2004 March) 9. 82 V Luneev ‘Organised Crime and Terrorism’ in High-Impact Terrorism (National Academy Press United States 2001) 38. 83 Modern Terrorism: Status and Prospects (Moscow 2000) 74. 84 R Gunaratna ‘Asia Pacific: Organised Crime & International Terrorist Networks’ in KPS Gill and A Sahni (eds) The Global Threat of Terror (Rakesh Press New Delhi 2002) 241, 268. 85 FN Baldwin ‘The Financing of Terror in the Age of the Internet: Wilful Blindness, Greed or a Political Statement?’ (2004) 8(2) Journal of Money Laundering Control 127. 86 W Laqueur The New Terrorism: Fanaticism and the Arms of Mass Destruction (Oxford University Press New York 1999) 217.

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a major part of the Partiya Karkeren Kurdistan PKK’s financial income is from narcotics smuggling.87 The most favourite and accessible route for the Kurdish smugglers is the ‘Balkan Route’.88 ‘In the Balkans, a region that suffered undue hardships in recent years, terrorism and organised crime have joined forces to disrupt the orderly development of democratic life and a free economy. Smuggling, illicit traffic in human beings, drugs, money laundering, and fiscal evasion undermine the foundations of orderly political life.’89 Extortion and blackmail are major methods of fund-raising used by the loyalist paramilitaries (Ulster Defence Association and the Ulster Volunteer Force) in Northern Ireland in the 1990s.90 There are other examples of cooperation between terrorism and organised crime following the breakdown of the Communist system of Soviet Union. In Chechnya, guerrilla-terrorist activities and organised crime were combined when fighting against the Russians and declaring itself a sovereign country in 1991. It is, indeed, difficult to draw a line between organised crime, patriotism and wars of liberation. The Chechen members of the Moscow gangs, or at least most of them, were patriots, and hundreds of them returned to their native country to defend it against the Russians. They used their infrastructure to obtain weapons and ammunition, including sophisticated war materials, from inside Russia and abroad. There is reason to believe that they were bribing Russian military personnel in order to obtain intelligence, and, while they continued to invest a considerable amount of their gains abroad, they also seem, to have bankrolled the Chechen war effort. At the same time, they refrained, by and large, from launching major terrorist attacks in the Russian capital, which should have been easy for them from a technical point of view. They must have realised that this would have resulted in a backlash that might have destroyed the main base from which they were transacting their business.91

Even though the old revolutionary slogans might still exist in some terrorist groups and they continue to generate funds through businesses and charities for their political ends, it is clear that terrorist groups have become more involved in criminal activities, which in the past were the domain of organised crime. So, to what extent did revolutionary terrorist groups tend to transform themselves into criminal organisations? Consider the emergence of the Triads and the Mafia, they were the result of public demand and were not regarded as criminal organisations when they were first established in the old days. The Triads rose as a revolutionary force to

87 T Ataov ‘Terrorism and Drug Trafficking: The Case of the “PKK”’ in AS Narang and P Srivastava (edd) Terrorism: The Global Perspective (Kanishka Publishers New Delhi 2001) 92, 96–97. 88 United Nations Report of the International Narcotics Control Board for 1996 (New York 1997) 59. 89 A Angjeli ‘The Challenge of Terrorism and Organised Crime’ (2003) Mediterranean Quarterly 34, 37. 90 A Silke ‘In Defense of the Realm: Financing Loyalist Terrorism in Northern Ireland – Part One: Extortion and Blackmail’ (1998) 21 Studies in Conflict & Terrorism 331. 91 W Laqueur The New Terrorism: Fanaticism and the Arms of Mass Destruction (Oxford University Press New York 1999) 220.

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overthrow the alien Ching Dynasty and to restore the Ming Dynasty.92 Whereas the Mafia emerged as protectors due to the lack of public trust after feudalism was abolished in Sicily. They claimed to serve the interests of the public and represented their discontent towards the government.93 However, as time passed and their original function was no longer needed, both became engaged in criminal activities for survival when the demand for illegal goods and services increased. Gradually, both the Triads and the Mafia degenerated into a global threat of organised crimes. One can say that the rise and fall of the revolutionary forces are shaped by the public interests at different epochs. In fact, there is a built-in failure mechanism in terrorism. Since their political objectives are not going to succeed in the long run and state-sponsors are going to distance themselves, terrorist groups have to find alternative justifications for their activities and other means to ascertain their status and lifestyles: organised crime is an attractive option. It is important to realise that in addition to the money for maintaining operational activities, substantial amounts of money are required to maintain networks and ensure ‘protection’ and financial security for those indirectly involved in terrorism. In other words, terrorism will be either fruitless in the long run or effective through organised crime. It is believed that terrorist organisations choose to move to criminal activities which are particularly lucrative but relatively low-risk, such as fraud and economic crimes.94 Conclusions While some believe that organised crime is highly structured and rationally designed criminal organisation, others claim that organised crime consists of loosely structured relationship engaging in disorganised illegal business. Depending on the various theories adopted by the authorities, a mixture of strategies and policies has been developed to combat organised crime. However, in my opinion, organised crime is a constantly changing phenomenon and different criminal activities require different organisational structures. Therefore, different approaches should be adopted at different times in different societies and perhaps there is no need for an exact definition of organised crime. The slogan ‘one man’s terrorist is another man’s freedom fighter’ indicates that terrorism is an emotive term and involves questions of morality. Philosophers, historians, social scientists, law enforcement officials, lawyers and researchers all define terrorism in their own context that suits their objectives and values. As a 92 M Booth The Triads: The Chinese Criminal Fraternity (Grafton Books London 1990); YK Chu The Triads as Business (Routledge London 2000). 93 D Gambetta The Sicilian Mafia: The Business of Private Protection (Harvard University Press Cambridge 1993); D Gambetta ‘Inscrutable Markets’ (1994) 6(3) Rationality and Society 353; D Gambetta and P Reuter ‘Conspiracy Among the Many: The Mafia in Legitimate Industries’ in G Fiorentini and S Peltzman (eds) The Economics of Organised Crime (Cambridge University Press 1995). 94 Home Affairs Committee on Organised Crime: Minutes of Evidence and Memoranda (HC Paper (1994–95) 18–II) 193, para 54.

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result, a variety of definitions, several classification systems, models and typologies are developed to explain this phenomenon. Like the meaning of organised crime, the definitions of terrorism also change over time and a different form of terrorism has emerged after World War II.95 Indeed, some commentators even believe that there is no need for a definition of terrorism at all.96 Although organised crime and terrorism may still be a different species of lawlessness, providing a clear cut definition of each concept has become almost impossible. Consequently, the interdiction of organised criminal syndicates and terrorist groups has become more difficult as the distinction between these two entities is clouded. On one hand, the terrorists tend to shift to organised criminal activities in obtaining the necessary funding, on the other hand, the organised crime groups tend to resemble the cellular terrorist structures. Nevertheless, both entities are inherently striving for divergent ends even though they often adopt similar methods.97 Due to their different end goals, political terrorist groups and transnational criminal organisations seldom cooperate on a long-term basis. If there is any cooperation, it is most likely to be short-term linkages of convenience, thus targeting and dismantling organised crime or terrorist groups remains a complex task. It is noted that ‘from a criminal law perspective, resort by a terrorist organisation to illegal means to finance its operations does not mean that the organisation has forfeited its ideological banner … The UN Convention Against Transnational Organised Crime concluded in 2000, exemplifies this tension between terrorism and organised crime by avoiding the inclusion of terrorist acts in the definition of organised crime despite the acknowledge and manifest links between the two.’98 Furthermore, with innovative development in technology, the tools and methods available to both organised criminals and terrorists have and are still changing. In some instances, only limited or even no physical violence may be involved. Cyberterrorism, being one of the best examples, is difficult to define or detect. A whole new arena for publicising the ideology behind terrorism and recruiting extremists through the Internet is being used nowadays.99 Besides, the fear of a terrorist attack via the Internet could render aspects of society incapable of functioning and cause severe disasters through affecting flight path data, nuclear

95 B Hoffman Inside Terrorism (Columbia University Press New York 1998) provides a clear summary of the major historical trends in international terrorism since the French Revolution and explains how the term ‘terrorism’ is interpreted during different periods in history. 96 R Thackrah ‘Terrorism: A Definitional Problem’ in P Wilkinson and A Stewart (eds) Contemporary Research on Terrorism (Aberdeen University Press Aberdeen 1989). 97 LI Shelley and JT Picarellli ‘Methods Not Motives: Implications of the Convergence of International Organised Crime and Terrorism’ (2002) 3(4) Police Practice and Research 305. 98 I Bantekas ‘The International Law of Terrorist Financing’ (2003) 97(2) The American Journal of International Law 315, 318. 99 JD Ballard, JG Hornik and D McKenzie ‘Technological Facilitation of Terrorism’ (2002) 45(6) The Amercian Behavioural Scientist 989; L Wade ‘Terrorism and the Internet: Resistance in the Information Age’ (2003) 16(1) Knowledge, Technology and Policy 104; FN Baldwin ‘The Financing of Terror in the Age of the Internet: Wilful Blindness, Greed or a Political Statement?’ (2004) 8(2) Journal of Money Laundering Control 127.

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reactors and water supply. Cyberlaundering is another example whereby the Internet is abused by criminals for laundering the proceeds of their illegal activities. Despite the obvious tendency that organised crime and terrorism are converging and cooperating to a certain extent, most governments tend to adopt different attitudes towards the two phenomena. They might maintain a symbiotic relationship with organised crime as a result of infiltration and corruption, however, terrorism is often perceived as a threat to the stability of the country. It is argued that some countries use the ‘War on Terror’ to justify their repressive measures on society and other countries. Whether or not organised crime and terrorism are parallel or intertwined, the process of globalisation and the broadening of economic opportunities worldwide highlight the need to strengthen cooperation among different countries and to adopt preemptive and defensive measures, such as intelligence-led policing and risk-based anti-money laundering strategy, in tackling these problems. In addition, effective legal, organisational and scientific support structures are required to interdict organised crime and terrorism. ‘No country can prevent terrorism in isolation: only governments working together can raise global counter-terrorism capacity’100 and transnational organised crime raises concerns in every society. As a result, the UN Convention Against Transnational Organised Crime101 was adopted by the General Assembly on 15 November 2000 to eradicate organised crime dealing specifically with the smuggling of migrants and people trafficking. Following the 11 September attacks in the United States, the UN Security Council Resolution 1368 calls upon all states ‘to work together urgently to bring justice to the perpetrators, organisers and sponsors of these terrorist attacks and stresses that those responsible for aiding, supporting, or harbouring the perpetrators, organisers and sponsors of these attacks will be held accountable.’102 The UN Security Council Resolution 1373103 imposes obligations on all states to block terrorist funds, prevent terrorist activity, cooperate on judicial and extradition questions and coordinate on related issues of transnational crime, illicit drugs and arms trafficking. In addition, the establishment of the UN Counter-Terrorism Committee (CTC) under Resolution 1373 is essential to coordinate the counter-terrorism activities between UN member states. Although numerous international efforts have been initiated, the complexity of intelligence sharing and the issues of secrecy continue to hinder the success in the fight against organised crime and terrorism. Besides, the large number of anti-organised crime and counter-terrorism bodies and agencies often results in duplication of resources and confusion in their objectives, which also adds to the complexity of the definitions. Therefore, coordinating the different bodies, agencies and task forces, and resolving and reviewing the different definitions and legislation to incorporate the latest changes in the criminality are of utmost importance.

100 Foreign Affairs Select Committee on the Foreign Policy Aspects of the War Against Terrorist (HC Paper (2002–03) 405, para 190). 101 United Nations Convention against Transnational Organised Crime (15 November 2000; A/RES/55/25). 102 UN Security Council Resolution 1368 (12 September 2001). 103 UN Security Council Resolution 1373 (28 September 2001).

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Chapter 3

Criminal Finance: Money Laundering and Terrorist Financing Organised criminals are driven either directly or indirectly by economic gain and terrorist activities would not be possible without any funding. As discussed in Chapter 2, many terrorist groups often secure their finances through criminal activities even though economic gain is not their ultimate goal. Both organised criminals and terrorists have to look for ways to secure and safeguard the proceeds of criminal ventures which allows power and prestige to be acquired. In order to avoid detection and prosecution, there is an obvious and compelling incentive for the criminals to hide the source of their illicit gains, in other words, to launder their profits from criminal activities so that illicit money can be re-invested in further legal and illegal activities. Terrorist financing is a more complicated subject due to the fact that part of their funding might have come from legitimate sources, which is then mixed with their illicit earnings, making detection more difficult. Tackling money laundering and terrorist financing effectively is therefore fundamental to combating serious organised crime and terrorism. The UK Cabinet Office observed, ‘removing assets from criminals can disrupt criminal organisations in much the same way that excessive taxation undermines legitimate business, by cutting into profits, reducing the availability of working capital for existing enterprises and removing reserves for start-up of new criminal enterprises.’1 This chapter explains the concepts of money laundering and terrorist financing, which is also known as ‘criminal finance’. The vulnerability of financial institutions, offshore financial centres and other professionals being used by organised criminals and terrorist groups is analysed. The development of relevant legislation, regulatory and professional bodies in combating criminal finance is also discussed.

1 Cabinet Office, Performance and Innovation Unit Recovering the Proceeds of Crime (Cabinet Office London 2000) para 3.10. Hereafter referred to as the ‘PIU Report’. The full report is available at , accessed 8 February 2007.

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Money Laundering Money laundering is the ‘lifeblood of organised crime’2 and enables criminal activity to continue. It is also known as the ‘Crime of the 1990s’.3 The well-known money laundering case, Bank of Credit and Commerce International (Overseas) Ltd v Akindele,4 is considered to be ‘the greatest scandal in the history of banking’.5 Phil Williams, Director of the Ridgeway Centre for International Security Studies states, ‘It took 45 seconds to launder the money by wire transfer, and it took the police officers 18 months to investigate the case.’6 So, what is money laundering and why criminals choose to launder their money? How does money laundering take place and what is the scope of the problem? What is Money Laundering? Money laundering is the process used by criminals to move, conceal and legitimise their proceeds of crime. The purpose of money laundering is ‘to render it almost impossible for evidence to be obtained which allow a court to establish the derivation of the money.’7 The money launderer can then use the proceeds for future legal or illegal activities without fear of criminal or civil sanction. In fact, it has long been recognised that the profits from economic and commercial crime may be used to finance drug trafficking or other forms of organised crime.8 The expression was first used in the major investigation carried out by the Central Tactical Unit (CENTAC) of the Drug Enforcement Administration (DEA) in the United States in 1980.9 However, others argued that the term formally appeared in a legal context 2 DA Chaikin ‘Money Laundering as a Supranational Crime: An Investigatory Perspective’ A Eser & O Lagodny (eds) Principles and Procedures for a New Transnational Criminal Law (1992) 420; BAK Rider ‘The Limits of the Law: An Analysis of the Interrelationship of the Criminal and Civil Law in the Control of Money Laundering’ (1999) 2 Journal of Money Laundering Control 209, 210. 3 GR Strafer ‘Money Laundering: The Crime of the ‘90s’’ (1989) 27 American Criminal Law Review 149. 4 Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2000] 4 All ER 221, [2000] All [2000] 3 WLR 1423. Now nicknamed the Bank of Crooks and Criminals International, see SA Ali Money Laundering Control in the Caribbean (Kluwer Law International United Kingdom 2003) n 133 at 25. 5 Per Lightman J in Bank of Credit and Commerce International SA (in liq) v Ali and others (No 2) [1999] 4 All ER 83. 6 P Williams Money Laundering (1997) 10(4) IASOC Magazine, available at , accessed 8 February 2007. 7 BAK Rider ‘Fei Ch’ien Laundries: The Pursuit of Flying Money (Part I)’ (1992) 1 Journal of International Planning 77. 8 BAK Rider ‘The Promotion and Development of International Co-operation to Combat Commercial and Economic Crime’ at 1980 Meeting of Commonwealth Law Ministers, Barbados, April–May 1980. 9 In April 1975, the Drug Enforcement Administration (DEA) in the United States created the first Central Tactical Unit (CENTAC) to concentrate enforcement efforts against major drug trafficking organisations. In December 1980, the DEA launched a major

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in 1982 in the case United States v $4,255,625.39.10 Since then, the term has been widely accepted and used throughout the world. It is believed to originate from the use of cash based retail service industries like laundries to disguise the origins of cash acquired through rackets in the United States.11 Illicit earnings are mixed with the legitimate earnings from the laundries. ‘Dirty’ money is put through a cycle of transactions or washed and is turned into legal and ‘clean’ money when it comes out at the other end. The laundering activity is not confined to cash, however; simply hiding the unlawful funds without disguising their criminal source is not money laundering because its criminal origin still exists. The National Money Laundering Strategy for 1999 defined money laundering as follows, Money laundering is the financial side of virtually all crime for profit. …This gives money laundering a dual importance. First, it provides the fuel that allows criminals and criminal organisations to conduct their ongoing affairs. It may seem like an antiseptic form of crime…But make no mistake, it is the companion of brutality, deceit and corruption. As the President said in his October 1995 speech before the UN General Assembly, ‘we must not allow [criminal enterprises] to wash the blood off profits from the sale of drugs, from terror to organised crime.’ Second, money laundering is important in its own right. It taints our financial institutions, and, where allowed to thrive, it erodes public trust in their integrity. Further, in an age of rapidly advancing technology and globalisation, it can affect trade flows and ultimately disturb financial stability. In the end, like the crime and corruption of which it is a necessary part, money laundering is an issue of national security.12

Money laundering can also be described as simply as ‘an operation that bridges the gap between the criminal world and the rest of society.’13 A more detailed definition describes money laundering as ‘a process that employs financial, accounting, legal and other instruments in conjunction with an object that has either been used in, or derived from, unlawful activity. The primary purpose of the process is to create a veil of legal cleanliness around the object. This veil not only prevents the object’s association with unlawful activity from being accurately traced and identified, but

investigation in Miami and set up a bogus money laundering corporation. The operation was known as ‘Operation Swordfish’ and aimed against international drug organisations. In January 1982, the Federal Bureau of Investigation (FBI) officially joined forces with the DEA to bolster the drug effort with more anti-drug manpower and resources. 10 United States v $4,255,625.39 (1982) 551 F Supp 314. 11 J Blum et al Financial Havens, Banking Secrecy and Money Laundering UNDCP technical series issue 8 (United Nations New York 1998) 6. 12 United States Department of the Treasury and United States Department of Justice The National Money Laundering Strategy for 1999, 3, available at , accessed on 8 February 2007. 13 J Robinson The Laundrymen: Inside the World’s Third Largest Business (Pocket Books London 1995) 269.

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also enables the object to be used in the legal economy with anonymity and without fear of criminal, civil, or equitable legal sanction.’14 Like any other phenomenon, there is no single definition of money laundering, it varies with the purpose of the research, the policy of the government or the legislation imposed. However, a precise definition is required for criminal offences purpose. Why Choose Money Laundering? Illegal activities, such as drug trafficking, extortion, prostitution rings, gambling, loansharking, illegal arms sales, smuggling, fraud and counterfeiting15 have generated huge profits for both organised criminals and terrorist groups. Since ‘clean money is worth more than dirty money’,16 it creates the incentive to legitimise the ill-gotten gains by disguising the sources, changing the form or moving the funds to places less prone to detection. Money laundering allows criminals to maintain control of the proceeds of crime, avoid detection, confiscation or forfeiture. It also enables the criminals to enjoy the ill-gotten profits without jeopardising or attracting attention to the underlying activity or the persons involved, and ultimately provides a legitimate cover for their source of income. Illicit gains are laundered through financial institutions and reinvested to fund future legal and illegal activities. In other words, it enables criminals to draw resources from the legal economy as inputs in their illegal activities and also facilitates diversification through investment.17 The fact that money laundering involves risk assessment and calculated decisions means that the reasons why rational and logical individuals or companies choose to engage in money laundering can be anticipated, generalised and modelled.18 Traditional Money Laundering Process Money laundering links the formal with the informal economies, the underground with the overground economies and the legal with the illegal economies. The processes involved in money laundering are not necessarily harmful or abusive per se, simply keeping wealth secret may not be intolerable in either a legal or 14 K Hinterseer Criminal Finance: The Political Economy of Money Laundering in a Comparative Legal Context (Kluwer Law International United Kingdom 2002) 11. 15 ‘Gangs linked to international terrorism and organised crime are relying increasingly on music piracy to fund their operations’. For details, see T Burt ‘Music Piracy “Funding Terrorism and Crime” The Financial Times 23 July 2004. 16 P Alldridge Money Laundering Law: Forfeiture, Confiscation, Civil Recovery, Criminal Laundering and Taxation of the Proceeds of Crime (Hart Publishing Oxford United Kingdom 2003) 1. 17 J Weatherford The History of Money (Three Rivers Press New York 1997) 206. 18 Ingo Walter’s Model of International Financial Secrecy is used as an analytic framework to examine why money laundering occurs and how money laundering operations are structured. See I Walter Secret Money: The Shadowy World of Fraud, Tax Evasion, Capital Flight and Fraud (Unwin Paperbacks London 1989); I Walter The Economics of International Money Laundering (Institute of Latin American and Iberian Studies, Columbia University, New York 1993).

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moral sense and it might even be prudent and beneficial in certain circumstances.19 However, the money laundering process ‘will inevitably involve resort to transactions, real or imagined, which will be designed to confuse the onlooker and confound the inquirer.’20 Misrepresentation is thus the key to the laundering process which involves three stages as portrayed by the Drug Enforcement Administration namely placement, layering and integration. Such traditional money laundering process described below takes a simplified and conventional view of the mechanism. In reality, money laundering techniques vary in their degree of sophistication depending on the purpose. The money laundering schemes can be more complex or more basic, may involve any number of intermediaries and utilise both traditional and nontraditional payment systems. The money laundering strategy adopted by the criminal organisations depends on a number of factors including (i) the type and location where the acquisitive crime was committed; (ii) the quantity of assets; (iii) the structure and level of organisation of the criminal syndicate; (iv) the amount of fear and intimidation a criminal enterprise can generate; (v) the educational, professional and business background of the criminal; (vi) the availability of technology and; (vii) the cost of hiring of financial experts in developing and implementing money laundering schemes. Placement This is the first stage in the washing cycle where the launderer is most likely to be detected. Illegally earned money is placed into the financial system through cash paid into the bank, or retail economy through buying high value goods, property or business assets, or is smuggled out of the country. In order to avoid the creation of any records or detection, the technique of ‘smurfing’ is used whereby large amount of cash transactions is broken into smaller ones, ‘bundles’ or ‘loads’, so that each transaction is below the threshold-reporting requirements. The aim of the placement stage is to remove the cash from the location of acquisition to avoid detection and the criminals usually gain nothing from successful placement. Layering Layering is the first attempt to conceal or disguise the source and the ownership of the funds by setting up complex multiple financial transactions (such as wire transfers abroad, cash deposited in overseas banking system, offshore financial centres and resale of goods and assets), which confuse the audit trail and separate the money from its criminal origin. Often times, these transactions serve no particular economic purposes. Given the huge amount of daily transactions, the high degree of anonymity available in some countries and the lack of cooperation in anti-money laundering investigations in certain jurisdictions, the chances of transactions being traced are insignificant. Integration It is at this final stage that illegal money is integrated and repatriated into the legitimate economy and is assimilated with all other assets in the system 19 BAK Rider The Price of Laundering Dirty Money (Jesus College, University of Cambridge: Private Paper) 2006. 20 BAK Rider The Price of Laundering Dirty Money (Jesus College, University of Cambridge: Private Paper) 2006.

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so that it appears as normal legally earned funds. Money launderers will establish anonymous, dummy, front or shell companies in foreign countries where the right to secrecy is guaranteed. They then grant themselves loans out of the laundered money for future legal transactions and create false loan repayments. Overvaluation of imports and exports by forging invoices may also be used at this stage. The overvaluation of imports allows the launderers to justify the money deposited at domestic banks, while the overvaluation of exports is used to justify the money transferred from abroad. By then, it is extremely difficult to distinguish legal and illegal wealth. A United Nations commissioned team has summarised the general process and developed the ‘ten fundamental laws of money-laundering’,21 1. The more successful a money laundering apparatus is in imitating the patterns and behaviour of legitimate transactions, the less likelihood of it being exposed. 2. The more deeply embedded illegal activities are within the legal economy, the less their institutional and functional separation, the more difficult to detect money laundering. 3. The lower the ratio of illegal to legal financial flows through any given business institution, the more difficult will be the detection of money laundering. 4. The higher the ratio of ‘services’ to physical goods production in any economy, the more easily money laundering can be conducted in that economy. 5. The more the business structure of production and distribution of nonfinancial goods and services is dominated by small and independent firms or self-employed individuals, the more difficult the job of separating legal from illegal transactions. 6. The greater the facility for using cheques, credit cards and other non-cash instruments for effecting illegal financial transactions, the more difficult is the detection of money laundering. 7. The greater the degree of financial deregulation for legitimate transactions, the more difficult will be the job of tracing and neutralising criminal money flows. 8. The lower the ratio of illegally to legally earned income entering any given economy from outside, the harder the job of separating criminal from legal money. 9. The greater the progress towards the financial services supermarket, the greater the degree to which all manner of financial services can be met within one integrated multi-divisional institution, the less the functional and institutional separation of financial activities, the more difficult the job of detecting money laundering.

21 J Blum, M Levi, T Naylor, and P Williams Financial Havens, Banking Secrecy and Money Laundering, A Study Prepared on Behalf of the United Nations Office for Drug Control and Crime Prevention Under the Auspices of the Global Programme Against Money Laundering (United Nations Vienna 1998) 100.

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10. The worse becomes the current contradiction between global operation and national regulation of financial markets, the more difficult the detection of money laundering. Different Channels for Money Laundering Money laundering is a necessary consequence of almost all profit generating crime and it will occur anywhere in the world. It is a flexible and dynamic operation whereby launderers can quickly adapt to the changing conditions. They are willing to exploit any product or service in any country depending on the available laundering mechanisms and the requirements of the criminal organisations. Their choice is based on cost-benefit analysis on their perception of the risk of detection, the costs for laundering the money, the effectiveness of the sector, the volume of funds to be laundered, the chosen destination for the funds, the ability to travel, the network of trusted relationship and the educational, professional or business background of the launderers. ‘The larger the organisation that is employed to launder the money, the greater the costs and the higher the risk of detection or of something going wrong.’22 Generally speaking, money launderers tend to choose developing countries with lower risk of detection due to their weak or ineffective anti-money laundering programmes. Besides, developing economies cannot afford to be too selective about the sources of capital invested in their financial systems. However, some launderers will prefer developed economies as a destination for laundered funds because of the perception that funds in those countries are clean and the financial systems are more stable, even though developed economies with sophisticated legal and regulatory controls may involve higher risk. Money launderers will set up corporate structures or trusts or use financial enterprise as a disguise. Products and assets that are easily converted into liquid assets or cash are attractive options for money launderers. In 2002, purchasing property in the United Kingdom was the most popular method of money laundering used by serious and organised criminals, followed by investment in front companies or high cash businesses or simply spending the criminal proceeds to fund a lifestyle and by transferring cash overseas using bureaux de change and money transmission agencies.23 The following are some money laundering techniques often employed by organised criminals demonstrating those business sectors which are highly vulnerable to money laundering.24

22 BAK Rider ‘The Limits of the Law: An Analysis of the Interrelationship of the Criminal and Civil Law in the Control of Money Laundering’ (1999) 2 Journal of Money Laundering Control 209, 215. 23 National Criminal Intelligence Service UK Threat Assessment 2003 (NCIS London 2003) 60. 24 Also see RE Bell ‘An Introductory Who’s Who for Money Laundering Investigators’ (2002) 5(4) Journal of Money Laundering Control 287; A Kennedy ‘Dead Fish Across the Trail: Illustrations of Money Laundering Methods’ (2005) 8(4) Journal of Money Laundering Control 305; P Lilley Dirty Dealing: The Untold Truth About Global Money Laundering, International Crime and Terrorism (Kogan Page London 2006).

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Formal Money Transfer Networks Basic banking services, wire transfer facilities and cash deposits are one of the core means of laundering criminal proceeds. Though money launderers have to face the challenge of due diligence checks carried out by the banks, the banking sector remains attractive to money launderers because the funds transferred are often perceived as ‘clean’ money and the receiving institutions tend to ask fewer questions about the transactions. Correspondent accounts are legitimate international banking facilities held between banks in order to facilitate cross jurisdictional transactions. They enable smaller banks or overseas banks to offer a wider range of international banking services. However, correspondent banking becomes an attractive option for laundering money across jurisdictions, if less stringent ‘Know Your Customer’ checks are required by banks based in particular jurisdictions who use the correspondent system to transfer funds to countries with a more rigid regime.25 Informal Money Transfer Networks Underground banking, also known as ‘parallel’ banking, ‘relationship’ banking, ‘intermediary’ banking, informal money transfer networks or alternative remittance systems, is the practice used to avoid taxation or government scrutiny. The most common forms of underground banking systems26 include Hawala system (used by the Indian communities), Hundi system (used by Pakistani communities), Phoei Kuan (used by Thai communities) and Fie Ch’ieu (used by Chinese communities). Al-Qaida was believed to have used the hawala system to move funds to finance the 11 September attacks in the United States.27 The underground banking systems tend to mirror more conventional bank practices, however, written records are usually kept in the format of dialect or shorthand or a language not familiar to the law enforcement agencies. These informal banking systems work on trust and tokens and can be used for legitimate as well as illegitimate purposes. The tokens used can be a playing card, a post card or even a numbered cloakroom ticket. One half is retained by the ‘depositor’ (the person wishing to transfer the money abroad) and the other half is sent abroad as proof that the money has been deposited. An associate abroad will facilitate the payment of funds to another party in another country in local currency on receipt of the other half of the token. This involves no actual movement of money across the border. Through these systems, money can be transferred highly efficiently and wholly unauthorised around the world, thereby circumventing the regulatory controls in place to help prevent and report suspicion of money laundering. Due to the lack of understanding of the cultures in which the different systems operate, not much 25 ‘Correspondent Banking: A Gateway for Money Laundering’ report by the Minority Staff of the Permanent Subcommittee on Investigations of the Senate Committee on Governmental Affairs, Washington DC, February 2001, 43. 26 For more information and case studies, see L Lambert ‘Asian Underground Banking Scheme’ (2002) 18(4) Journal of Contemporary Criminal Justice 358; S Nawaz, McKinnon and R Webb ‘Informal and Formal Money Transfer Networks: Financial Service or Financial Crime?’ (2002) 5(4) Journal of Money Laundering Control 330. 27 The Interdiction of Terrorist Property Working Group The Funding of Terror: The Legal Implications of the Financial War on Terror (The Society for Advanced Legal Studies United Kingdom 2002).

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is known about underground banking in law enforcement circles and government regulatory agencies. Financial Services Bureaux de change and money transmission agents have been utilised by organised crime groups, especially those involved in drug trafficking. Money transmitting services in the form of wire, fax, draft, cheque or by courier are created by the demand of those who are unable to use traditional financial institutions. Customer anonymity is a primary feature of such transmissions. Just in one case, Colombian drug traffickers in the United Kingdom were believed to have laundered £47 million through a London bureaux de change owned by members of the group. Besides, one in six suspicious activity reports (SARs) in 2002 were made by money service businesses.28 Money launderers will need to invest or transform their criminal proceeds at some stage in the laundering process. Purchasing property in the United Kingdom or overseas is a comparatively easy and efficient means to launder money. Large amounts of cash can be laundered in one transaction through building societies and it is a rather safe investment provided that the property market does not fall. Money laundering techniques can also involve paying off a debt faster than income would support. Any types of securities and derivatives, which can be purchased, sold and converted between currencies and transferred from one jurisdiction to another, are attractive means for laundering the proceeds of crime.29 Futures markets are another favoured option for money launderers. Due to the anonymous nature of the trade strategies in the futures markets, all the brokers trade as principals and not in their clients’ name, thus the true identity of the beneficial owner is often unknown. In the futures market, one can only buy a commodity if someone is willing to sell. Money launderers take the advantage of buying and selling the same commodity. They pay the loss with dirty money and receive a cheque that legitimises their profits as well as creating a paper trail to verify the source of their income. Anti-money laundering initiatives have led criminals to seek new ways of laundering their proceeds. In addition to the traditional targets of banks and building societies, money launderers now target the insurance industry particularly at the layering stage.30 They invest their cash in different financial products, such as insurance policies, share portfolios or high yield savings accounts, then followed by early cancellation or surrender and the money will return ‘clean’. Though there are costs or penalties incurred in early withdrawal of savings or surrender of policies, criminals will choose this method if the overall risk of detection is lower. They might also try to corrupt financial professional advisors into assisting them to set up sophisticated money laundering schemes. In addition, trusts are often misused by criminals because of its secretive nature and flexibility. Information about the 28 National Criminal Intelligence Service UK Threat Assessment 2003 (NCIS London 2003) 61. 29 S Sharma ‘Dirty Money: How the UK Securities and Derivatives Markets are used to Launder Money’ (2001) 4 Journal of Money Laundering Control 309. 30 R Orr ‘Money Launderers Targeting Insurance Industry’ The Financial Times 8 February 2005.

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settler and beneficiary of the trust is often hidden and trusts are usually set up in conjunction with front companies resulting in more confusion in the audit trails. Non-Financial Sectors The Financial Action Task Force (FATF) annual typology report in 1996–9731 indicated that money launderers increasingly target non-banking financial institutions and non-financial businesses because traditional banking and financial sectors are more vigilant as a result of the increasing compliance regulations. The use of gatekeepers, such as lawyers, accountants, financial advisors and other intermediaries, for financial advice to set up corporate and trust structures or to act as nominated shareholders, directors or trustees provide a useful and hidden route for depositing funds into the banking system.32 Most complex money laundering cases involve UK shell companies.33 Trading companies and high cash businesses owned or part-owned by the criminals or close associates are often used as front companies to launder their proceeds. Trade-based money laundering is defined as ‘the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimise their illicit origin.’34 This is usually achieved through the misrepresentation of the price, quantity or quality of imports or exports including over-and-under invoicing of goods and services, multiple invoicing of goods and services, over-and-under shipments of goods and services and falsely described goods and services. Other businesses, such travel agents, restaurants, nightclubs, fast food outlets, video rental stores, tanning salons, taxi firms, car repairs, sales companies and pawn shops have high cash turnovers which provide a cover for cash deposits into bank accounts. Laundering proceeds through high value goods and casino gambling are other options employed by launderers. High value goods business is often traded in cash and there is the general lack of audit trails in the business. High value goods such as gem, gold, diamonds, jewels, artwork and antiques, are highly portable and can be transported between national borders much easier and less risky in relative to cash. This approach might carry some risks particularly if the pattern of spending exceeds any obvious source of income, thus criminals would either develop a plausible cover story or being discreet in their spending habits. Casinos and gambling establishments offer a simple and relatively risk free choice for laundering money. Illicit money can be deposited with a casino in exchange for gambling chips. The money launderer would typically make frequent high stake bets at very low odds resulting in a minimal profit, after a few games, the launderer will then cash in the reminder for a cheque 31 Financial Action Task Force 1996–1997 Report on Money Laundering Typologies (FATF February 1997), full report is available at < http://www.fatf-gafi.org/ dataoecd/31/29/34043795.pdf>, accessed 8 February 2007. 32 Financial Action Task Force 2000–2001 Report on Money Laundering Typologies (FATF February 1997), full report is available at , accessed 8 February 2007. 33 The PIU Report (n 1 above) para 9.48. 34 Financial Action Task Force Trade Based Money Laundering (FATF June 2006), full report is available at , accessed 8 February 2007.

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which is effectively ‘clean’ and can be deposited in his account. Sometimes money launderers will buy winning tickets from people in bookmakers and used them as the proof of the source of income. Another option is Internet gambling.35 Offshore Financial Centres and Overseas Companies The collapse of American energy company ENRON has been linked to the extensive use of offshore companies registered in the Cayman Islands, Barbados, Bermuda, the Turks and Caicos and Aruba. The Offshore Financial Centres (OFCs) can be defined as a place that ‘hosts financial activities that are separated from major regulating units (states) by geography and/or legislation.’36 The services of such businesses are conducted in foreign currency and are provided exclusively to non-residents of the host state. The Offshore Financial Centres attempt to attract offshore financial business through the imposition of minimal taxation and bank secrecy.37 Services provided by the Offshore Financial Centres to foreigners or non-residents include personal and corporate banking services, offshore fund management and administration, trust and company administration, investment management and advice, accounting and legal services. The Offshore Financial Centres can be divided into three main types namely functional, notional and compound. Actual financial activities take place at the functional Offshore Financial Centres such as Bermuda, Jersey, Guernsey and the Isle of Man. The functional Offshore Financial Centres usually employ more than 12% of the local labour force and contribute over 25% of Gross Domestic Product (GDP). Notional Offshore Financial Centres, such as Anguilla, the Cook Islands, Vanuatu, Seychelles and Labuan, are shell offices of banks which make book entries of financial transactions with overall local employment of less than 3% and GDP contributions below 10%. Compound Offshore Financial Centres, like the Bahamas and the Cayman Islands, carry out a mixture of functional and notional activities employing 3% to 10% of local labour force and contributing 10% to 24% of GDP.38 The rapid growth of Offshore Financial Centres since the 1960s and the emergence of a suitable environment for international money laundering can be seen in light of ‘four spaces’ namely secrecy space (confidentiality), the regulatory space, political space and the fiscal space (taxation).39 ‘The provision of “offshore” financial and banking services is not in itself a problem, but when these facilities are offered with impenetrable bank secrecy and the supervision over these operations is lax or insufficient for proper prudential surveillance, then the attraction for organised crime 35 P Hugel and J Kelly ‘Internet Gambling, Credit Cards and Money Laundering’ (2002) 6(1) Journal of Money Laundering Control 57. 36 MP Hampton ‘Treasure Islands or Fool’s Gold: Can and Should Small Island Economies Copy Jersey?’ (1994) 22(2) World Development 237. 37 M Cook Offshore Financial Centres (Financial Times Business Publishing London 1981). 38 MP Hampton The Offshore Interface: Tax Havens in the Global Economy (Macmillan Basingstoke 1996). 39 MP Hampton ‘Creating Spaces: The Political Economy of Offshore Finance Centres: The Case of Jersey’ (1996) 84(2) Geographische Zeitschrift 103; MP Hampton & M Levi ‘Fast Spinning into Oblivion? Recent Developments in Money Laundering Policies and Offshore Finance Centres’ (1999) 20(3) Third World Quarterly 645.

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and others who wish to launder money or create “secret money” are obvious.’40 The Offshore Financial Centres often provide criminals with a convenient and seemingly legitimate means to transfer funds out of the United Kingdom. The stock of wealth held offshore is estimated at over US$6 trillion.41 Money laundering via offshore and overseas companies might involve the purchase of legitimate companies outside the United Kingdom using criminal proceeds, the transferring of funds through foreign based company accounts or setting up of overseas companies. In addition, the setting up of ready-made ‘off the shelf’ offshore companies offered by company formation agents is easy and quick and is often advertised in reputable financial magazines. In fact, the United Kingdom is one of the jurisdictions where it is the easiest and cheapest to acquire instance companies which can greatly facilitate organised crime and other illicit instant companies.42 The Scope of the Problem In addition to focusing on the money laundering processes, it is essential to recognise at what stage a particular exercise would be considered as money laundering, and more importantly, how the laundered proceeds would impact the economy and the society as a whole. The proceeds of crime, if laundered successfully, will be legitimised hence will not be recognised or confiscated. These proceeds can be consumed and invested in the legal economy and allow organised crime to acquire or penetrate legitimate businesses. In other words, money laundering provides the means through which criminal enterprises are able to extend their influence throughout the legitimate economy without the fear of legal sanction. They might even attempt to dominate the market, engage in predatory pricing, extortion and corruption. Money laundering also produces further series of macroeconomic harms.43 It might erode a nation’s economy by changing the demand for cash, making interest and exchange rates more volatile, thus causing high inflation. In addition, money laundering might deter foreign direct investment. Furthermore, social and collective ethical standards and ultimately the democratic institutions of society might be weakened as a result of corruption and criminal enterprises infiltration into different levels of society. Therefore, the absence of money laundering legislation can serve to destabilise the political system of a country. Due to the fact that money laundering is a concealed activity and occurs outside the normal sphere of economic statistics, it is difficult to estimate the

40 BAK Rider in Home Affairs Committee Third Report on Organised Crime: Minutes of Evidence and Memoranda (HC Paper (1994–95) 18–II) 193, para 75. 41 A Edwards Review of Financial Regulation in the Crown Dependencies: A Report (Home Office London 1998). 42 BAK Rider in Home Affairs Committee Third Report on Organised Crime: Minutes of Evidence and Memoranda (HC Paper (1994–95) 18–II) 193, para 76. 43 PJ Quirk Macroeconomic Implications of Money Laundering, IMF Working Paper 96/66 (International Monetary Fund Washington DC 1996); V Tanzi Money Laundering and the International Financial System, IMF Working Paper 96/55 (International Monetary Fund Washington DC 1996).

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exact scale of the problem or to quantify its ‘dark figure’44 and direct observation by macroeconomists is almost impossible.45 Globalisation, integration within the financial markets and technological innovation allow the launderers to conduct their activities with greater ease, sophistication and profitability. It also makes it more difficult to measure the actual scale of the problem. Money laundering is regarded as the world’s third largest industry after international oil trade and foreign exchange.46 The International Monetary Fund (IMF) estimated the size of money laundering worldwide to be between US$600 million and US$1.5 trillion, which is about 2% to 5% of the world’s Gross Domestic Product (GDP).47 A figure of US$600 million roughly equals to the value of the total output of an economy the size of Spain.48 According to Austrian Professor Friedrich Schneider, the total global volume of money laundered in 2004 was estimated to be worth US$1,400 billion and 40% of laundered money has been derived from drug trafficking.49 The size and complexity of the financial sector and free movement of capital within the European Union makes London a prime target for money laundering. The sums involved in money laundering in the United Kingdom are not known. However, an estimate by the Foreign and Commonwealth Office (FCO) showed that within the United Kingdom alone the underground economy accounts for up to 15% of the nation’s GDP.50 The former Her Majesty’s Customs and Excise (HMCE) estimated the annual proceeds of crime in the United Kingdom at somewhere between £19 billion and £48 billion, with approximately £25 billion actually laundered. This amount would roughly equate to one-fifth of all undeclared economic activity in the United Kingdom which is about 13% of UK’s GDP, according to the International Monetary Fund estimates.51 The use of Internet to launder money in and out of the United Kingdom also poses increasing threat though there is no data on the level of money laundered in this way. It is argued that the visible effects of money laundering would have been far greater if the sums laundered are in actual fact as large as is claimed and that the effect 44 Dark figure refers to the difference between unreported or unprosecuted cases and cases come before courts. 45 PJ Quirk ‘Money Laundering: Muddying the Macroeconomy’ (1997) 34 Finance and Development 7. 46 J Robinson The Laundrymen: Inside the World’s Third Largest Business (Pocket Books London 1995). 47 M Camdessus Money Laundering: The Importance of International Countermeasures (10 February 1998), details can be found at , accessed 8 February 2007. 48 Financial Action Task Force ‘Policy Brief: Money Laundering’ OECD Observer, July 1999. Details can be found at , accessed 8 February 2007. 49 Card World and Fraud Watch Annual User Guide 2005 (C&M Publications Ltd United Kingdom 2005) 58. 50 Foreign and Commonwealth Office ‘Money Laundering’ Focus International, September 1999. 51 National Criminal Intelligence Service UK Threat Assessment 2003 (NCIS London 2003) 60.

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is indeed far less than is suggested by the law enforcement agencies. Nevertheless, whether or not they know how much is laundered, it constitutes a significant problem to the world as a whole.52 Besides, without a more precise estimate, anti-money laundering strategies or policy-making will be detrimentally affected and their true impact on money laundering activities cannot be assessed accurately. Terrorist Financing Following the 11 September terrorist attacks in the United States, the vital importance of taking action to combat the financing of terrorism is recognised worldwide which has accelerated the ratification of the International Convention for the Suppression of the Financing of Terrorism. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT Act) 2001 has been enacted to identify, freeze, seize and forfeit the funding of terrorist activities.53 Governments, law enforcement agencies and international organisations extend their missions beyond money laundering to a global effort against terrorist financing. The first international legal use of the term ‘terrorist financing’ appeared in the United Nations General Assembly’s Declaration on Measures to Eliminate International Terrorism in 1994.54 The Financial Action Task Force (FATF) has issued the Eight Special Recommendations on Terrorist Financing,55 together with the FATF Forty Recommendations on Money Laundering,56 set out the basic framework to detect, prevent and suppress the financing of terrorism and terrorist acts. Furthermore, a new measure, Special Recommendation IX, which calls on countries to stop cross-border cash movements by terrorists and criminals, has been added as a key element to the world’s counter-terrorist financing defences.57 An interesting issue raised in this context is how far should the law go to criminalise terrorist financing, should the original motivation or purpose or intention to commit a crime or terrorist acts be criminalised? One must bear in mind that anti-money

52 P van Duyne ‘Money Laundering: Pavlov’s Dog and Beyond’ (1998) 37 Howard Journal of Criminal Justice 359, 360; P van Duyne & H de Miranda ‘The Emperor’s Clothes of Disclosure: Hot Money and Suspect Disclosures’ (1999) 31 Crime, Law and Social Change 245. 53 For discussions of the substantive provisions in the USA PATRIOT Act 2001 see FN Baldwin ‘Money Laundering Countermeasures with Primary Focus upon Terrorism and the USA Patriot Act 2001’ (2002) 6(2) Journal of Money Laundering Control 105; SD Cassella ‘Terrorism and the Financial Sector: Are the Right Prosecutorial Tools Being Used?’ (2004) 7(3) Journal of Money Laundering Control 281. 54 General Assembly Resolution 49/60 of 9 December 1994 (A/RES/49/60), Annex II, op.paras. 4, 5. 55 FATF Eight Special Recommendations can be found at , accessed 8 February 2007. 56 FATF Forty Recommendations on Money Laundering can be found at , accessed 8 February 2007. 57 FATF Special Recommendations IX can be found at , accessed 8 February 2007.

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laundering legislation might not be able to target funds which has a legitimate origin but intended to be used to commit crimes in the future. Sources of Funding Wealth is the ultimate goal of organised criminals while the primary objective of terrorism is ‘to intimidate a population, or to compel a Government of an international organisation to do or abstain from doing any act.’58 While the difference in their objectives may be true to some extent, terrorist organisations still require financial support in order to achieve their aims. As mentioned in the report by the Northern Ireland Affairs Committee of the House of Commons, ‘Terrorism is about gaining power through violence, and money is a means to that end.’59 Therefore, it is necessary for a successful terrorist group to build and maintain an effective financial infrastructure and gain access to international payment systems. It must develop various sources of funding and a means of laundering these funds. In April 2002, the Financial Action Task Force issued guidance for financial institutions describing the sources of terrorist financing and how to detect terrorist financing activities.60 The Joint Money Laundering Steering Group (JMLSG) has also issued the typologies of terrorist financing.61 There are two primary sources of funding namely (i) financial support provided by States or large organisations and (ii) financial support derived directly from various ‘revenue-generating’ activities. The former so-called ‘state-sponsored’ terrorism has declined and replaced by individual financial means, for instance, the establishment and the support of Al-Qaida terrorist networks provided by Osama bin Laden. Though the extent to which nations or states sponsor terrorist groups remain an open question and no particular state is addressed by the United Nations Security Council Resolutions, countries such as Iran, Libya, Syria and Sudan have been accused of fostering terrorism. It was widely known that the Taliban regime supported the Al-Qaida networks and operations. The latter source of funding involves crime or other unlawful activities, such as narcotics trafficking, extortion and kidnapping, theft and robbery, fraud, gambling, smuggling and trafficking in counterfeit goods. ‘Narco-terrorism’ has attracted particular attention as discussed in Chapter 2. For example, the Liberation Tigers of Tamil Eelam (LTTE) has close ties to drug trafficking networks in Burma; members of Hizbollah are linked to drug trafficking in Lebanon; and the Al-Qaida network is linked to the production and distribution of opium in Central Asia and East Africa. A decline in direct state sponsorship has led to the increased use of criminal activity by terrorist groups to 58 Article 2, International Convention for the Suppression of the Financing of Terrorism, 9 December 1999. 59 Northern Ireland Affairs Committee The Financing of Terrorism in Northern Ireland (HC Paper 978 (2002–03) I) 9. 60 Financial Action Task Force Guidance for Financial Institutions in Detecting Terrorist Financing (FATF 24 April 2002), available at , accessed 8 February 2007. 61 Joint Money Laundering Steering Group Guidance Notes for the Financial Sector (December 2001) 136–139.

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obtain the necessary finance, which results in little difference between the sources of funding for terrorists and organised crime groups in this respect.62 One of the key differences between criminal organisations and terrorist groups is that funding for the latter may also include income derived from legitimate sources or from a combination of lawful and unlawful sources. Community solicitation and fundraising appeals are very effective means of raising funds to support terrorism which are often carried out in the name of charitable or relief organisations and may be targeted at a particular community. Members of these organisations often have no knowledge that part of their contributions is being used to support terrorist activities as they are led to believe that they are giving for a good cause. ‘Some of the specific fundraising methods might include: collection of membership dues and/or subscriptions; sale of publications; speaking tours; cultural and social events; door-to-door solicitation within the community; appeals to wealthy members of the community; and donations of a portion of their personal earnings.’63 Members of Hamas and Hizbollah received significant financial support from wealthy Muslims within the Middle East in the course of making zakat (that is, charitable contributions) and from Palestinian émigrés in Western Europe and the United States during the 1980s and 1990s. The methods employed by terrorist groups in gathering funds are varied and they often employ one or more mechanisms to raise funds. Thus, terrorism can be financed with perfectly clean funds, ‘if the focus is only on the source of the money moving through the financial channels, this will be completely missed. It is the manner in which the money is being moved that is the clue to the intended future use of that money for dreadful purposes.’64 Laundering of Terrorist Funds In addition to relying on apparent legal sources of income, terrorist groups may derive income from criminal acts in much the same way that organised crime syndicates do. It might seem logical that funding from legitimate sources would not need to be laundered. Nevertheless, terrorist groups utilise the financial networks and process their funds in much the same way as non-terrorist criminal groups so as to obscure or disguise links to the sources of their funding and the perpetrators, organisers and sponsors of their activities and to use the funds without drawing the attention of authorities. Some of the methods employed include cash smuggling, structured deposits to or withdrawal from bank accounts, purchases of different

62 W Laqueur The New Terrorism: Fanaticism and the Arms of Mass Destruction (Oxford University Press New York 1999); The Interdiction of Terrorist Property Working Group The Funding of Terror: The Legal Implications of the Financial War on Terror (The Society for Advanced Legal Studies United Kingdom 2002). 63 Financial Action Task Force Guidance for Financial Institutions in Detecting Terrorist Financing (FATF 24 April 2002) 5. 64 SD Cassella ‘Reverse Money Laundering’ (2003) 7(1) Journal of Money Laundering Control 92.

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types of monetary instruments, shell and front companies, use of credit and debit cards, wire transfers and also underground banking systems.65 In spite of the similar laundering methods used by organised criminal groups discussed above, the laundering activities carried out by the terrorist groups might not constitute a money laundering offence per se if the source of funding is not from criminal activity. When such a connection between the funds and the criminal act that generated them could not be shown, anti-money laundering laws might not be able to assist the investigation or target the funds. In fact, the terrorist-related laundering process can be known as ‘reverse money laundering’66 which refers to the use of ‘clean’ money for ‘dirty’ ends. It is therefore much harder for a financial institution to identify terrorist money laundering and it is extremely difficult to trace or prove the proceeds of crime before the crime is committed. Detecting and Tracing of Terrorist Funds There are certain factors that make detecting and tracing terrorist funding more difficult. The first aspect is the apparent legal source of funding from charitable or relief organisations. Terrorist money only becomes tainted when it is donated to a terrorist organisation. Fundraising activities are more problematic and might be difficult to detect in the first place by using the traditional anti-money laundering techniques. As stated in the Financial Action Task Force Guidance, It should be acknowledged as well that financial institutions will probably be unable to detect terrorist financing as such. Indeed, the only time that financial institutions might clearly identify terrorist financing as distinct from other criminal misuse of the financial system is when a known terrorist or terrorist organisation has opened an account. Financial institutions are, however, in a position to detect suspicious transactions that, if reported, may later prove to be related to terrorist financing…’ and ‘financial institutions do not necessarily need to determine the legality of the source or destination of the funds. Instead, they should ascertain whether transactions are unusual, suspicious or otherwise indicative of criminal activity.67

Besides, the lack of clear typologies for the operation of ‘terrorist’ accounts means that financial institutions will have to rely principally upon information given or made available to them from outside sources in order to detect terrorist funding within their accounts. The second aspect is the size and nature of the transactions involved. ‘Money intended for terrorism does not move around the financial system like dirty money; it does not need to make rapid movements between accounts, across borders, through 65 Financial Action Task Force Guidance for Financial Institutions in Detecting Terrorist Financing (FATF 24 April 2002) 5. 66 T Graham, E Bell & N Elliott Butterworths Compliance Series: Money Laundering (Butterworths Great Britain 2003) 58; SD Cassella ‘Reverse Money Laundering’ (2003) 7(1) Journal of Money Laundering Control 92; DD Aufhauser ‘Analysis – Terrorist Financing: Foxes Run to Ground’ (2003) 6(4) Journal of Money Laundering Control 301. 67 Financial Action Task Force Guidance for Financial Institutions in Detecting Terrorist Financing (FATF 24 April 2002) 3.

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a range of currencies, into and out of assets. It simply behaves like ordinary money doing ordinary things and so is almost impossible to identify. This means that the usual range of counter-money laundering techniques and tools are of very limited use. For example each act of terrorism may require small amounts of money – and so neither the cash transaction reporting measures nor suspicious transactions reporting systems are triggered.’68 For example, an examination of the financial connections among the September 11th hijackers showed that most of the individual transactions were small sums, that is, below the usual cash transaction reporting thresholds, and in most cases the operations consisted of only wire transfers. The individuals were ostensibly foreign students who appeared to be receiving money from their parents or in the form of grants for their studies, thus the transactions would not have been identified as needing additional scrutiny by the financial institutions involved.69

The use of alternative remittance systems or underground banking systems makes it extremely difficult to trace money flows through these systems, or indeed to separate legal from illegal money flows. These systems operate outside the regulated financial sector, thus, the requirements for detailed record keeping and reporting and due diligence are less stringent than those for banks or other regulated financial institutions. Existing laws and systems are designed to focus on the origins of dirty money and are not able to ‘spot legitimate money passing through for illegitimate purposes in the future.’70 The Financial Action Task Force experts tried to determine whether the distinction between legal and illegal sources of funding affects the ability of the states to use anti-money laundering measures to detect, investigate and prosecute potential terrorist-related money laundering. There was some disagreement amongst the experts about the extent to which anti-money laundering laws could or should play a direct role in the fight against terrorism. Some were in the opinion that terrorist-related money laundering is a distinct sub-category of money laundering and should become ‘a specific focus of anti-money laundering measures’. While others argued that the current money laundering counter-measures on serious crime, including terrorism, were sufficient and that any specific focus on anti-terrorist measures should take place elsewhere.71

68 The Interdiction of Terrorist Property Working Group The Funding of Terror: The Legal Implications of the Financial War on Terror (The Society for Advanced Legal Studies United Kingdom 2002) 41. 69 Financial Action Task Force Guidance for Financial Institutions in Detecting Terrorist Financing (FATF 24 April 2002) 6. 70 M Peel & J William ‘The dirty money that is hardest to clean up’ Financial Times (20 November 2001). 71 Financial Action Task Force FATF-XII Report on Money Laundering Typologies 2000– 2001 (FATF 1 February 2001), available at , accessed 8 February 2007.

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UK Domestic Measures Against Criminal Finance The United Kingdom plays an important part in deciding and promoting anti-money laundering and counter-terrorist financing strategies given the role of London as a major international financial centre. The anti-money laundering architecture in the United Kingdom involves the criminal law, the civil law and the regulatory law. The three main parties in the legislative and regulatory framework for combating money laundering are (i) the Government which sponsors the primary legislation, defines criminal offences and makes the Money Laundering Regulations; (ii) the Financial Services Authority which makes regulatory (non-criminal) rules to counter money laundering; and (iii) the Joint Money Laundering Steering Group which issues extensive guidance notes on the meaning and application of the regulations and on good practice.72 No doubt, the banking sector has a major role in financial services regulation and the Joint Money Laundering Steering Group is chaired by the British Bankers Association (BBA).73 Initially, most attention was concentrated on the proceeds of drug trafficking. The former Customs and Excise, now part of Her Majesty’s Revenue and Customs, had a national remit against organised crime focusing on the fight against drugs. They were responsible for the prevention and detection of illegal import and export of controlled drugs and international drug smuggling; while the Police were responsible for enforcing the law against the supply, manufacture and possession of controlled drugs. Such distinction between the importation of drugs and the distribution of drugs often cause overlaps and conflicts between the Customs and the Police in their investigation and prosecution of drug offences. However, in recent years, the focus has shifted to recovering the proceeds of serious crime and terrorist financing. Money Laundering Offences The first money laundering offences were contained in the Drug Trafficking Offences Act 1986 and were later consolidated into the Drug Trafficking Act 1994. However, these offences were confined to laundering the proceeds of drug trafficking offences.74 The Government soon realised that it was not practical to distinguish drugs from non-drugs proceeds and introduced new offences into the Criminal Justice Act 1988 by the Criminal Justice Act 1993, which applied to the proceeds of indictable non-drugs offences. The criminal law dimension of the money laundering offences

72 AVM Leong ‘Chasing Dirty Money: Domestic and International Measures Against Money Laundering’ (2007) 10(2) Journal of Money Laundering Control 140. 73 WJL Blair et al, Banking and Financial Services Regulation (Butterworths London 2002); WJL Blair Butterworths Banking Law Handbook (Butterworths London 2002). 74 A drug trafficking offence is defined as (i) production, supply and possession for supply of controlled drugs; (ii) an offence under Customs and Excise Management Act 1979; (iii) exportation, improper importation or fraudulent evasion; (iv) manufacture of a scheduled substance; (v) using a ship for illicit traffic in controlled drugs; (vi) money laundering offences; or (vii) any conspiracy, attempt or incitement to commit the above. Note that simple possession of drugs is not a drug trafficking offence.

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will be discussed in Chapter 5. In 2000, the PIU Report75 reviewed the anti-money laundering and confiscation regimes; it identified the weaknesses in the system and generated policy implications for the Proceeds of Crime Act 2002. Part VII of the Proceeds of Crime Act 2002 consolidates, updates and reforms the criminal law in relation to money laundering under a single legislation. It extends the definition of money laundering to all crimes and includes three principle offences namely (i) concealing or transferring criminal property;76 (ii) entering into or becoming concerned in money laundering arrangements;77 and (iii) acquiring, possession and use of criminal property.78 These principle offences all carry a maximum of 14 years imprisonment, which is more than most predicate offences. There are further criminal offences related to money laundering, including the failure to disclose knowledge or suspicion of money laundering;79 tipping off80 and prejudicing an investigation.81 These new money laundering provisions are discussed in more details in Chapter 7. Terrorist Money Laundering Where the terrorist organisation has acquired the property by illegal means, then it is liable to confiscation under the normal criminal legislation. However, terrorism in its ‘purest’ form is not necessarily done for profit and no benefit is obtained, thus posing a challenge to the confiscation legislation. Besides, the laundering activities carried out by the terrorist groups might not constitute any money laundering offence per se if the source of funding is not from criminal activity. In other words, regular confiscation and money laundering proceedings cannot go after the money intended for use in terrorism which has not been itself acquired by terrorist or criminal acts. In fact, the target of terrorist financing is not the provenance of the funds but the use of the funds in the future. In order to target those funds acquired legally and intended for the purpose of terrorism, forfeiture and criminalisation are the only available mechanisms. Such provisions are available under the Terrorism Act 2000 which echo those for confiscation under the Drug Trafficking Act 1994 and the Criminal Justice Act 1988. The Terrorism Act 2000 is designed to consolidate the larger part of the relevant legislation in the United Kingdom82 and to incorporate the 1998 Terrorist Bombings Convention and the 1999 Terrorist Financing Convention. The Act deals with 75 PIU Report (n 1 above). 76 Section 327, Proceeds of Crime Act 2002. 77 Section 328, Proceeds of Crime Act 2002. 78 Section 329, Proceeds of Crime Act 2002. 79 Sections 330–332, Proceeds of Crime Act 2002. 80 Section 333, Proceeds of Crime Act 2002. 81 Section 342, Proceeds of Crime Act 2002. 82 The Terrorism Act 2000 provides a new framework of a permanent UK-wide counterterrorist legislation with application not only to Irish terrorism, but also to other domestic and international threats. This Act reforms and replaces previous legislation including the Prevention of Terrorism (Temporary Provisions) Act 1989, the Northern Ireland (Emergency Provisions) Act 1996 and the Criminal Justice (Terrorism and Conspiracy) Act 1998. The reasons for establishing a permanent UK-wide counter-terrorist legislation can be found

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offences committed abroad and against non-UK nationals, it recognises that terrorist operations cannot be carried out by a single individual but require a structured organisation. Terrorism is defined as the use or threat of action which involves serious violence against a person; or involves serious damage to property; or endangers a person’s life; or creates a serious risk to the health or safety of the public or a section of the public; or is designed seriously to interfere with or seriously to disrupt an electronic system and where the use or threat of that action is designed to influence the Government or to intimidate the public or a section of the public and is made for the purpose of advancing a political, religious or ideological cause.83 The Act defines four main offences that may have an impact on the financial sector: fund-raising,84 use and possession of funds,85 funding arrangements86 and money laundering.87 A person commits an offence if (i) he invites another to provide money or other property; or (ii) he receives money or other property; or (iii) he provides money or other property; or (iv) he uses or possesses money or other property for the purposes of terrorism. He also commits an offence if he enters into or becomes involved in an arrangement, which money or other property is made available for the purposes of terrorism. It is also an offence if he facilitates the retention or control by or on behalf of another person of terrorist property by concealing it, removing it from the jurisdiction, transferring it to nominees or in any other way. Another new offence can be committed by a person if he does not disclose to a constable his belief or suspicions incurred in the course of a trade, profession, business or employment that another person has committed an offence under sections 15 to 18 of the Terrorism Act 2000.88 The adoption of Anti-Terrorism, Crime and Security Act in 2001 amended certain provisions in the Terrorism Act 2000, including measures to cut off terrorist funding, to facilitate sharing of information between law enforcement agencies and public authorities, to increase investigative powers and to provide for new offences in relation to the duty to disclose information or suspicion of terrorist financing. Indeed, the United Kingdom has adopted a multi-agency approach in intelligenceled investigations for targeting and disrupting terrorist financing.89 This new counterterrorist regime has become more stringent by creating new offences and providing additional measures in relation to terrorist financing. It also gives the law enforcement officers more intrusive powers in terrorist investigations. in Lord Lloyd Inquiry into Legislation Against Terrorism Cm3420 (HMSO London 1996 October). 83 Section 1, Terrorism Act 2000. 84 Section 15, Terrorism Act 2000. 85 Section 16, Terrorism Act 2000. 86 Section 17, Terrorism Act 2000. 87 Section 18, Terrorism Act 2000. 88 Section 19, Terrorism Act 2000. Schedule 2, Part III of the Anti-Terrorism, Crime and Security Act 2001 amends the Terrorism Act 2000 and inserts a new section 21A, which imposes an obligation of disclosure upon a person who is in the course of business in the regulated sector. 89 HM Treasury Combating the Financing of Terrorism: A Report on UK Action (HMSO London 2002 October).

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On 16 December 2004, the Law Lords ruled that detention under the AntiTerrorism, Crime and Security Act 2001 was in breach of the Human Rights Act 1998. They held that Part IV powers of the Act were discriminatory as they only applied to foreign nationals and were not proportionate to the threat of terrorism faced by the UK. The Human Rights 1998 (Designated Derogation) Order 2001 was quashed and section 23 the Anti-Terrorism, Crime and Security Act 2001 was declared incompatible with Articles 5 (right to liberty) and 14 (freedom from discrimination) of the European Convention on Human Rights.90 As a result, the Prevention of Terrorism Act 2005 had an accelerated passage through the Parliament and received Royal Assent on 11 March 2005. The purpose of this Act is to replace Part IV powers under the Anti-Terrorism, Crime and Security Act 2001 and to provide the Home Secretary with power to make ‘non-derogating control orders’91 or to apply to High Court for ‘derogating control orders’.92 Such control orders impose obligations93 on individuals, whether British or foreign nationals, suspected of being 90 House of Commons Hansard Debates for 26 January 2005 (pt 4), ‘Measures to Combat Terrorism’, see , accessed 8 February 2007. 91 Section 15 of the Prevention of Terrorism Act 2005 defines ‘non-derogating control order’ as a control order made by the Secretary of State that does not involve derogating from the European Convention on Human Rights. 92 Section 15 of the Prevention of Terrorism Act 2005 defines ‘derogating control order’ as a control order imposing obligations that are or include derogating obligations from the European Convention on Human Rights. 93 Section 1(4) of the Prevention of Terrorism Act 2005 states that those obligations may include in particular (a) a prohibition or restriction on his possession or use of specified articles or substances; (b) a prohibition or restriction on his use of specified services or specified facilities, or on his carrying on specified activities; (c) a restriction in respect of his work or other occupation, or in respect of his business; (d) a restriction on his association or communications with specified persons or with other persons generally; (e) a restriction in respect of his place of residence or on the persons to whom he gives access to his place of residence; (f) a prohibition on his being at specified places or within a specified area at specified times or on specified days; (g) a prohibition or restriction on his movements to, from or within the United Kingdom, a specified part of the United Kingdom or a specified place or area within the United Kingdom; (h) a requirement on him to comply with such other prohibitions or restrictions on his movements as may be imposed, for a period not exceeding 24 hours, by directions given to him in the specified manner, by a specified person and for the purpose of securing compliance with other obligations imposed by or under the order; (i) a requirement on him to surrender his passport, or anything in his possession to which a prohibition or restriction imposed by the order relates, to a specified person for a period not exceeding the period for which the order remains in force; (j) a requirement on him to give access to specified persons to his place of residence or to other premises to which he has power to grant access; (k) a requirement on him to allow specified persons to search that place or any such premises for the purpose of ascertaining whether obligations imposed by or under the order have been, are being or are about to be contravened; (l) a requirement on him to allow specified persons, either for that purpose or for the purpose of securing that the order is complied with, to remove anything found in that place or on any such premises and to subject it to tests or to retain it for a period not exceeding the period for which the order remains in force; (m) a requirement on him to allow himself to be photographed; (n) a requirement on

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involved in terrorism-related activity.94 These are preventative orders, which are designed to restrict or prevent the further involvement by individuals in such activity and are subject to full hearings by the High Court or Court of Session. Breach of an obligation imposed by a control order, without reasonable excuse, will be a criminal offence punishable following indictment conviction with imprisonment up to 5 years or a fine or both; or following summary conviction with imprisonment up to 12 months or a fine or both.95 Rules and Regulations: Detection and Prevention of Money Laundering The Money Laundering Regulations were made to ensure that the United Kingdom complies with the European Money Laundering Directives. The first Money Laundering Regulations 1993 came into force on 1 April 1994 which imposed a number of statutory obligations on all financial institutions namely (i) to set up procedures for verifying the identity of clients; (ii) to set up record-keeping procedures for evidence of identity and transactions; (iii) to set up internal reporting procedures for suspicions, including the appointment of a Money Laundering Reporting Officer (MLRO); (iv) to train relevant employees in their legal obligations; and (v) to train those employees in the procedures for recognising and reporting any suspicion of money laundering. The Second Money Laundering Directive resulted in the implementation of Money Laundering Regulations 2003 which has extended the statutory obligations to cover financial services, money transfer agents, auditors, external accountants and tax advisors, real estate agents, notaries and other legal professionals acting in any financial or real estate transactions, dealers of high value goods (when payment in cash of 15,000 euros is made) and casinos. Therefore, not only financial institutions but other non-financial businesses are affected by money laundering regulations legally and financially. The latest Third Money Laundering Directive is intended to consolidate and update the First and Second Money Laundering Directives and to ensure that its anti-money laundering rules are in line with the Financial Action Task Force revised Forty Recommendations in June 2003. The United Kingdom must implement the Third Money Laundering Directive by 15 December 2007. Her Majesty’s Treasury has issued a consultation on the Government’s proposed implementation of the Third Money Laundering Directive in July 200696 and a consultation of the Draft Money Laundering Regulations

him to co-operate with specified arrangements for enabling his movements, communications or other activities to be monitored by electronic or other means; (o) a requirement on him to comply with a demand made in the specified manner to provide information to a specified person in accordance with the demand; and (p) a requirement on him to report to a specified person at specified times and places. 94 Section 1 of the Prevention of Terrorism Act 2005. 95 Section 9 of the Prevention of Terrorism Act 2005. 96 Her Majesty Treasury, Implementing the Third Money Laundering Directive: A Consultation Document (HMSO London 2006 July). This document is available at < http:// www.hm-treasury.gov.uk/media/B60/AC/moneylaundering310706.pdf>, accessed 8 February 2007.

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2007 in January 2007.97 Since most existing legislation in the United Kingdom is already compliant with the Proposed Directive, the provisions in the draft Articles is envisaged to have little impact in the United Kingdom. Nevertheless, due to the need for compliance, additional costs are likely to increase in the areas of administration, training and the provision of storage space for records. The question of proper implementation and enforcement still remains. Serious Organised Crime Agency The Serious Organised Crime and Police Act 2005 received Royal Assent on 7 April 2005. Part I of the Act establishes the Serious Organised Crime Agency (SOCA), a non-departmental public body reporting to the Home Office and incorporates National Crime Squad (NCS), National Criminal Intelligence Service (NCIS), the investigative and intelligence work of Her Majesty’s Revenue and Customs98 on serious drug trafficking and the Immigration Service’s responsibilities for organised immigration crime. The core objective of the Serious Organised Crime Agency is to reduce the harm to the United Kingdom caused by serious organised crime at all levels. The Serious Organised Crime Agency takes over from the National Criminal Intelligence Service responsibility for the regime’s Financial Intelligence Unit (FIU) and its database of suspicious activity reports (SARs).99 The Serious Organised Crime Agency aims to improve the performance of intelligence and coordinate the collection, collation, analysis and dissemination of intelligence. Following the Lander’s Report, one of its milestones is to operationalise the suspicious activity report system by adopting a risk-based approach, updating the technology so as to allow full access to all SARs by all law enforcement agencies, clearing the backlog of SARs and addressing the issue of confidentiality.100 Financial Services Authority Since the advent of N2 (30 November 2001), the Financial Services Authority has taken over the responsibilities of nine regulators and plays a significant part in the legislative and regulatory framework for combating 97 Her Majesty Treasury, Implementing the Third Money Laundering Directive: Draft Money Laundering Regulations 2007 (HMSO London 2007 January). This document is available at , accessed 8 February 2007. 98 Her Majesty’s Revenue and Customs is a new department established on 18 April 2005 which merges Her Majesty’s Customs and Excise and the Inland Revenue. 99 The Financial Intelligence Division (FID) of NCIS, formerly known as the Economic Crime Bureau, had two distinct functions namely the development of intelligence and the processing of suspicious activity reports (SARs). The FID had established a proactive unit in developing financial intelligence to support the NCIS Service objectives and national and international initiatives as the United Kingdom Financial Intelligence Unit (FIU). It had a dedicated Foreign Financial Intelligence Unit (FFIU) to conduct FIU to FIU enquiries abroad and was the conduit through which the law enforcement agencies in the United Kingdom can seek to obtain similar financial information from foreign counterparts. The other main function of the FID included the receipt, analysis and dissemination of SARs. 100 Lander, Sir S., Review of the Suspicious Activity Reports Regime (SOCA London 2006 March), available at , accessed 8 February 2007.

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money laundering in the United Kingdom. The regulatory objective of the Financial Services Authority is to deter criminals and terrorists from trying to use the financial system to perpetrate financial crime and to make it easier to catch and punish those who abuse the financial system.101 With its powers of supervision and enforcement in relation to financial businesses authorised under the Financial Services and Markets Act 2000, the Financial Services Authority has made regulatory rules to counter money laundering.102 The Money Laundering Rules made by the Financial Services Authority impose five main duties on firms similar to the statutory obligations under the Money Laundering Regulations including the requirements (i) to identify the applicants for business (Know Your Customer), (ii) to have record keeping procedures, (iii) to establish a Money Laundering Reporting Officer, (iv) to ensure suspicion of money laundering is reported internally and externally and (v) to impose internal controls appropriate for forestalling and preventing money laundering. The Financial Services Authority also has a power of criminal prosecution for breaches of the Money Laundering Regulations. The Financial Fraud Information Network (FFIN) was established in 1992 to bring together regulators and law enforcement agencies to share information on cases of mutual interest. The Financial Services Authority organises and provides the secretariat to the Financial Fraud Information Network to pool intelligence between the various agencies involved and to secure the earliest possible detection of fraud and money laundering. Recently, the Financial Services Authority emphasises the importance of a riskbased approach which means that resources should be allocated to the fight against money laundering on a proportionate basis (that is, in relation to concrete risks faced by the financial institutions). As stated in the Policy Statement in January 2006,103 the Financial Services Authority will remove the existing detailed rules on antimoney laundering controls and replace them with high-level provisions in the Senior Management Arrangements, Systems and Controls Sourcebook for firms to have their own risk-based controls on money laundering so that resources can be allocated on a more proportionate and cost-effective basis. The real challenge is to generate a flexible, workable, high-level and effective framework.104 Joint Money Laundering Steering Group The Joint Money Laundering Steering Group consists of 16 leading UK Trade Associations105 in the Financial Services 101 Section 6, Financial Services and Markets Act 2000. 102 Section 146, Financial Services and Markets Act 2000. 103 Financial Services Authority Reviewing our Money Laundering Regime – Feedback on Chapter 2 of CP05/10 and made text Policy Statement 06/1(2006 January), available at < http://www.fsa.gov.uk/pubs/policy/ps06_01.pdf>, accessed 8 February 2007. 104 M Gill and G Taylor ‘Preventing Money Laundering or Obstructing Business’ (2004) 44(4) British Journal of Criminology 582. 105 Members of the Joint Money Laundering Steering Group include Association of British Insurers (ABI), Association of Friendly Societies (AFS), Association of Independent Financial Advisers (AIFA), Association of Private Client Investment Managers and Stockbrokers (APCIMS), British Bankers’ Association (BBA), British Venture Capital Association (BVCA), Building Societies Association (BSA), Council of Mortgage Lenders (CML), Electronic Money Association (EMA), Finance and Leasing Association (FLA), Foreign Banks and

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Industry and is chaired by the British Bankers Association. Its purpose is to provide practical assistance and guidance in interpreting the Money Laundering Regulations. It has been publishing Money Laundering Guidance Notes for the financial sector since 1990.106 The Guidance Notes cover all financial sector firms107 and will be of relevance to a court in determining whether there has been a breach of Money Laundering Regulations and whether there have been reasonable grounds for suspicion of money laundering. The purpose of the Guidance Notes is (i) to outline the requirements of the UK money laundering legislation, (ii) to give a practical interpretation of the Money Laundering Regulations, (iii) to set out the requirements of the Financial Services Authority Money Laundering Rules, evidential provision and guidance, (iv) to provide an indication of good generic industry practice and (v) to provide a base from which management can develop tailored policies and procedures that are appropriate to their business. The Guidance Notes are updated regularly to reflect changes in circumstances and developments in good practice. The revised JMLSG Guidance108 in 2006 will change the way that money laundering and terrorist financing risk is managed in the United Kingdom, affecting the way many firms operate and deal with customers. The new guidance will enable the financial services industry to take a sharper, risk-based approach to the international fight against financial crime and place individual firms approach firmly on their senior management.109 The Joint Money Laundering Steering Group will also publish guidance for firms on the EU Wire Transfer Regulation 1781/2006 which comes into force on 1 January 2007 and requires that payment services providers (PSPs) must include certain information in electronic funds transfers and ensure that the information is verified.

Securities Houses Association (FBSA), Futures and Options Association (FOA), Investment Management Association (IMA), London Investment Banking Association (LIBA), PEP & ISA Managers’ Association (PIMA) and Wholesale Market Brokers’ Association (WMBA). 106 For more details on Guidance Notes, see , accessed 8 February 2007. 107 The Guidance Notes are applicable to (i) all banks, building societies and other credit institutions; (ii) all individuals and firms engaged in investment business within the meaning of the Financial Services and Markets Act 2000; (iii) all insurance companies covered by European Life Directives, including the life business of Lloyds of London and (iv) bureau de change, cheque encashment centres and money transmission services. 108 Joint Money Laundering Steering Group, Prevention of Money Laundering/Combating the Financing of Terrorism: Guidance for the UK Financial Sector Part I (JMLSG London January 2006); Joint Money Laundering Steering Group, Prevention of Money Laundering/ Combating the Financing of Terrorism: Guidance for the UK Financial Sector Part II: Sectoral Guidance (JMLSG London January 2006), available at , accessed 8 February 2007. 109 T Douglas ‘Notes on New Joint Money Laundering Steering Group (JMLSG) Guidance’ (2006) 7(1) Journal of Investment Compliance 64.

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International Measures Against Criminal Finance Money laundering and terrorist financing are, no doubt, global phenomena involving cross-border elements, thus, any strategies dealing with these problems have to have a significant international dimension. No single industry or country can deal with money laundering and terrorist financing alone, a cohesive approach is essential. A number of international initiatives against criminal finance have been established and some of the major ones are reviewed below.110 United Nations United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (‘The Vienna Convention’) The Vienna Convention in 1988 is the first inter-governmental initiative to endorse the criminalisation of money laundering (Article 3) and provides for the identification, tracing and confiscation of criminal proceeds (Article 5). The Convention was signed on behalf of the United Kingdom on 20 December 1988 and ratified on 28 June 1991. The Convention forms the landmark in international money laundering control and binds more than 160 countries. Besides the criminalisation of money laundering, the participating countries are required to outlaw drug trafficking-related activities including the conversion or transfer of property, knowing that such property is derived from drug trafficking, for the purpose of concealing or disguising the illicit origin of the property or any person involved in the offence. It also renders illegal the acquisition, possession or use of property known at the time of receipt that such property is derived from drug trafficking, conspiracy, aiding and abetting and facilitating the commission of drug trafficking offences. Although the term ‘money laundering’ is not used in the Vienna Convention, Article 3 has identified the constituent elements of money laundering which form the basis for all subsequent legislation. International Convention for the Suppression of the Financing of Terrorism The International Convention for the Suppression of the Financing of Terrorism 1999 forms the cornerstone of the struggle against terrorism and establishes a distinct offence of terrorist financing which obliges the participating countries to criminalise the provision or collection of funds for terrorist activity. The purpose is to block 110 AVM Leong ‘Chasing Dirty Money: Domestic and International Measures Against Money Laundering’ (2007) 10(2) Journal of Money Laundering Control 140; WC Gilmore Dirty Money: The Evolution of International Measures to Counter Money Laundering and the Financing of Terrorism (Council of Europe Strasbourg 2004); Commonwealth Secretariat Combating Money Laundering and Terrorist Financing: A Model of Best Practice for the Financial Sector, the Professions and Other Designated Businesses (Commonwealth Secretariat Library 2006); PA Schott Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism (The World Bank: International Monetary Fund Washington DC 2006). For detailed analysis of the various international initiatives against money laundering and terrorist financing, see P Reuter and EM Truman Chasing Dirty Money: The Fight Against Money Laundering (Institute for International Economics US 2005); TJ Biersteker, S Eckert and N Passas Financing Global Terrorism (Routledge UK 2006).

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the flow of terrorist funds without disrupting the circulation of capital and the continuation of business across global markets. The provisions permit the punishment of an offence and extend to attempts to commit or complicity in an offence as well as their organisation (Article 2). Article 8 deals with the matter of financing which permits the countries to take all necessary measures in order to freeze, seize and detect the origins of funds which could assist terrorism. The participating countries should also ensure that national legal principles are adapted to the framework of the Convention. However, there is no specific requirement to criminalise the laundering of such funds for terrorist activity. Though the 1999 Convention was proposed 18 months before the 11 September terrorist attacks in the United States, member states had played little attention, fortyone states signed the 1999 Convention but only six had ratified it before September 2001. Following the horrible September events, the United Nations Security Council called upon all states to sign the 1999 Convention as soon as possible and take immediate steps to ratify and implement the 1999 Convention fully. United Nations Convention against Transnational Organised Crime The United Nations Convention against Transnational Organised Crime was adopted by the General Assembly on 15 November 2000 in order to eradicate organised crime dealing specifically with the smuggling of migrants and trafficking in persons. It applies to the prevention, investigation and prosecution of various offences, including money laundering, which involves organised crime and have a cross-border element. United Nations Security Council Resolution 1373 After 11 September 2001, the United Nations Security Council immediately adopted Resolution 1373 which imposes more or less the same obligations as the 1999 Convention. In order to implement and monitor the terms of the Resolution, the Security Council has established the Counter-Terrorism Committee111 whereby member states are obliged to report to the Committee within 90 days on the steps they have taken to implement the Resolution. The Resolution is a binding document requiring all member states to prevent and suppress the financing of terrorist acts; to criminalise the provision or collection of funds intended, or known to be intended, for terrorist acts; to freeze immediately funds, assets or economic resources of persons who commit, attempt to commit, participate in or facilitate terrorist acts and entities owned or controlled by them; to prohibit nationals or persons within their territories from aiding or providing any aid to the persons and entities involved in terrorism; to refrain from providing any form of support to entities or persons involved in terrorist acts; to prevent the commission of terrorist acts by providing early warning to other member states by exchange of information; and to deny safe haven to those who finance, plan, support or commit terrorist acts.112 Subsequent to the September 11 events, the United Kingdom government has issued various lists identifying 48 individuals 111 For more details and links to other relevant UN Security Council Resolutions, see the UN Security Council Counter-Terrorism Committee website at , accessed 8 February 2007. 112 S/RES/1373 (2001).

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and 77 organisations whose accounts would be frozen pursuant to Security Council Resolution 1373. United Nations Security Council Resolution 1390 The United Nations Security Council Resolution 1390 was adopted by the Security Council on 16 January 2002. It imposes more or less the same obligations as Resolution 1373 and requires the member states to take measures with regard to Osama bin Laden, members of the Al-Qaida organisations and the Taliban and any individuals, groups, undertakings and entities associated with them.113 Council of Europe The Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime (ETS No 141) was signed on behalf of the United Kingdom on 8 November 1990 and ratified on 29 September 1992. Unlike the Vienna Convention, the 1990 Convention is not confined to drug trafficking and extends its provisions on an all crime basis. It also provides that for the purpose of a member state implementing its provisions, it does not matter whether the underlying criminal offence which gave rise to the criminal proceeds are the subject of a money laundering charge that was committed within the jurisdiction of that state. European Union In view of the free movement of goods, services and capital within the European Union in 1993, the European Union Council issued a Council Directive 91/308/ EEC on the prevention of the use of the financial system for the purpose of money laundering on 10 June 1991. This Directive was based on the Financial Action Task Force Forty Recommendations on money-laundering and was known as the First Money Laundering Directive. Though it was signed in 1991, it was not fully implemented by all member states till 1996. The Directive imposes a number of specific obligations to a wide range of credit and financial institutions including duties on customers identification (Article 3), record keeping (Article 4) and due diligence (Article 5). It also imposes the system of mandatory reporting of suspicious transactions. Article 8 prohibits the disclosure to the customer that an investigation is being carried out and legal immunity is provided for disclosures of information about customers to the authorities. The Directive also requires the credit and financial institutions to provide internal control and anti-money laundering training to staff. On 4 December 2001, an amendment was made to Directive 91/308/EEC, the Amended Directive (2001/97/EC), also known as the Second Money Laundering Directive, was adopted. It extends the number of crimes to which the provisions apply and widens the range of professions who have to observe the reporting obligations under its main anti-money laundering instrument. This includes professionals and non-financial businesses (legal professionals acting in any financial or real estate transactions, auditors, external accountants and tax advisors, real estate agents, 113 S/RES/1390 (2002).

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money transfer agents, dealers in high-value goods, auctioneers and casinos) believed to be vulnerable to money laundering. Certain exemptions are provided for legal professionals, accountants, auditors and tax advisors with regard to information obtained from their clients in the course of ascertaining the legal position of the client or in relation to judicial proceedings. The Amended Directive also applies to a range of serious crimes including drug trafficking, various activities of criminal organisations and certain categories of fraud and corruption. It also requires member states to implement the amendments by 15 June 2003. The Third Money Laundering Directive (2006/48/EC) is intended to consolidate and update the First and Second Money Laundering Directives and to ensure that its anti-money laundering rules are in line with the Financial Action Task Force revised Forty Recommendations in June 2003. Draft Articles for the Proposed Directive114 were issued in March 2004 and a formal Proposal115 was issued by the European Commission in June 2005. On 7 June 2005, the European Union Finance Ministers agreed the European Commission proposals to revise the current money laundering directive so that it covers the funding of terrorism. The new proposal declares the financing of terrorist activities a criminal offence, like money laundering, and brings it within the scope of the Directive. The Directive introduces additional requirements and safeguards for situations of higher risk (for example, trading with correspondent banks situated outside the European Union) and stricter checks on ‘politically exposed persons’. Another key change brought about by the Third Directive is the introduction of the concept of a risk-based approach into the European Union law. The Commission has approved the Third Directive in October 2005 and the latest date for implementation is 15 December 2007. Financial Action Task Force The Financial Action Task Force (FATF), a ministerial task force on money laundering, was established in 1989 by the Heads of State of the G-7 nations116 at the Organisation for Economic Cooperation and Development (OECD) Economic Summit in Paris. As of February 2007, it consists of 33 full membership countries and territories.117 Its purpose is the development and promotion of policies, both at 114 See , accessed 8 February 2007. 115 See , accessed 8 February 2007. 116 The Group of Seven (G-7) nations is comprised of the world’s seven leading industrial countries namely United States, United Kingdom, Japan, Italy, France, Germany and Canada. 117 The original membership was confined to the G-7 nations and eight other invited countries. It has now expanded to 33 full membership including representatives from 29 countries and two regional organisations. The list of members include Argentina, Australia, Austria, Belgium, Brazil, Canada, Denmark, European Commission, Finland, France, Germany, Greece, Gulf Cooperation Council, Hong Kong, Iceland, Ireland, Italy, Japan, Kingdom of the Netherlands, Luxembourg, Mexico, New Zealand, Norway, Portugal, Russian Federation, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, United Kingdom

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national and international levels, to combat money laundering and terrorist financing and to preserve the integrity of the financial system. The Financial Action Task Force is an international ‘policy making body’ bringing together the policy-making power of legal, financial and law enforcement experts from its members. The Financial Action Task Force monitors members’ progress in implementing necessary measures, reviews money laundering and terrorist financing techniques and countermeasures and promotes the adoption and implementation of appropriate measures globally. Building on the foundations laid by the Vienna Convention and the Basle Statement of Principles, the Financial Action Task Force published the Forty Recommendations118 in 1990 as an initiative to combat the misuse of financial systems by money laundering. The Forty Recommendations provide a comprehensive blueprint of action and international standard for the fight against money laundering and seek to achieve three main objectives namely (i) improving national systems to combat money laundering; (ii) strengthening the role of financial systems; and (iii) strengthening international cooperation. The Recommendations for establishing the Financial Intelligence Units and mainstreaming financial transaction intelligence are discussed in Chapter 7. In fact, the FATF Recommendations are now recognised as the principal standard in this field covering the criminal justice system and law enforcement, the financial system and its regulation and international cooperation. The original Forty Recommendations were revised in 1996 to reflect the changing money laundering typologies and have been endorsed by more than 130 countries. The revised Recommendations suggest the extension of money laundering predicate offences to non-drug offences covering all serious crimes and assert the mandatory reporting requirements of suspicious transactions by financial institutions as well as non-financial business.119 The FATF Recommendations form the international antimoney laundering benchmark standard and are reviewed regularly with the latest update in 2003.120 The Recommendations are backed up with a self-assessment and United States. In June 2006, the Financial Action Task Force is progressing applications for membership received from China, India and the Republic of Korea. Gibraltar and the Channel Islands are observer members, so are China and the Republic of Korea. 118 FATF Forty Recommendations on Money Laundering can be found at , accessed 8 February 2007. 119 FATF Annual Report 1995–96 is available at , accessed 8 February 2007. 120 The major changes that have been adopted include (i) specifying a list of crimes that must underpin the money laundering offence; (ii) the expansion of the customer due diligence process for financial institutions; (iii) enhanced measures for higher risk customers and transactions, including correspondent banking and politically exposed persons; (iv) the extension of anti-money laundering measures to designated non-financial business and professions (casinos; real estate agents; dealers of precious metals/stones; accountants; lawyers, notaries and independent legal professions; trust and company service providers); (v) the inclusion of key institutional measures, notably regarding international co-operation; (vi) the improvement of transparency requirements through adequate and timely information on the beneficial ownership of legal persons such as companies, or arrangements such as trusts; (vii) the extension of numerous anti-money laundering requirements to cover terrorist financing; and (viii) the prohibition of shell banks.

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questionnaire121 and mutual evaluation exercises among member states which enables each state to examine the efficiency of its own measures in the fight against money laundering. Following the terrorist attacks in the United States in 2001, the Financial Action Task Force has expanded its mission beyond money laundering to a worldwide effort to combat terrorist financing and has issued the Nine Special Recommendations on new international standards and measures to deny terrorists and their supporters access to the international financial system. The following Nine Special Recommendations122 should be combined with the Forty Recommendations: (i) (ii) (iii) (iv) (v)

(vi) (vii) (viii) (ix)

Ratification and implementation of UN instruments Criminalising the financing of terrorism and associated money laundering Freezing and confiscating terrorist assets Reporting suspicious transactions related to terrorism International co-operation in connection with criminal, civil enforcement and administrative investigations, inquiries and proceedings in terrorist financing Licensing or registering alternative remittance services Including originator information on wire transfers Increasing regulation of non-profit organisations Restraining or stopping cross-border cash movements

Each year in February, the Financial Action Task Force releases its typology reports on developments in worldwide money laundering trends, techniques and countermeasures. On 14 February 2000, the Financial Action Task Force published an initial report on ‘non-cooperative countries and territories’ (NCCTs). This report sets out twenty-five criteria in examining and identifying the serious and systemic weaknesses in the anti-money laundering programmes of certain jurisdictions which are named as ‘non-cooperative countries and territories’.123 The list of NCCTs is reviewed regularly and the Financial Action Task Force continues to monitor closely developments in countries that are removed from the list.124 121 The International Monetary Fund, the World Bank, the Financial Action Task Force, the Egmont Group, the Basel Committee on Banking Supervision and the International Association of Insurance Supervisors are working together to prepare a common comprehensive assessment methodology for a global standard required to implement the FATF 40 (+9) recommendations. 122 FATF Nine Special Recommendations can be found at , accessed 8 February 2007. 123 The first NCCT Review on 22 June 2000 named 15 jurisdictions including Bahamas, Cayman Islands, Cook Islands, Dominica, Israel, Lebanon, Liechtenstein, Marshall Islands, Nauru, Niue, Panama, Philippines, Russia, St. Kitts and Nevis, and St. Vincent and the Grenadines. The list of NCCTs published in the fifth NCCT Review on 27 October 2004 named 6 jurisdictions including Cook Islands, Indonesia, Myanmar, Nauru, Nigeria and Philippines. 124 Nauru was removed from the NCCTs list in October 2005 after Nauru abolished its 400 shell banks and therefore removed the major money laundering risk. Nigeria was also

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One of the positive outcomes of the ‘naming and shaming’ phenomenon is to coerce defaulting jurisdictions to raise the standard of their anti-money laundering regimes. Apart from the issues of national pride, the pressure to comply may simply be driven by financial motives as the Financial Action Task Force requires the members to instruct their financial systems to put in practice ‘special measures of caution’ in transactions with the financial systems of the NCCTs.125 However, it was argued that ‘policies of name, blame and shame’ might not yield good results in the long run, it is more important to provide a level playing field to enhance level of integrity globally.126 One of the possible consequences of the categorisation phenomenon is the implementation of anti-money laundering legislation in NCCTs without effective enforcement. It simply results in a ‘window-dressing’ exercise by ‘non-cooperative’ jurisdictions so that their names can be removed from the list. Furthermore, up until now, the Financial Action Task Force has not undertaken any action to name and shame for failures to abide by terrorist finance recommendations which implies that the application of anti-money laundering regime to the financing of terrorism still seems to be in its infancy. International Monetary Fund and World Bank The International Monetary Fund and the World Bank have joined the global anti-money laundering drive and contributed to the FATF’s efforts in several core areas. They provide a natural forum for information sharing, developing common approaches to issues and promoting financial policies and standards in the fight against money laundering and terrorist financing.127 They conduct financial sector assessments,128 provide technical assistance129 in the financial sector, initiate training and awareness programmes (such as global dialogue, distance learning network and

removed from the NCCTs list on 23 June 2006 and so did Myanmar. As of 13 October 2006, there are no countries designated as non-cooperative. 125 SA Ali Money Laundering Control in the Caribbean (Kluwer Law International United Kingdom 2003) 259. 126 RM Alba ‘Offshore Centres of Latin America and the Caribbean: The Need for a Level Playing Field in the Search for Integrity’ presented at Twenty First International Symposium on Economic Crime, Jesus College, University of Cambridge, United Kingdom, 11 September 2003. 127 WE Holder ‘The International Monetary Fund’s Involvement in Combating Money Laundering and the Financing of Terrorism’ (2003) 6(4) Journal of Money Laundering Control 383; PL Chatain ‘The World Bank’s Role in the Fight against Money Laundering and Terrorist Financing’ (2004) 6 International Law FORUM du droit international 190. 128 Financial sector assessments including the Financial Sector Assessment Programme (FSAP) and the Offshore Financial Centre (OFC) assessments. The World Bank, in collaboration with the International Monetary Fund and the Financial Action Task Force, has produced a global common methodology (which includes 120 criteria) to assess countries’ legal and institutional frameworks to fight money laundering and terrorist financing according to the Financial Action Task Force International Standards. 129 Technical assistance including legislative drafting, support to supervisory bodies, establishment of financial intelligence units as well as training and capacity building.

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mentoring programme), conduct research and gather data and exercise surveillance over member’s exchange systems. Egmont Group The Egmont Group (named for the location of the first meeting at the EgmontArenberg Palace in Brussels on 9 June 1995) is an international group made up of members of National Financial Intelligence Units (FIUs), which are specialised government agencies responsible for handling money laundering activities and suspicious activity reports. The Egmont Group provides a forum for discussion and improving support to their respective national anti-money laundering programmes. As of May 2007, the Financial Intelligence Units from 106 countries are members of the Egmont Group.130 The National Criminal Intelligence Service was the former representative of the United Kingdom and is now represented by the Serious Organised Crime Agency. As mentioned in its Statement of Purpose,131 plenary meetings, known as ‘Egmont Group Meetings’, are held to ‘discuss issues common to FIUs and to foster such international cooperation among established FIUs, to assist and advise FIUs under development and to cooperate with representatives of other government agencies and international organisations interested in the international fight against money laundering.’ The Egmont Group emphasises the importance of information and intelligence exchange among FIUs and has published the Principles of Information Exchange Between Financial Intelligence Units for Money Laundering Cases.132 The Group has developed a model Memorandum of Understanding and secured Internet Websites to facilitate rapid information exchange and to promote training opportunities and personnel exchanges. Following the terrorist attacks in September 2001, the G-7 Finance Ministers all undertook to join the Egmont Group under the Action Plan to Combat the Financing of Terrorism adopted on 6 October 2001. Interpol, Europol and World Customs Organisation Interpol assists member nations to cooperate and share information with each other in the investigation of money laundering and provides technical assistance and training on anti-money laundering methods. As early as 1979, Interpol has passed a resolution urging members to confiscate assets derived from crime. Europol established a counter-terrorist unit in 2001 which works closely with other counterparts in the fight against money laundering and terrorist financing. This special counter-terrorist

130 The list of Financial Intelligence Units of the world can be found at , accessed 21 June 2007. 131 Statement of Purpose of the Egmont Group of Financial Intelligence Units, Guernsey, 23 June 2004, available at , accessed 8 February 2007. 132 See Annex, Statement of Purpose of the Egmont Group of Financial Intelligence Units, The Hague, 13 June 2001, available at , accessed 8 February 2007.

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unit aims to ‘open and expand analysis files’ on individuals suspected of terrorist offences. Counter-terrorist specialists are employed at Europol and liaison officers work with other forces to exchange information on suspects, possible witnesses, contacts, associates and informants. The World Customs Organisation133 monitors the physical movement of money across international borders and has created a central database for money laundering cases which can be accessed by all customs administrators. Private Measures Against Criminal Finance The September 11 events have certainly accelerated the establishment of a strict international finance regime. With increasing obligations under the various antimoney laundering and terrorist financing legal instruments, private financial institutions have been burdened with disclosure duties, the lifting of bank secrecy privileges, the freezing of client accounts and even their survival is under pressure. Though the Security Council Resolution 1373 states that the same rules should be applied worldwide, it often depends on the resources available in each jurisdiction. In order to ensure their interests and better comply with the new obligations, private financial institutions have united and established guidelines for their member institutions. Wolfsberg Group The Wolfsberg Group consists of twelve global banks which aims to develop financial services industry standards, ‘Know Your Customers’ policies, anti-money laundering and counter terrorist financing guidelines. The Wolfsberg Group stresses the importance of continuing cooperation with law enforcement and government agencies and the need for information to be exchanged promptly between jurisdictions without breaching any privacy or discrimination legislation. The Group published the Wolfsberg Anti-Money Laundering Principles on Private Banking in October 2000, which was revised in May 2002 as a result of the September 11 events.134 The Group then published a Statement on the Suppression of the Financing of Terrorism in January 2002135 and also released the Wolfsberg Anti-Money Laundering Principles for Correspondent Banking in November 2002.136 Other recent publications in 133 The World Customs Organisation, formerly known as the Customs Cooperation Council, was established in 1952 with the purpose of harmonising the efforts of customs administrators. It is also involved in intelligence and information sharing as well as the prevention and suppression of transnational crime. 134 Wolfsberg Anti-Money Laundering Principles on Private Banking is available at , accessed 8 February 2007. 135 Wolfsberg Statement on the Suppression of the Financing of Terrorism is available at , accessed 8 February 2007. 136 Wolfsberg Anti-Money Laundering Principles for Correspondent Banking is available at , accessed 8 February 2007.

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March 2006 include the Guidance on a Risk Based Approach for Managing Money Laundering Risks137 and Anti-Money Laundering Guidance for Mutual Funds and Other Pooled Investment Vehicles.138 The Wolfsberg Principles represent a riskbased management which should result in a more precise, focused and practice-based set of regulations.139 However, it was noted in the Basle Committee Report140 that ‘voluntary codes of conduct cannot be regarded as a substitute for formal regulatory guidance’ and it is up to the banks whether they believe it to be appropriate to change the rules, thus, becoming an internal matter for banks rather than a policy matter for regulators. Basel Committee on Banking Regulation and Supervisory Practices The Basel Committee was established by the Central Bank Governors of the G-10 countries141 and the supervisory authorities of Luxembourg in 1974. The Basel Committee consists of about 30 technical working groups and task forces and the secretariat is provided by the Bank of International Business Settlements. Its purpose is to formulate broad supervisory standards and guidelines and recommend statements of best practice. Following the collapse of Bank of Credit and Commerce International in 1988, the Basle Committee issued the Basle Statement of Principles142 in December 1988 which warned that the use of financial system for criminal purpose should be a matter of concern for banking supervisors and bank management. The Principles covers the basic issues in relation to the policies and procedures of customer identification, compliance, record keeping systems and staff training in the suppression of money laundering through the banking system. Similar to the Wolfsberg Group, the Committee emphasises the importance of enhanced information sharing143 and cooperation with law enforcement. It also states

137 Wolfsberg Statement – Guidance on a Risk Based Approach for Managing Money Laundering Risks is available at , accessed 8 February 2007. 138 Wolfsberg Statement – Anti-Money Laundering Guidance for Mutual Funds and Other Pooled Investment Vehicles is available at , accessed 8 February 2007. 139 M Peith and G Ajolfi ‘The Private Sector Becomes Active: The Wolfsberg Process’ in A Clark and P Burrell (eds) A Practitioner’s Guide to International Money Laundering Law and Regulation (City and Financial Publishing UK 2003); A Haynes ‘The Wolfsberg Principles – An Analysis’ (2004) 7(3) Journal of Money Laundering Control 207. 140 Basle Committee 2001, para. 17. 141 The Group of Ten (G-10) countries include Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, United Kingdom and United States. 142 Basel Committee on Banking Supervision Prevention of Criminal Use of the Banking System for the Purpose of Money Laundering (December 1988), available at , accessed 8 February 2007. 143 Basel Committee on Banking Supervision Sharing of Financial Records Between Jurisdictions in Connection with the Fight Against Terrorist Financing (BIS Paper No. 89, April 2002), available at , accessed 8 February 2007.

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that effective ‘Know Your Customers’ and customer due diligence procedures144 implemented by the financial services providers are vital to prevent abuse of the financial system by terrorists or criminals. The Basle Principles covers all criminal proceeds and not restricted to drug-related money laundering. The new Basel Capital Accord or Basel II requires banks to align their capital more closely with credit risk, market risk and operational risk145 and encourages banks to improve their risk management processes. Under the Revised Core Principles for Effective Banking Supervision, the criteria dealing with the fight against money laundering and terrorist financing as well as fraud prevention have been expanded. These core principles have also been used by the International Monetary Fund and the World Bank in the context of the Financial Sector Assessment Programme to assess countries’ banking supervision systems and practices.146 However, the Basle Statement of Principles is not legally binding on banking supervisors internationally and merely constitutes guidelines and moral standards. European Banking Federation The European Banking Federation was established in 1960 and represents the interests of over 5,000 European banks from 29 National Banking Associations with total assets of more than EUR 20,000 billion and over 2.3 million employees.147 The Anti-Fraud and Anti-Money Laundering Committee takes official positions on all anti-fraud, anti-money laundering and anti-terrorist legislative measures which have an impact on the banking industry. The European Banking Federation has made a list of recommendations based on a meeting of experts on 15 October 2001.148 The 144 Basel Committee on Banking Supervision Customer Due Diligence for Banks (BIS Paper No. 85, October 2001), available at , accessed 8 February 2007. 145 A Cornford ‘Basel II: Vintage 2003’ (2004) 12(1) Journal of Financial Regulation and Compliance 22; RB Johnston and J Abbott ‘Placing Bankers in the Front Line’ (2005) 8(3) Journal of Money Laundering Control 215. 146 The Basel Core Principles covers seven broad areas: (i) preconditions for effective banking supervision (objectives, independence, powers, transparency and cooperation); (ii) licensing and structure; (iii) prudential regulation and requirements; (iv) methods of ongoing banking supervision; (v) accounting and disclosure; (vi) corrective and remedial powers of supervisors; and (vii) consolidated and cross-border banking supervision. Basel Committee on Banking Supervision Core Principles for Effective Banking Supervision (2006 October), available at , accessed 8 February 2007. 147 More information is available at , accessed 8 February 2007. 148 The full list of recommendations is quoted in The Interdiction of Terrorist Property Working Group The Funding of Terror: The Legal Implications of the Financial War on Terror (The Society for Advanced Legal Studies United Kingdom 2002) 85 as follows: (i) the need for better identification of persons or organisations targeted by sanctions; (ii) the need for a clarification of the definition of the freezing of funds; (iii) the need for authorisation of exemptions within three weeks. In particular, collective authorisations for the banks’ ordinary management of accounts should be provided for if such management is not explicitly taken into account in the definition of freezing of funds; (iv) the need for a quick unfreezing procedure. In cases of wrongful freezing, an unfreezing authorisation should be granted by EU member

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Federation has also published a revised report on Money Laundering Legislation: National Measures149 in 2002 which offers an inventory of national regulation on money laundering in more than 35 countries in Europe and beyond and also gives a clear description of the new regime in the United States after the adoption of the USA PATRIOT Act 2001. In 2005, the European Banking Federation has published another report on anti-money laundering legal framework in European Union member states, other European and non-European countries.150 Conclusions To control organised crime and terrorism effectively, we have to either make their activities unprofitable or impossible by depriving them of illicit gains and disrupting any funding available for future activities. It is therefore vital for us to understand how the criminal finance works, such as the money laundering process, the operation of underground banking systems and the typologies of terrorist financing, before any meaningful strategies can be derived. It is not only hard to detect terrorist financing but the actual tracing of the funds can be extremely challenging due to the fact that some terrorist funds come from legitimate sources and behave exactly like any ‘clean’ and ‘ordinary’ money. Besides, the ever evolving techniques employed by the organised criminals make the investigation and prosecution of money laundering cases particularly difficult and expensive. Indeed, the laundering of criminal finance is no longer just a local problem affecting certain jurisdictions. It has manifested into a transnational phenomenon which calls for more radical strategies with a significant international dimension. The common elements found in the different anti-money laundering and counter-terrorist financing efforts include (i) the criminalisation of money laundering and terrorist financing; (ii) the confiscation of criminal proceeds and; (iii) the development international cooperation among law enforcement agencies. In addition, it is important to get the right balance between disrupting criminal finance and not excluding people from the financial mainstream. With the increasingly intrusive investigative powers and orders available to law enforcement and government agencies, there is also the need to balance the investigator’s right to investigate and the citizen’s human rights. Despite the enormous efforts and cooperation by the governments, law enforcement agencies and financial institutions, organised criminals and terrorists are still one step ahead and the problems remain. On one hand, it is argued that state authorities within no more than two working days; (v) where partial embargoes allow to continue to trade with persons or organisations subject to financial sanctions, these partial embargoes should at the time allow banks to carry out customary methods of payment related to such trading; (vi) the need for a clarification of the notion of circumvention of offences; and (vii) the need for an exemption of liability for banks and their staff. 149 See press release about the report at , accessed 8 February 2007. 150 European Banking Federation Anti-Money Laundering Report 2005 (EBF Brussels 2005), full report is available at , accessed 8 February 2007.

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adequate laws and regulations against money laundering and terrorist financing have been formed and the main problem identified is the lack of enforcement. It is obvious that law itself will not solve the problem if it is not fully implemented and properly enforced. On the other hand, it is in doubt whether the traditional antimoney laundering measures will be able to detect, identify or freeze terrorist finance. There is also the concern that stricter regulation will only increase the burden on the financial industry which might hinder the economic recovery in the long run. Furthermore, Internet banking, online stockbroking and investment fund services and online casinos provide new opportunities for criminals to launder electronic money in a more sophisticated and technological manner. The Financial Action Task Force typologies reports over recent years have regularly highlighted the vulnerabilities of the new emerging technologies. Indeed, the so-called ‘digital money’ and ‘cyberlaundering’151 continue to pose new threats to the financial industry and are dramatically altering the environment in which policies on money laundering, terrorist financing and wire transfers operate.152

151 Cyberlaundering refers to the laundering of property using Web-based financial services. 152 RM Bortner ‘Cyberlaundering: Anonymous Digital Cash and Money Laundering’ paper presented at the Law and the Internet Seminar at the University of Miami School of Law (1996); H Ping ‘New Trends in Money Laundering – From the Real World to Cyberspace’ (2004) 8(1) Journal of Money Laundering Control 48; FN Baldwin ‘The Financing of Terror in the Age of the Internet: Wilful Blindness, Greed or a Political Statement? (2004) 8(2) Journal of Money Laundering Control 157.

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Chapter 4

Traditional Law Enforcement Response to Organised Crime This chapter sets out to review the historical background of policing in the United Kingdom. The development of local policing to national law enforcement agency is explored. The growth and functions of traditional and non-traditional policing in addressing organised crime are also examined. Since organised crime has become more transnational, an inter-agency or multi-agency approach seems to be the way forward in combating this problem.1 Development of the Law Enforcement Structures in the United Kingdom What is Policing? Whether a government exists depends on its ability to create and maintain order in the society. Every society has an established peace-keeping system, generally known as ‘policing’. The word ‘police’ is derived from the Greek word ‘polis’ which also provides the basis for the modern word ‘politics’. The term ‘policing’ does not just refer to man in uniform enforcing public order but reflects the broadest features of social structure and social change. In fact, the police are actively engaged in ‘defining and defending’ the state. ‘Policing is essentially one of a number of political tools used for the establishment and sustenance of hegemony. It is a system for influencing people’s perceptions, feelings, values and actions. This is achieved more often by the use of signals or symbols, but in the final resort, to a recourse of force.’2 ‘The police are the domestic specialists in the exercise of legitimate force. Thus policing is at the heart of the functioning of the state, and central to an understanding of legal and political organization.’3 It is also referred to as ‘the second general division of jurisprudence…which properly signified the policy of civil government.’4

1 For the purpose of analysis in this Chapter, ‘traditional’ refers to the Pre-POCA era when the controlling of organised crime in the United Kingdom is mainly dealt with under the criminal law. 2 M Lofthouse ‘The Core Mandate of Policing’ in C Critcher and D Waddington (eds) Policing Public Order: Theoretical and Practical Issues (Avebury United Kingdom 1996) 40. 3 R Reiner ‘Policing a Postmodern Society’ (1992) 55(6) The Modern Law Review 761, 762. 4 A Smith Lectures on Jurisprudence (Oxford University Press Oxford 1978; originally published in 1763).

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Functionality of Policing The general view is that the ‘core mandate of policing, historically and in terms of concrete demands placed upon the police, is the more diffuse one of order maintenance.’5 Crime prevention and detection is too at the heart of policing as emphasised by Sir Charles Rowan and Sir Richard Mayne, Commissioners of the Metropolitan Police, The primary object of an efficient police is the prevention of crime: the next that of detection and punishment of offenders if crime is committed. To these ends all efforts of the police must be directed. The protection of life and property, the preservation of public tranquillity, and the absence of crime will alone prove whether those efforts have been successful, and whether the objects for which the police were appointed have been maintained.6

Thus, the basic philosophy of law enforcement responsibilities specifies that ‘the police are charged with the protection of lives and property, the safety and well-being of all citizens through the detection and apprehension of criminals, the prevention of crime, and limited control of non-violent conduct.’7 However, in reality only a small proportion of police time is spent in actual crime prevention and detection. ‘When one looks at what policemen actually do, one finds that criminal law enforcement is something that most of them do with the frequency located somewhere between virtually never and very rarely.’8 Much police time is devoted to a range of administration tasks and training programmes as well as other various service functions – ‘covering man’s social problems from birth to death – the police service has gradually, and largely unwittingly, accumulated a broad range of “welfare” functions. Indeed, the police could well be described as the only 24 hour, fully mobile, social service.’9 The annual official performance reports on all 43 police forces in England and Wales in 2004 revealed that ‘police officers spend barely half their working time carrying out frontline duties, the rest is taken up with paperwork, meetings, waiting to give evidence in court and a host of other behindthe-scenes activities.’10 More surprisingly, the amount of time that police officers spent on patrols was at an average of two minutes and 15 seconds in a typical tenhour shift.11 In general, the functions of police can be broadly categorised into two roles: expressive and repressive. These two roles are mutually supportive and destructive. 5 R Reiner The Politics of the Police (Wheatsheaf Books United Kingdom 1985) 172. 6 M Punch & T Naylor ‘The Police: A Social Service’ (1973) 17 New Society 358. 7 E Eldefonso, A Coffey and R Grace Principles of Law Enforcement (2nd edn John Wiley & Sons United States 1968) 27. 8 E Bittner ‘Florence Nightingale in Pursuit of Willie Sutton: A Theory of the Police’ in H Jacob (ed) The Potential for Reform of Criminal Justice (Sage Publications Beverly Hill 1974) 17, 23. 9 M Punch & T Naylor ‘The Police: A Social Service’ (1973) 17 New Society 358. 10 M Hickley ‘Why Police Spend Only Half Their Time Fighting Crime’ Daily Mail 23 September 2004. 11 N Sears and B Taylor ‘Two-minute Patrols’ Daily Mail 15 March 2005.

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All police operate in both categories but to a different degree depending on the time and circumstances. Expressive Role The expressive role is a welfare one and often presented and portrayed as ‘community policing’.12 Through the expressive role, the image of the police finds its roots for the working and redundant classes. The close contact with all the classes in the society creates the opportunity for the police to maintain moral and social order through education and to gather information and intelligence. And yet, the expressive role is essentially part of the repressive mechanism, ‘a benign bobby…still brings to the situation a uniform, a truncheon, and a battery of resource charges…which can be employed when appeasement fails and fists start flying.’13 As the moral entrepreneur of public propriety, and by implication, the arbiter of deviance, he performs a purely expressive function of community welfare and is expected to do so impartially, as a public servant in context occupied solely by what appear to be individual citizens in need or distress. This aspect of the job is necessarily very labour intensive.14

Repressive Role On the other end of the spectrum is the repressive role, which is the mass physical expression of their use of force. Police are portrayed as the tangible representatives of the state with all its power imposed. Such power is often directed against the working and redundant classes who have a higher chance of being involved in property and violent crimes. ‘Police authority has always borne more heavily on the economically marginal elements in society, the unemployed (especially if vagrant) and young men whose lives are lived largely in the street and other public places.’15 They are also the same group of people experiencing the expressive role of policing. As the administrator of a judicial ideology of crime in which the bourgeoisie has enshrined its version of the rights of capital and the obligations of labour, he performs a repressive function in policing a context where there are two categories of client – the legitimate and the illegitimate possessors of property. This aspect of the job is increasingly capital intensive.16

Due to these two mutually supportive yet destructive roles, it was suggested that ‘the police institution has a double and contradictory origin and function, for at the same time and in the same society it may be both the agent of the people it polices and

12 The ten principles of ‘community policing’ can be found in R Trojanowicz and B Bucqueroux Community Policing: A Contemporary Perspective (Anderson Publishing Company United States 1990) xiii. 13 M Punch Policing the Inner City (Macmillan United Kingdom 1979) 116. 14 P Cohen ‘Policing the Working Class City’ in B Fine, R Kinsey, J Lea, S Piciotto, and J Young (eds) Capitalism and the Rule of Law (Hutchinson United Kingdom 1979) 128. 15 P Reiner The Politics of the Police (Wheatsheaf Books United Kingdom 1985) 80. 16 P Cohen ‘Policing the Working Class City’ in B Fine, R Kinsey, J Lea, S Piciotto, and J Young (eds) Capitalism and the Rule of Law (Hutchinson United Kingdom 1979) 128.

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of the dominant class controlling these same people.’17 Critical theorists argued that law enforcement agencies act in the interests of the dominant groups of a society and their central function is to control the working class.18 Indeed, the true art of policing is neither social service nor law enforcement but the maintenance of status quo and social order. The police are constantly oscillating between political and civil society trying to maintain an impossible balance. Therefore, ‘policing institutions, both generally and at times of crisis, provide the coercive power and the information resources to maintain the hegemonic domination of the state. That is their core mandate.’19 Police v Military Through regular refining of their roles in society over time and the constant process of professionalisation, policing institutions continue to develop and evolve structures and capabilities that match the political requirements of their states. This has also led to the formation of ‘paramilitary policing’ especially when the police are threatened with increasingly violent-oriented disorders, such as riot and terrorism. Although both the police and the military have numerous shared organisational characteristics, some debates exist concerning the definition of the term ‘paramilitary policing’, which is defined as ‘the application of (quasi)-military training, equipment, philosophy and organisation to questions of policing (whether under centralised control or not).’20 It is criticised that an additional element, namely the ‘coordination through superior command and control’, is often largely ignored in the existing paramilitary policing.21 Such a militaristic style of policing is found in the highly trained and disciplined specialist squads, such as the tactical response group and special patrol group. Nevertheless, analogies between the law enforcement and the military are often drawn. Personnel from both organisations cross-train, participate in joint exercises, share weaponry and exchange expertise.22 Both institutions are instruments of force and for both institutions the occasions for using force are unpredictably distributed. Thus the personnel in each must be kept in a highly disciplined state of alert-preparedness. This formalism that characterises the military

17 CD Robinson and R Scaglion ‘The Origin and Evolution of the Police Function in Society: Notes Toward a Theory’ (1987) 21(1) Law and Society Review 109, 109. 18 O Marenin ‘Parking Tickets and Class Repression: The Concept of Policing in Critical Theories of Criminal Justice’ (1982) 6 Contemporary Crises 241. 19 M Lofthouse ‘The Core Mandate of Policing’ in C Critcher and D Waddington (eds) Policing Public Order: Theoretical and Practical Issues (Avebury United Kingdom 1996) 47. 20 T Jefferson The Case Against Paramilitary Policing (Open University Press Milton Keynes 1990) 16. 21 PAJ Waddington ‘The Case Against Paramilitary Policing Considered’ (1993) 33(3) British Journal of Criminology 353, 353. 22 PB Kraska ‘Militarising Criminal Justice: Exploring the Possibilities’ (1999) 27 Journal of Political and Military Sociology 205.

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organisation, the insistence on rules and regulations, on spit and polish, on obedience to superiors and so on, constitute a permanent rehearsal for the ‘real thing’.23

Despite the fact that the paramilitary model is useful for enhancing discipline and unity of command among police officers, relevant literature suggests that the paramilitary model is adopted with little empirical evidence supporting its suitability in the law enforcement environment.24 One must bear in mind the fundamental remit of law enforcement is internal security and maintenance of social order. The police are urged to use minimum violence, as excessive force would lead to legal scrutiny, whereas the core mandate of the military is external security, even though military personnel are sometimes involved in law enforcement matters. One of the major beliefs of militarism relies on physical power, domination and the use of force where torture, violence and even killing might become necessary and legitimate.25 By adopting such militaristic model, there is the danger that paramilitary policing might promote little respect for the societal institutions that uphold the rule of law and threaten the proper functioning of the criminal justice process. Besides, paramilitary policing might result in unhealthy police-public relationship and poor quality policing.26 In fact, the distinction between internal and external security has become increasingly blurred in the post-Cold War era. The roles of police and the military have converged, with military more involved in domestic security and police more concerned at the external level. As a result, there is the emergence of gendarmerietype agencies which involve in both border and internal security in post-war reconstruction efforts.27 Traditional and Non-Traditional Policing Traditional Policing Prior to 1829, the enforcement of the monarch’s law was the responsibility of each man and his own tything.28 The King appointed a judge, known as ‘reeve’, who was responsible for maintaining law and order in each county 23 E Bittner The Functions of the Police in Modern Society (Government Printing Office Washington 1970) 53. 24 E Bittner Aspects of Police Work (Northeastern University Press Boston MA 1990); V Franz and DM Jones ‘Perceptions of Organizational Performance in Suburban Police Department: A Critique of the Military Model’ (1987) 15(2) Journal of Police Science and Administration 153. 25 EP Mendes ‘Raising the Social Capital of Policing and Nations: How can Professional Policing and Civilian Oversight Weaken the Circle of Violence?’ in EP Mendes et al (eds) Democratic Policing and Accountability: Global Perspectives (Ashgate Aldershot 1999). 26 A Meliala ‘Police as Military: Indonesia’s Experience’ (2001) 24(3) Policing: An International Journal of Police Strategies and Management 420. 27 D Lutterbeck ‘Between Police and Military: The New Security Agenda and the Rise of Gendarmeries’ (2004) 39(1) Co-operation and Conflict 45. 28 Early Anglo-Saxon England was divided into four counties known as shires. A group of ten families was known as a shire tything and ten tythings were known as a hundred. See E Eldefonso, A Coffey and R Grace Principles of Law Enforcement (2nd edn John Wiley & Sons United States 1968) 61.

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or shire. One of the major events in the history of policing was in 1066 when William the Conqueror invaded England, he divided the police and judicial aspects of law enforcement; judges were then known as vicecombs. In 1116, King Henry I defined felony and misdemeanour. Then King Henry II developed the jury system and King Richard I introduced the appointment of specific knights, known as peace wardens, to enforce the law. The use of military force during the English Industrial Revolution in mid-1700 led to the creation of civil police laws. The Metropolitan Police Act 1829 was created based on the assumption raised by Sir Robert Peel, Home Secretary, that police functions could be carried out best by each community having its own police force. Pursuing the recommendations provided by Sir Robert Peel, Sir Charles Rowan and Sir Richard Mayne headed a commission, which formed the 1,000 man London Metropolitan Police, known as ‘Scotland Yard’. ‘The first patrols of the Metropolitan Police set out on their beats on 29th September 1829, dressed in top hats, blue swallow-tail coats, heavy serge trousers and boots, and equipped with a wooden rattle and a trucheon.’29 At the beginning, this modern British Police caused public discontent, opposition and negative attitudes especially among the working class because the police were portrayed as a means of secretly surveying and controlling citizens. They believed that the tradition of social control should be a private, local and voluntary matter done within the household and should not be enforced by a ‘paid police’. Over time, the Metropolitan Police began to develop the image as the impartial embodiment of the rule of law and gradually gain public consent and support in the mid-19th century. Public attitudes towards the British Police had changed dramatically since the ‘Dixon era’30 which was described as the ‘Golden Age’ of policing when patrol officer was seen as national hero in the 1950s. In the 1970s and 1980s, the crisis of confidence in the police began to unfold. There was widespread public criticism of the police due to their apparent inability to cope with escalating levels of recorded crime. The declining status of the police was also a result of a number of changes in organisation and policy, which undermined the legitimacy of the police.31 The Police Act 1964, following the Royal Commission Report in 1962,32 established a ‘tripartite’ system of police governance resulting in more than 150 ‘Home Office’ police forces in England and Wales during the 1960s. By the mid-1970s it was reduced to 43, however, the problem of non-standardised police practice remained. This was worsened by the increasing activities in the ‘hybrid’33 or ‘grey’34 areas of policing where law enforcement activities were carried out by public officials and special police forces, such as the Atomic Energy Authority 29 M Ignatieff ‘Police and People: The Birth of Mr Peel’s “Blue Locusts”’ (1979) 49 New Society 443, 443. 30 Clarke ‘Holding the Blue Lamp: Television and the Police in Britain’ (1983) 19 Crime and Social Justice 44. 31 R Reiner ‘Policing a Postmodern Society’ (1992) 55(6) The Modern Law Review 761, 764–769. 32 Royal Commission on the Police Final Report Cmnd 1728 (HMSO London 1962). 33 L Johnston The Rebirth of Private Policing (Routledge London 1992). 34 B Hoogenboom ‘Grey Policing: A Theoretical Framework’ (1991) 2 Policing and Society 17.

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Constabulary, the Ministry of Defence Police, the British Transport Police, the Royal Park Constables, the Post Office Investigations Department and the ‘municipal’ police protecting council property. Furthermore, private companies had begun to play an active role in crime prevention. The Scarman Report35 in 1981 proposed a blend of community consultation and police professionalism. There had been new emphasis on professional management techniques and the concern for value for money throughout the 1980s. There was a change in police culture to incorporate quality of service values. The Government also proposed the principle of crime prevention through multi-agency or interagency approach.36 However, the political and ethical problems associated with the expansion of multi-agency work had either been ignored by the central government or treated as administrative difficulties. Though it was recognised that the effectiveness of policing could not be easily measured,37 the police was criticised for having the ‘means over ends syndrome’38 whereby too much emphasis was put on improvement efforts on organisation and operating methods than spelling out the objectives more clearly and defining problems more precisely. The UK Government’s Financial Management Initiative in the Home Office Circular 114/1983 stressed the need for explicit statements of objectives and operational policies reviews to ensure good managerial practice in policing. In 2007, there are 43 regional police forces39 in England and Wales, eight in Scotland and one in Northern Ireland. Each police force arranges its departments slightly differently and they operate independently of each other. The centralising tendency has led to the establishment of the Association of Chief Police Officers (ACPO) in 1948. The main purpose of the Association of Chief Police Officers is to maintain the ‘tripartite’ framework of policing and bring together the local Chief Constable, the local Police Authority and the Home Secretary so that appropriate policing policies, strategies and infrastructures can be developed in one place on behalf of the 43 police forces. The Association of Chief Police Officers is a private company limited by guarantee and is governed by a Board of Directors.40 The Association of Chief Police Officers produces manuals, guidance and recommendations to police forces

35 Scarman Report Cmnd 8427 (HMSO London 1981). 36 Home Office Standing Committee on Crime Prevention Safer Communities: The Local Delivery of Crime Prevention Through the Partnership Approach (Home Office London 1991); also see AE Bottoms ‘Crime Prevention facing the 1990s’ (1990) (1) Policing and Society 3. 37 Some of the difficulties in the evaluation of policing are outlined in M Chatterton ‘Assessing Police Effectiveness – Future Prospects’ (1987) 27(1) British Journal of Criminology 80, 81–82. 38 H Goldstein ‘Improving Policing: A Problem-Oriented Approach’ (1979) 25 Crime and Delinquency 236. 39 More information about regional police forces in the United Kingdom can be obtained at , accessed 16 February 2007. 40 More information about the Association of Chief Police Officers can be obtained at , accessed 16 February 2007.

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in ten main business areas.41 The first Her Majesty’s Inspectorate of Constabulary (HMIC) was appointed under the County and Borough Police Act 1856, their statutory duties of examining and improving the efficiency of the police service in England and Wales were described in the Police Act 1996. However, despite the efforts of the Association of Chief Police Officers and Her Majesty’s Inspectorate of Constabulary, differences in procedures and culture among the large number of individual police forces continue to exist. Non-Traditional Policing In addition to the traditional statutory policing, there is the so-called ‘non-traditional policing’ operating nationally dealing with certain manifestations of crime within their remit. The Metropolitan Police Special Branch was formed in March 1883 in response to the Irish fight for independence in the 19th century and their remit is limited to terrorism and extremist related matters. Historically, Her Majesty’s Customs and Excise was primarily concerned with defeating attempts to avoid revenue duties. Later, its national remit was expanded to the prevention of smuggling of drugs and weapons, the evasion of revenue duties on tobacco and alcohol, VAT evasion, fraud and the distribution of counterfeit goods. However, the Custom’s national remit was limited to matters within their statutory purview, so was the Inland Revenue. In 2005, the Customs and the Inland Revenue were merged to form Her Majesty’s Revenue and Customs. The aim of the Serious Fraud Office is to deter fraud and maintain confidence in the probity of business and financial services in the United Kingdom.42The Serious Fraud Office investigates and prosecutes mainly serious and complex fraud cases. The Department for Business, Enterprise and Regulatory Reform43 has wide-ranging powers of investigating in certain areas similar to those possessed by the Serious Fraud Office. The Financial Services Authority formed under the Financial Services and Markets Act 2000 has important regulatory and investigatory powers for achieving its objective in reducing financial crime, but it is again confined within its statutory authority. The Immigration Service and the Department of Work and Pensions, though have their own investigative arms, are in a similar position. Therefore, the major problem here is that there is no coordination and no central direction among the different departments in their remit of controlling crime which results in the lack of intelligence sharing and overlaps in resources.

41 The ten business areas are crime, criminal justice, general policing, road policing, race and community relations, terrorism and allied matters, finance and resources, personnel management, performance management, and information management. 42 Serious Fraud Office Annual Report 2005–2006 (SFO London 2006), available at , accessed 16 February 2007. 43 The Department for Business, Enterprise and Regulatory Reform is previously known as the Department of Trade and Industry (DTI).

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Law Enforcement Response to Organised Crime Understating the Problem of Organised Crime44 Until the 1980s, the extent of organised crime activity was generally understated by the traditional law enforcement in the United Kingdom. One of the main reasons, as mentioned in Chapter 2, was the difficulty in the definition and perception of organised crime. There had been substantial institutional and political opposition within the British police forces, especially among the senior management, in identifying the problem or accepting the fact that existing resources and structures were ill-equipped and incapable in solving the problem of organised crime. Besides, they opposed to the development of resources specially designed to assess and control organised crime. Since transactions associated with money laundering go through channels that were outside law enforcement’s customary range of control, the police did not recognise the importance of disrupting criminal finance. Money laundering investigations were often thought to be ancillary to the main crime being targeted or too complex to investigate. In fact, financial investigations were never an integral part of criminal investigations till the 21st century. The importance of intelligence was underplayed at both strategic and tactical levels due to the nature of most police procedures. The police did not give sufficient weight to the creation and maintenance of profiles, which could be used to develop the real picture of syndicated and organised criminal activity. Thus, the role of police in interdicting organised crime was often locked at the street level and continuing criminal enterprise was rarely perceived. In addition, most criminal intelligence systems tended to be based on the pyramid structures of traditional organised crime, instead of developing a greater understanding of the structures and operations of new organised crime groups. As discussed in Chapter 2, the new organised crime groups are loose networks established on a similar independent cellular pattern as the terrorist organisations. Organised crime syndicates are highly sophisticated with resources available through their own illicit proceeds. They can operate efficiently in a number of jurisdictions and at a multi-layered and multi-purpose level. On the contrary, traditional law enforcement agencies were bound by limited resources and legal jurisdiction. The British police forces were independent and there was the lack of a centralised intelligence and investigatory capability to assess and interdict organised crime. Though there were Special Branches and other non-traditional policing operating nationally, they were concerned with only certain manifestations of organised crime and their national remits were within their statutory purview. Jurisdiction in criminal law matters has been territorial and it is an established principle of International Law that one state will not enforce the public law penalties of another state. Extradition is often costly and there might not be effective procedures for extradition in certain jurisdictions. Furthermore, once criminal organisations manage to penetrate or infiltrate the politicians or leaders of developing countries, it 44 BAK Rider in Home Affairs Committee Third Report on Organised Crime: Minutes of Evidence and Memoranda (HC Paper (1994–95) 18–II) 193.

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poses a major legal and jurisdictional problem beyond the reach and perception of traditional law enforcement agencies since the subject becomes a political rather than a matter for law enforcement. Though Mutual Assistance Treaties and Memoranda of Understanding have been signed, much depends upon the resources and capabilities of the various agencies in implementing these agreements. Differences in priorities and allocation of resources as well as the attitude problem all impede cooperation at the inter-force level. National Response and Inter-Agency Approach to Organised Crime Control Traditional law enforcement are criticised for being too reactive in their responses to organised crime. Besides, organised crime is often perceived to be beyond the competence of the police to investigate due to the lack of centralised intelligence and investigatory capabilities. Different task forces and units are established within the British law enforcement to tackle organised crime. The Regional Crime Squads were established in 1964 as a result of increasing criminals committing crime across police forces borders and the fact that local officers were ill-equipped to deal with them efficiently. The Regional Crime Squads proactively targeted criminals of serious offences regionally, nationally and internationally. In the late 1970s, the first national effort in combating international drug trafficking was formed consisting of officers from the Association of Chief Police Officers, the Customs and the Interpol Drug Enforcement Administration. This was known as the National Drug Intelligence Unit which had a national remit to drugs and drug-related matters. The Metropolitan Police SO1 Branch (International and Organised Crime) and SO11 Branch (Criminal Intelligence) were established at New Scotland Yard specialising in developing intelligence and prosecuting groups of organised criminals. The Metropolitan Police Special Branch SO13 (Anti-Terrorist) was established with the remit to investigate all acts of terrorism. The Serious and Organised Crime Command of the Metropolitan Police were formed to provide a fast time proactive response to serious and organised crime with the Central Task Force targeting class ‘A’ drug dealers, firearms users and traffickers; the Flying Squad investigating major robberies; the Kidnap and Special Investigation Unit dealing with kidnapping cases; the Hostage and Crisis Negotiations Unit providing specially trained negotiators for hostage and kidnap crimes in action or suicide intervention; the Cultural and Communities Resource Unit deploying Metropolitan Police Service staff that have relevant life skills to assist with investigations of crime and resolving critical incidents; the Community Engagement Unit conducting operations against London based criminals whose activity impacts on the vulnerable communities of London; the Intelligence Support Unit and the different projects teams carrying out proactive information analysis and operations against organised crime.45 A more joined-up national approach was seen as the way forward in the battle against organised crime and terrorism. Besides, the law enforcement agencies began to realise that good quality intelligence-led and 45 More information about the Serious and Organised Crime Command of the Metropolitan Police can be found at , accessed 28 February 2007.

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proactive police service would result in an increasingly accurate crime pattern analysis underpinning crime prevention and reduction strategies.46 Various national agencies, such as the National Criminal Intelligence Service and the National Crime Squad were established to focus specifically on combating national and international serious and organised crime. Her Majesty’s Customs and Excise also had a vital frontline role in fighting against organised crime. Following the Cabinet Office’s report on Recovering the Proceeds of Crime,47 the Assets Recovery Agency was formed under the Proceeds of Crime Act 2002 which represents a new era in interdicting organised crime by focusing on tracking down and recovering the proceeds of crime. This new regime is discussed in more details in Chapter 7. The Home Office announced the establishment of the new UK-wide Serious Organised Crime Agency48 on 9 February 2004, which is tasked with defeating serious organised crime and will be discussed in more details in Chapter 9. National Criminal Intelligence Service The threat of organised crime in the United Kingdom led to the formation of the National Criminal Intelligence Service on 1 April 1992. The aim of the National Criminal Intelligence Service was to provide leadership and excellence in criminal intelligence to tackle serious and organised crime. It supported inter-agency collaboration through the delivery of its specialist products and services including, strategic and tactical assessments, problem profiles, target profiles, operational intelligence and coordination services. It also provided a national overview on the impact of organised criminal activity upon the United Kingdom. The major national strategies of the National Criminal Intelligence Service included the Concerted Inter-Agency Drugs Action Group (CIDA), the InterAgency Action Group Against People Smuggling and Trafficking in Human Beings (REFLEX), the Concerted Inter-Agency Criminal Finance Action Group (CICFA), the National Firearms Strategy Group and other strategy groups tackling paedophilia, frauds, violent and property crime.49 The Security Service Act 1996 allowed the National Criminal Intelligence Service to employ the full range of skills, resources and expertise of the Security Services in tasking and coordinating their activities in appropriate cases, thus, enhancing the success of policing organised crime. The Financial Intelligence Division (FID) of the National Criminal Intelligence Service, formerly known as the Economic Crime Bureau, had two distinct functions namely the development of intelligence and the processing of suspicious activity reports (SARs). The Financial Intelligence Division had established a proactive unit in developing financial intelligence to support the Service objectives and national and international initiatives as the UK Financial Intelligence Unit (FIU). It had a dedicated 46 Her Majesty’s Inspectorate of Constabulary Policing With Intelligence: Criminal Intelligence – A Thematic Inspection on Good Practice (HMIC United Kingdom 1997). 47 Cabinet Office, Performance and Innovation Unit Recovering the Proceeds of Crime (Cabinet Office London 2000), available at , accessed 8 February 2007. 48 Home Office One Step Ahead: A 21st Century Strategy to Defeat Organised Crime Cm 6167 (HMSO London 2004 March). 49 National Criminal Intelligence Service NCIS Service Plan 2004/2005 and 2005/2006 (NCIS United Kingdom 2004) 7–8.

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Foreign Financial Intelligence Unit (FFIU) to conduct FIU to FIU enquiries. The other main function of the Division included the receipt, analysis and dissemination of SARs. SARs, which required consent within 7 working days or urgent response from law enforcement agencies, were processed through the intelligence database, known as ELMER immediately, while the remaining SARs were forwarded to the Allocation Team who then decided to allocate or retain the information based on the intelligence requirements. The duty desk of the Financial Intelligence Division also dealt with consent issues50 and was responsible for monitoring deadlines. Under the Proceeds of Crime Act 2002, all SARs in the United Kingdom must be submitted to National Criminal Intelligence Service through fax, letter or direct electronic transfer. Between 2000 and 2002 the numbers of SARs doubled to over 60,000. The increasing number of SARs was due to the implementation of the Financial Services and Markets Act 2000, the Proceeds of Crime Act 2002 and the terrorist events of 11 September 2001.51 Since the establishment of the Serious Organised Crime Agency in 2006, the National Criminal Intelligence Service responsibility for the regime’s Financial Intelligence Unit and its database of SARs has been taken over by the new Agency. The National Criminal Intelligence Service has also produced the National Intelligence Model (NIM)52 on behalf of the Association of Chief Police Officers Crime Committee to professionalise the intelligence discipline within law enforcement including the codification of best practice, professional knowledge and the identification of selection and training requirements of staff. It provides an efficient clearing house for the exchange of information on top tier criminality, on a regional, national and international scale via the International Division. National Crime Squad The National Crime Squad was formed under the Police Act 1997 as a result of the report by the Home Affairs Committee on Organised Crime.53 The National Crime Squad was established on 1 April 1998 through the amalgamation of the six Regional Crime Squads. The mission of the National Crime Squad was to combat national and international serious and organised crime through working in partnership with and providing support to police forces and other law enforcement agencies, especially the National Criminal Intelligence Service and Her Majesty’s Customs and Excise. The National Crime Squad operated within the framework of the National Intelligence Model and its Central Intelligence Unit (CIU) had developed an internal intelligence collection, analysis and dissemination model. Its operational teams were based in three Operational Command Units (OCUs) each headed by a Detective Chief Superintendent and covering England and Wales. The National Crime Squad emphasised greatly on a multi-agency approach in its

50 Part VII of the Proceeds of Crime Act 2002 states the requirement to obtain consent to do a prohibitive act. 51 National Criminal Intelligence Service UK Threat Assessment 2003 (NCIS London 2003) 60. 52 More information on NIM can be found at , accessed 16 February 2007. 53 Home Affairs Committee Third Report on Organised Crime (HC Paper, 1994–95) 18–I).

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three-dimensional strategy of partnership development, technology and innovation and capability and capacity building. Working closely with the National Criminal Intelligence Service and the Immigration Service, the National Crime Squad took the lead in REFLEX to tackle organised immigration crime. Specialist units, such as the National Hi-Tech Crime Unit (NHTCU) and the Paedophilia On-Line Investigation Team (POLIT) had provided a platform for the national deployment of specialist investigators. With the specialist skills, experience and capability, the National Crime Squad proactively targeted organised criminal enterprises. Her Majesty’s Customs and Excise Her Majesty’s Customs and Excise had a vital frontline role in fighting against organised crime through the prevention of illegal imports of drugs and firearms, alcohol and tobacco smuggling and tax fraud. Working in partnership with the National Criminal Intelligence Service, the National Crime Squad, the objectives of the Customs were to (i) reduce the supply of illegal drugs; (ii) help other countries to tackle the production and distribution of illegal drugs and associated money laundering through the Drugs Liaison Officers of the National Intelligence Division and; (iii) deprive traffickers of their assets and proceeds of crime. The criminal arm of the Customs, the National Investigation Service (NIS), countered the importation and supply of controlled drugs, dismantling and disrupting drugs smuggling organisations. In 2005, the Customs were merged with the Inland Revenue to form Her Majesty’s Revenue and Customs. It has 36 business units arranged in four business areas namely Operations, Process and Product Groups, Customer Units and Corporate Functions. International Initiatives to Organised Crime Control Foreign and Commonwealth Office The Foreign and Commonwealth Office, through its Drugs and International Crime Department (DICD), works to coordinate the implementation of the United Kingdom’s international effort against drugs and organised crime, in partnership with the former National Criminal Intelligence Service, Her Majesty’s Revenue and Customs, the Immigration Service, the Home Office, the Financial Services Authority and the Department for International Development. It oversees the nation’s overseas Law Enforcement Liaison Officer network, which consists of more than 100 drugs, fiscal and immigration officers from different agencies working from Diplomatic Missions overseas to assist the exchange of information on transnational organised crime between host governments and law enforcement agencies in the United Kingdom. It has played an active role in negotiating the United Nations Convention Against Transnational Organised Crime and its three associated Protocols, which cover the trafficking and smuggling of people and the illegal production of and trafficking in firearms and ammunition. It also leads on United Kingdom drugs policy in the United Nations and G-8.

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Interpol Interpol was established in 1923 to facilitate cross-border criminal police cooperation and has 186 member countries as of February 2007.54 The General Secretariat in Lyon is the essential coordinating mechanism for members’ access to international databases of criminal information, crime patterns and trends. Its activities concern public safety and terrorism, criminal organisations and drug-related crimes, financial and high-tech crimes, trafficking in human beings and fugitive investigation support. The Criminal Organisations and Drug Sub-Directorate, located within the Criminal Intelligence Directorate of the General Secretariat of Interpol, aims to enhance cooperation among member countries and to stimulate the exchange of information on illicit production, traffic and use of narcotic drugs and psychotropic substances. A number of resolutions55 in relation to financial crime, which address the importance of identifying, tracing and seizing the assets of criminal enterprises, have been passed by the Interpol General Assembly. However, Interpol is criticised for having a very limited scope for non-traditional policing issues and being inadequate in addressing organised crime. The reason is that Interpol depends too much upon traditional law enforcement agency support and is dominated by their intents and purposes, thus, it is sometimes referred to as the ‘police club’. Confined by its own constitution, there is very limited executive activity, communications network and criminal databases on organised crime. Most of the staff at Interpol is seconded from the police forces in member countries, thus, there is a high turnover of staff resulting in the lack of continuity or expertise. In addition to a lack of clear political mandate and limited resources, there is the misperception that Interpol is more concerned with problems of those countries which have made more contributions.56 Europol The European Police Office (Europol), instituted by the Maastricht Treaty of 1992, was established in the Hague, the Netherlands. The principle objective of Europol as stated in Article 2 of the Europol Convention, based on Article K3 of the Treaty on European Union, is the improvement of the effectiveness and cooperation of relevant competent authorities within member states of the European Union in preventing and combating serious forms of organised international crime. Europol is accountable to the European Union Justice and Home Affairs Council, which consists of the justice and home affairs Ministers of all the European Union countries. Europol establishes and maintains a database of intelligence on transnational crime, which facilitates the exchange of information among member states, provides operational and crime analysis as well as expertise and technical support for investigations and operations. The Crimes against Property and Financial Crime Unit (SC4) has also established the Europol Criminal Asset Bureau providing technical information on how to trace criminal assets in Europe. In addition, SC4 holds the permanent 54 See the list of Interpol member states at , accessed 16 February 2007. 55 Resolutions AGN/55/RES/18, 1986; AGN/56/RES/11, 1987; AGN/60/RES/4, 1991; AGN/66/RES/15, 17 and 18, 1997. 56 BAK Rider in Home Affairs Committee Third Report on Organised Crime: Minutes of Evidence and Memoranda (HC Paper (1994–95) 18–II) para 80–83.

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secretariat of CARIN (Camden Asset Recovery Inter-Agency Network) which is an informal network of practitioners from the judiciary and police from over 40 states and jurisdictions as well as from international organisations specialised in criminal asset tracing and asset recovery. Unlike the Interpol, the staff of Europol consists of liaison officers representing major national law enforcement agencies (including police, customs, immigration services, etc) thus allowing more scope for non-traditional policing issues. However, the effect of the additional member states into Europol ‘family’ in May 2004 remains to be seen. United Nations and Other Inter-Governmental Organisations Various agencies within the United Nations, such as the United Nations Crime Prevention Branch, the United Nations Division on Narcotic Drugs, the United Nations Office on Drugs and Crime, have contributed to the fight against drug trafficking. However, there is little evidence on the real impact on the interdiction of organised crime even though the United Nations Convention against Transnational Organised Crime was adopted by the General Assembly in November 2000. Despite the various efforts by different countries and organisations, most international initiatives to organised crime control are criticised for operating at a too general and too senior level, as a result, political and other considerations are often involved at this macro level. Besides, many intergovernmental organisations, such as the Organisation for Economic Cooperation and Development (OECD), G-8, Council of Europe, Association of Southeast Asian Nations (ASEAN), South American Agreement on Narcotic Drugs and Psychotropic Substances (ASEP), have been developed in the international fight against narcotics related offences, but little has been done in regard to the fight against economic and organised crime.57 Terrorism as a National Security Matter International terrorism continues to pose real and serious threats to the United Kingdom. Threat assessments provided by the Security Service in consultation with the Joint Terrorism Analysis Centre reveal that the main terrorist danger to the United Kingdom and British interests overseas comes from Al-Qaida and associated groups. In Northern Ireland, the Dissident Irish Republican terrorist groups reject the Belfast Agreement (Good Friday Agreement) and present a serious threat to British interests; paramilitary and criminal activity by all paramilitary organisations continues.58 Three main pieces of legislation that give the Government its chief powers in combating 57 BAK Rider in Home Affairs Committee Third Report on Organised Crime: Minutes of Evidence and Memoranda (HC Paper (1994–95) 18–II) para 79–86. 58 Independent Monitoring Commission First Report of the Independent Monitoring Commission HC 516 (HMSO London 2004 April), available at , accessed 16 February 2007. The Independent Monitoring Commission was set up by the British and Irish Governments on 7 January 2004. Its purpose is to promote the establishment of stable and inclusive devolved government in a peaceful Northern Ireland and to give confidence to all sides of the community in Northern Ireland that the key commitments under the Good Friday Agreement are being fulfilled.

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terrorism are the Terrorism Act 2000, the Anti-Terrorism, Crime and Security Act 2001 and the Prevention of Terrorism Act 2005. Terrorism is always considered as a matter of national security. Traditionally, it is dealt with mainly by the United Kingdom National Intelligence Machinery59 namely the Security Service (also known as MI5), the Secret Intelligence Service (SIS, also known as MI6) and the Government Communications Headquarters (GCHQ). However, this phenomenon has become more of a law enforcement matter as the terrorists tend to shift to organised crime activities for the necessary funding. Thus, law enforcement agencies now play a role in combating terrorism. Special Branches on Anti-Terrorism are established in various law enforcement agencies and the Commander of the Metropolitan Police Anti-Terrorist Branch is appointed by the Association of Chief Police Officers as the national coordinator for the investigation of acts of terrorism. The National Counter Terrorism Security Office (NaCTSO) works to the Association of Chief Police Officers and coordinates a nationwide network of specialist police advisors in regard to counter-terrorism and protective security. Other government departments also play a significant part in defending the United Kingdom against terrorist threats. The Home Office holds primary responsibility for counter-terrorism within the country and deals with counter-terrorist policy and legislation. The Foreign and Commonwealth Office is responsible for countering the terrorist threat against United Kingdom interests overseas and cooperates with foreign governments and international partners to track down and freeze terrorist funds. The Cabinet Office coordinates security, intelligence and civil contingencies matters to protect the United Kingdom against disruptive threat. The Northern Ireland Office works to secure a lasting peace based on the Good Friday Agreement. The Department for Business, Enterprise and Regulatory Reform handles licences to export controlled military and dual-use technology from the United Kingdom and therefore helps to prevent the proliferation of weapons of mass destruction. The Ministry of Defence and the Armed Forces defend the United Kingdom and overseas territories, its people and interests and work to strengthen international peace and security. The Defence Intelligence Staff of the Ministry of Defence is part of the central intelligence machinery. Special Branch The Metropolitan Police Special Irish Branch was formed in March 1883 in response to a Fenian bombing campaign at that time and the Irish fight for independence in the 19th century. Its responsibility expanded over time to countering a wide range of extremist and terrorist activity, thus, it was renamed as the Metropolitan Police Special Branch. There are 52 Special Branches in different police forces and those with territorial responsibility at ports and airports and in many ‘non-territorial’ forces, such as the British Transport Police. Their remits include policing the ports, providing personal protection, ensuring community safety, gathering and assessing 59 Cabinet Office National Intelligence Machinery (HMSO London 2001 September), available at , accessed 16 February 2007.

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intelligence relating to terrorism and extremism and coordinating counter-terrorist investigations.60 Even though Special Branch is not a nationally organised structure, Special Branch officers are often drawn into MI5 operations since they are police officers with power of arrest. The largest Special Branch is the Metropolitan Police Special Branch which has several national roles including (i) the National Public Order Intelligence Unit coordinates the collection, analysis, exploitation and dissemination of intelligence on the extremist threat to public order; (ii) the National Terrorist Financial Investigation Unit has a remit to receive SARs relating to terrorism, carry out and coordinate terrorist financial investigations throughout the country; (iii) the National Joint Unit advises on terrorist legislation, detentions and coordinates particular national operations; and (iv) the Communications Intelligence Unit deals with interception warrants and forensic recovery of computer disc data. The Metropolitan Police Special Branch also has an European Liaison Section which acts as a channel to Europol and equivalent agencies in other European Union member states. As a result of the London terrorist attacks in July 2005, a new Counter Terrorism Command (SO15) was created within the Metropolitan Police. This has taken over the roles and responsibilities of the Anti-Terrorist Branch and Special Branch and was launched on 2 October 2006. The new command brings together intelligence analysis and development with investigations and operational support activity. Security Service The Security Service, also known as MI5, originated in 1909 as the internal arm of the Secret Service Bureau, under Sir Vernon Kell, was tasked with countering German espionage. During 1909 to World War I, the major responsibilities of MI5 included the coordination of government policy concerning aliens, vetting, security measures at munitions factories and counter-espionage. During World War I and World War II, MI5’s work extended to cover the threats from Communist subversion within the armed services and sabotage to military installations, subsequently fascism. Following the defeat of Nazi Germany and the advent of the Cold War, the priorities of MI5 gradually shifted from anti-subversion work to counter-terrorism by the late 1970s.61 Throughout the 1970s and 1980s, MI5 played a leading role in establishing an effective network for cooperation on terrorism among Western security and 60 Home Office Guidelines on Special Branch Work in the United Kingdom (Home Office London 2004). The revised Guidelines replace the Guidelines on Special Branch Work in Great Britain issued in 1994. Also see, Her Majesty’s Inspector of Constabulary Report Need to Know – HMIC Thematic Inspection of Special Branch and Ports Policing published in January 2003; Her Majesty’s Inspector of Constabulary for Scotland Report For Police Eyes Only published in 2000. 61 The National Archives releases materials on the history of the Security Service since 1909 for public view, including surviving records on MI5’s response to the significant espionage attack on the United Kingdom launched by Germany before and during World War I, personal files for German intelligence officers and agents during World War II, the files for Klaus Fuchs of the secrets of the atom bomb, etc. See Collections at , accessed 16 February 2007. Professor Christopher Andrew at

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intelligence services. Since the 1990s, the threat from subversion diminished and the risk from espionage required fewer resources. However, the European Commission on Human Rights ruled that MI5 surveillance of Harriet Harman and Patricia Hewitt, former Legal Officer and General Secretary of NCCL/Liberty, was in breach of the European Convention on Protection of Human Rights and Fundamental Freedoms 1950 (ECHR). This ruling had led to the Security Service Act 198962 which formally acknowledged the existence of the Security Service and MI5 was then given a formal role in countering terrorism and national security by the UK Parliament. In October 1992, the responsibility for leading the intelligence effort against Irish republican terrorism on the United Kingdom was transferred to MI5 from the Metropolitan Police Special Branch. From 2000 onwards, the majority of MI5’s resources are deployed to combat domestic terrorism and international terrorism. Following the attacks on the World Trade Centre and the Pentagon in the United States on 11 September 2001, extra funding was given by Her Majesty’s Treasury immediately to increase MI5’s work against the international terrorist threat and the Joint Terrorism Analysis Centre was formed in 2003. Today, MI5 is responsible for protecting the United Kingdom against covertly organised threats to national security and economic well-being, including terrorism, espionage and the proliferation of weapons of mass destruction. However, MI5 only has an intelligence-gathering role and is not a law enforcement agency or a prosecuting authority. In other words, its staff has no executive powers to make arrests and has to work closely with the police and custom officers in prosecuting cases. MI5 operational teams will bring in local Special Branch officers to carry out arrests and to present evidence in court. It mainly supports the police and other law enforcement agencies in preventing and detecting serious crime through collecting and disseminating intelligence, investigating and assessing threats and offering security advice on relevant protective security measures. MI5 also works closely with the Secret Intelligence Service and Government Communications Headquarters. In February 2004, David Blunkett, the Home Secretary, announced further funding for MI5 which is at present based at Thames House in London. There is no doubt that certain investigative methodologies deployed by MI5 can be quite intrusive. It is, therefore, necessary to justify the proportionality, legality, accountability and necessity of using such intrusive intelligence-gathering methods under the Human Rights Act 1998 and the European Convention on Human Rights.63 The work of MI5 is overseen in three different ways namely ministerial oversight, parliamentary oversight and judicial oversight. These oversight mechanisms are incorporated in four key pieces of legislation, the Security Service Acts 1989 and 1996, the Intelligence Services Act 1994, the Regulation of Investigatory Powers

Cambridge University was appointed in 2002 to research and write an official history of the Service to mark its centenary in 2009. 62 R Blackburn ‘Security Service Act 1989: The Legislation’ (1989) 52 Modern Law Review 801. 63 Home Affairs Committee on Accountability of Security Service Cm 2197 HC 265 (1992–93).

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Act 2000 and the Anti-Terrorism, Crime and Security Act 2001. Besides, MI5 is responsible to the Home Secretary under the statutory basis for the Service. Secret Intelligence Service The Secret Intelligence Service (SIS), also known as MI6, originated in 1909 as the Foreign Section of the Secret Service Bureau under Sir Mansfield Cumming. The Foreign Section was responsible for gathering intelligence overseas. By 1922 Cumming’s section had become a separate service with the title SIS and Sir Cumming signed himself ‘C’. The Intelligence Services Act 199464 places the Secret Intelligence Service on a statutory basis and the Foreign Secretary is responsible for the work of MI6 which is based at Vauxhall Cross in London. The Act also defines the functions of the Secret Intelligence Service and establishes its control and oversight arrangements. Its principle function is to obtain secret information and conduct operations using both human and technical sources, in accordance with the requirements established by the Joint Intelligence Committee and approved by Ministers, for the purpose of supporting the United Kingdom’s foreign policy objectives and countering threats to United Kingdom interests worldwide. Government Communications Headquarters The Government Communications Headquarters (GCHQ) predecessor in 1919, the Government Code and Cipher School based at Bletchley Park, was best known for its work during the Second World War. The Government Communications Headquarters, which was founded in 1946 and has been based in Cheltenham since 1952, is at the leading edge of communications technology. The Intelligence Services Act 1994 defines the role of the Government Communications Headquarters in the post Cold War period. The Act also brings about formal oversight of the intelligence agencies which leads to the formation of the Intelligence and Security Committee and the Intelligence Services Tribunal. The Government Communications Headquarters is an intelligence and security organisation, which is responsible to the Foreign Secretary and works closely with MI5 and MI6. The two missions of the Government Communications Headquarters are signals intelligence (Sigint) and information assurance. Sigint is derived from intercepting communications and other signals in both the United Kingdom and overseas. Through its signals intelligence work, the Government Communications Headquarters supports government decision-making in the fields of national security, military operations and law enforcement. The Government Communications Headquarters also provides significant intelligence for the fight against terrorism and the prevention of serious crime. The decision of what to intercept and what to report to government departments and military commands is based on the requirements established by the Joint Intelligence Committee and approved by Ministers. The Communications Electronics Security Group (CESG) 64 J Wadham ‘Intelligence Services Act 1994: The Legislation’ (1994) 57 Modern Law Review 916; F Wilson ‘Smile on the Face of the Tiger’ (1990) 41 Northern Ireland Legal Quarterly 64.

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of the Government Communications Headquarters advises government departments and the Armed Forces on information and communications assurance and works closely with industry to ensure that sensitive information is properly protected. Like MI5 and MI6, the Government Communications Headquarters is subject to rigorous oversight by the UK Parliament and senior members of the judiciary and works within a legal framework which complies with the European Convention on Human Rights. Therefore, all the activities at the Government Communications Headquarters are underpinned by the Intelligence Services Act 1994, the Regulation of Investigatory Powers Act 2000 and the Anti-Terrorism, Crime and Security Act 2001. Conclusions The problem of organised crime has been understated for decades until the 1980s when the harm caused by organised crime to the British society was too serious to be ignored. Since then, the law enforcement response to organised crime in the United Kingdom has escalated from a local to a national level and from many different agencies to a single UK-wide Serious Organised Crime Agency. The organisational structures of law enforcement and their attitude towards the problem have changed to accomplish the necessary anti-organised crime policies. At the same time, terrorism, normally regarded as a matter of national security, has become more of a law enforcement matter due to the fact that terrorists tend to shift to organised crime activities for the necessary funding. In other words, organised crime and terrorism are not so distinct at the operational level, even though their ultimate motives are different.65 Indeed, the central intelligence machinery supports the police and other law enforcement agencies in preventing and detecting serious crime. However, having said that, law enforcement and security service continue to adopt different strategies towards the two phenomena. The question then follows is ‘would it be more efficient if the responses to organised crime and terrorism are converged at the strategic and tactical level’? If the current strategy in interdicting organised crime and terrorism focuses on disruption, would it still be effective to emphasise on traditional policing power of arrest? Or should the law enforcement be focusing more on the proactive approach in utilising intelligence for combating money laundering and terrorist financing? These issues require further analysis and will be discussed in later chapters. Despite the various efforts of cooperation between national security agencies and local law enforcement communities, differences in interpretations of intelligence and disparities in objectives and functions among different organisations have created difficulties in developing a unity of purpose, thus, increasing the complexity of intelligence sharing. Besides, the large number of different agencies and task forces with similar remit often result in duplication of resources. ‘It is therefore vital that intelligence capabilities are refined and extended beyond the national intelligence community since ultimately the state and local authorities must be involved in 65 LI Shelley and JT Picarelli ‘Methods Not Motives: Implications of the Convergence of International Organized Crime and Terrorism’ (2002) 3(4) Police Practice and Research 305.

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identifying and responding to threats, acts and campaigns of terrorism.’66 Indeed, it is essential for law enforcement and security service to join force in combating both organised crime and terrorism. Therefore, a more joined-up multi-agency approach is seen as the way forward. Whether the concept of cross-agency cooperation works and to what extent it is effective will be discussed in Chapter 6.

66 S Sloan ‘Meeting the Terrorist Threat: The Localisation of Counter Terrorism Intelligence’ (2002) 3(4) Police Practice and Research 337, 337.

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Chapter 5

Traditional Legal Response to Organised Crime Depending on the scope of the problem, various anti-organised crime legislative acts and approaches have been established in different countries. Some legislation focuses on criminalising the act of the crime, while others criminalise the membership of certain groups. In other words, provisions for criminalising members of organised crime groups can be divided into two categories: the first category is the criminalisation of specific offences committed by members of an organised crime group; and the second category is the criminalisation of the membership of an organised crime group which makes it an offence to become a member. This chapter analyses the experience of the United States and other countries in dealing with organised crime. The traditional criminal legal response in the United Kingdom is discussed and compared with those in other countries. Since targeting the proceeds of criminal activities plays an important part in combating organised crime and terrorism, the history and development of money laundering, forfeiture and confiscation provisions in the United Kingdom are also reviewed in this chapter.1 Criminalising Specific Offences as Organised Crime: The American Experience The United States is a leader in anti-organised crime legislation and many jurisdictions around the world often benchmark themselves against the development in America. One of the most influential and controversial legislation on organised crime is the Racketeering Influenced and Corrupt Organisations Act 1970 (RICO), which represents a cornerstone of American’s response to organised crime. Racketeering Influenced and Corrupt Organisations Act 1970 The sociological background for the Racketeering Influenced and Corrupt Organisations Act 1970 has evolved from the concept of La Cosa Nostra or Mafia family, as mentioned in Chapter 2, which has been identified in the 1960s as a nationwide, centralised, hierarchical and rationally designed criminal organisation that is believed to have engaged in criminal activities for generations. Each family

1 For the purpose of analysis in this chapter, ‘traditional’ refers to the Pre-POCA era when the controlling of organised crime in the United Kingdom is mainly dealt with under the criminal law.

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is headed by the ‘boss’, followed by the ‘underboss’, ‘caporegime’ and ‘soldiers’.2 It is understood that the Mafia is alien to American society and seen as a conspiracy, whose aim is to infiltrate, corrupt and control American society. As outlined in the Katzenbach Report, the increasing infiltration of organised crime into legitimate businesses in the United States has brought violence and intimidation and has posed enormous threat on American economic system.3 In order to create a new means by which individual criminals and their organisations could be prosecuted, the United States Congress introduced the Senate Bill 30 which subsequently became the Racketeering Influenced and Corrupt Organisations Act 1970. The Act provides a powerful legal tool for law enforcement agencies and strengthens the powers to investigate and prosecute organised crime. As a result, the ‘Godfather’ can be prosecuted for operating and managing criminal enterprises even though he has never engaged in the actual acts of racketeering activities in person. The Racketeering Influenced and Corrupt Organisations Act 1970 serves as both a retributive and a preventive measure, which targets at the economic incentives and economic means by which criminals conduct their businesses. It also outlines a list of specified predicate offences4 as racketeering activity and creates the legal tools of criminal forfeiture and civil remedies. The power of asset forfeiture deprives criminal organisations of their ill-gotten gains and allows capital and tools used to finance and facilitate further criminal activities to be seized. In addition, the Act also contains civil remedy provisions for private and government litigants. The victims of the Mafia family (such as, the extorted businessman and the debtors of loan sharking) can sue the Godfather for damages in a civil action under section 1964. The law enforcement has always believed that the problem could be solved through vigorous prosecution and incarceration of the leaders of the Mafia family, however, the problem with the Racketeering Influenced and Corrupt Organisations Act 1970 is that the law has been developed from the concept of La Cosa Nostra, which is a purely academic theory very similar to Max Weber’s ideal type of legalrational bureaucracy. In reality, the organisation of organised crime is not as clearcut and simple as the Mafia model, thus in practice this piece of legislation might have increased the number of prosecutions and incarcerations, but it has not actually solved the problem or addressed its cause. Specified Predicate Offences To establish criminal liability under the Racketeering Influenced and Corrupt Organisations Act 1970, the defendant must have committed

2 DR Cressey Theft of the Nation: The Structure and Operations of Organised Crime in America (Harper & Row New York 1969) 319. 3 A Califa ‘RICO Threatens Civil Liberties’ (1990) 43 Vanderbilt Law Review 807. 4 ‘Predicate offence’ is an American term which refers to the underlying criminal offence that gave rise to the criminal proceeds which are the subject of a money laundering charge.

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two predicate offences (mostly Federal crimes5 but some state crimes6 are included), he must operate or manage the ‘enterprise’ with some sort of decision-making structure and a ‘pattern of racketeering activity’ must be shown. ‘Racketeering activity’ refers to any act in section 1961(1) which outlines a list of specified predicate offences including those traditional criminal activities related to racketeering such as extortion, kidnapping, arson, narcotics, gambling,7 murder for hire,8 illegal gambling business,9 theft,10 interference with commerce by threat of violence such as robbery or extortion,11 bribery,12 sport bribery,13 dealing in obscene matter,14 dealing in a controlled substance or listed chemical,15 white-collar crime such as financial institutions frauds,16 laundering of monetary instruments,17 obstruction of justice,18 criminal infringement of a copyright,19 counterfeiting,20 trafficking in counterfeit labels,21 trafficking in contraband cigarettes22 and importation of aliens for immoral purpose.23 In the wake of the 11 September 2001 terrorist attacks, the United States Congress passed the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the ‘USA PATRIOT Act’), and in this respect, section 813 of Title VIII PATRIOT Act amends the Racketeering Influenced and Corrupt Organisations Act 1970 to include terrorism in the definition of ‘racketeering activity’. 5 Federal crime is a violation of the laws passed by the United States Congress or federal law rather than (or in addition to) state law. Federal crime also covers all commission of crime taking place on military installations and federal property. These crimes sometimes involve criminal activity that crosses state borders, such as kidnapping or trafficking. They are tried in federal courts by a separate set of judges from state courts and federal rules of evidence and sentencing are applied. In the past two decades, the Congress has been extending federal jurisdiction over crime control to areas once considered to be within state and local jurisdiction, as a result, trials for federal crimes are increasing. 6 State crime is a violation of the state laws and covers all commission of crime taking place within the state and local jurisdiction. States crimes are tried in the state courts by a separate set of judges from federal courts and simpler rules of evidence and sentencing are applied. 7 18 USC § 1952. 8 18 USC § 1958. 9 18 USC § 1955. 10 18 USC § 659. 11 18 USC § 1951. 12 18 USC § 201. 13 18 USC § 224. 14 18 USC § 1461–1465. 15 As defined in section 102 of the Controlled Substances Act. 16 18 USC § 1344. 17 18 USC § 1956. 18 18 USC § 1503. 19 18 USC § 2319. 20 18 USC § 471–473. 21 18 USC § 2318. 22 18 USC § 2341–2346. 23 18 USC § 278.

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‘Enterprise’ refers to any organisation that can be infiltrated by organised crime and is defined as ‘any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity.’24 A ‘pattern of racketeering activity’ involves at least two predicate offences that have been committed or attempted to be committed within ten years and these offences must also display relationship and continuity.25 The relevant part of section 1961 reads as follows, ‘pattern of racketeering activity requires at least two acts of racketeering activity, one of which occurred after the effective date of this chapter and the last of which occurred within ten years (excluding any period of imprisonment) after the commission of a prior act of racketeering activity.’26 As mentioned above, before a racketeering charge can be brought, two specified predicate offences must be committed or attempted. There is no doubt that it would be easier to prove that the funds have a criminal origin than to prove that the funds are derived from a specified predicate offence. In some cases, it might not be possible to narrow down the proceeds to one predicate offence in particular, especially when it was committed in a foreign jurisdiction. On one hand, the Congress specifies that strict and precise limits on the application of the Racketeering Influenced and Corrupt Organisations Act 1970 should be imposed. On the other hand, the Congress has regularly added new offences to the list of predicate offences which can give rise to a RICO charge. This has attracted concerns on various constitutional and civil liberty issues, especially in relation to the use of electronic surveillance and wiretapping for gathering evidence. In addition, the questions of whether a list of specified predicate offences is necessary when defining organised crime, or indeed whether an offence of ‘racketeering’ is necessary in anti-organised crime legislation are raised. Substantive RICO Offences Section 1962 defines ‘prohibited activities’ and uses the word ‘unlawful’ which emphasises the fact that the Racketeering Influenced and Corrupt Organisations Act 1970 has both a criminal and a civil regime. This section makes four types of RICO substantive offences, in simple terms, it makes it unlawful for a person (i) to use an enterprise to launder money generated by a pattern of racketeering activity or collection of an unlawful debt; or (ii) to acquire or maintain an interest in an enterprise through a pattern of racketeering activity or collection of an unlawful debt; or (iii) to conduct affairs of an enterprise through a pattern of racketeering activity or collection of an unlawful debt; or (iv) to conspire to commit

24 18 USC § 1961(4). 25 In HJ Inc v Northwestern Bell, 492 U.S. 229 (1989), the Supreme Court held that the factors of relatedness and continuity combined to produce a ‘pattern of racketeering’. In order to show relatedness, the criminal actions that form the pattern of racketeering must ‘have the same or similar purposes, results, participants, victims, or methods of commission, or otherwise are interrelated by distinguishing characteristics’. Also see Religious Technology Center v Wollersheim 971 F 2d 364, 366 (9th Cir 1992); Midwest Grinding Co Inc v Spitz 976 F 2d 1016, 1021–22 (7th Cir 1992); Western Associates Ltd Partnership, ex rel Ave Associates Ltd Partnership v Market Square Associates 235 F 3d 629, 634–35 (DC Cir 2001). 26 18 USC § 1961(5).

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any of the three substantive RICO offences.27 The Act has broadened the definition of conspiracy which enables the prosecutors to bring an action in a situation where the business activity pursued is predominantly, but not entirely, legal; or where a criminal violates the statute but does not actually infiltrate the legitimate business. In addition, there is no requirement of an overt act. As long as the conspirators share a common purpose, there is no need to prove that each conspirator agreed that he would be the one to commit the predicate acts. Section 1962 reads as follows: (a) It shall be unlawful for any person who has received any income derived, directly or indirectly, from a pattern of racketeering activity or through collection of an unlawful debt in which such person has participated as a principal within the meaning of section 2, title 18, United States Code, to use or invest, directly or indirectly, any part of such income, or the proceeds of such income, in acquisition of any interest in, or the establishment or operation of, any enterprise which is engaged in, or the activities of which affect, interstate or foreign commerce. A purchase of securities on the open market for purposes of investment, and without the intention of controlling or participating in the control of the issuer, or of assisting another to do so, shall not be unlawful under this subsection if the securities of the issuer held by the purchaser, the members of his immediate family, and his or their accomplices in any pattern or racketeering activity or the collection of an unlawful debt after such purchase do not amount in the aggregate to one percent of the outstanding securities of any one class, and do not confer, either in law or in fact, the power to elect one or more directors of the issuer. (b) It shall be unlawful for any person through a pattern of racketeering activity or through collection of an unlawful debt to acquire or maintain, directly or indirectly, any interest in or control of any enterprise which is engaged in, or the activities of which affect, interstate or foreign commerce. (c) It shall be unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise’s affairs through a pattern of racketeering activity or collection of unlawful debt. (d) It shall be unlawful for any person to conspire to violate any of the provisions of subsection (a), (b), or (c) of this section. Criminal Penalties Section 1963 deals with criminal penalties and provides for fines and imprisonment,28 jurisdiction29 and transfer of rights in property.30 Violation 27 Diamonds Plus Inc v Kolber 960 F 2d 765, 769 (8th Cir 1992); River City Markets Inc v Fleming Foods West Inc 960 F 2d 1458, 1461 (9th Cir 1992); Lightening Lube, Inc v Witco Corp. 4 F 3d 1153, 1188 (3d Cir.1993); Reves v Ernst & Young 507 US 170, 184 (1993); McDonough v National Home Insurance Co 108 F 3d 174, 177 (8th Cir 1997). 28 18 USC § 1963(a). 29 18 USC § 1963(b). 30 18 USC § 1963(c).

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of any of the provisions may result in a fine of US$250,000 or twice the loss or gain, imprisonment for 20 years per violation and forfeiture of the illegal proceeds and of any interest that the defendant has acquired or maintained in a business in violation of the Act. In addition, these sentences can be conservative for each predicate offence proven.31 This section also reintroduces the legal tool of criminal forfeiture following its abolishment for almost 180 years under Article 3(3)(2) of the Constitution in 1790. The Racketeering Influenced and Corrupt Organisations Act 1970 makes it mandatory to consider forfeiture where a person is convicted for engaging in racketeering activity through a business.32 Interim measures, such as restraining orders or injunctions,33 are available under the Act to preserve the availability of property subject to forfeiture and to ensure that such property is not dealt in an adverse manner. The related-back doctrine34 provides the conceptual basis for forfeiture.35 There are two types of forfeiture; civil forfeiture and criminal forfeiture, which allow the government to interfere with an individual’s rights and confiscate his property. Civil forfeiture is based on an in rem action brought against an object through the civil courts and the onus of proof is based on the balance of probabilities that the object was used in unlawful activity. Criminal forfeiture is an in personam action brought against a person with a higher standard of proof where the owner of the object must be convicted of unlawful activity before forfeiture can occur. An important aspect of forfeiture under the Racketeering Influenced and Corrupt Organisations Act 1970 is that it is a hybrid forfeiture action that brings together the in personam nature of criminal forfeiture, but involves the more relaxed civil procedural and standard of proof in the civil forfeiture proceedings, thus the safeguards exist to protect the rights of the individual are often criticised.36 Three aspects raise particular civil liberty concerns: (i) there is no need for criminal charge even though the reason for the action is that the property is associated with criminal activity, thus the safeguard of the common law due process attached to a criminal indictment is not applicable; (ii) the prosecutor only needs to prove to the standard of balance of probabilities that the property was associated with the unlawful conduct; and (iii) the defence has a higher standard of proof than the government that the unlawful conduct did not occur or any exceptions apply and that the property should not be forfeited.

31 United States v. Salerno, 794 F.2d 64, 77 (CA2 1986). 32 United States v. Kravitz, 738 F.2d 102 (3rd Cir.) cert denied, 105 S. Ct. 1752 (1984) 33 18 USC § 1963(d). 34 In accordance to the related-back doctrine, the property is tainted by the illegal act, thus, the property becomes as guilty as the person who commits the crime. 35 Forfeiture was defined in United States v Eight (8) Rhodesian Statutes 449 F Supp 193 (CD Cal 1978) as ‘divestiture without compensation of property used in a manner contrary to the laws of the sovereign’. Also quoted in K Hinterseer Criminal Finance: The Political Economy of Money Laundering in a Comparative Legal Context (Kluwer Law International UK 2002) 213. 36 United States v One Single Family Residence 683 F Supp 783 (SD Fla 1988); also see K Hinterseer Criminal Finance: The Political Economy of Money Laundering in a Comparative Legal Context (Kluwer Law International UK 2002).

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Civil Remedies The Racketeering Influenced and Corrupt Organisations Act 1970 contains civil remedy provisions which empower the courts to make appropriate orders requiring any person to divest himself of any interest in any enterprise in question37 and allows private parties injured by a violation of section 1962 to bring a civil action to recover treble damages and his attorney’s fees.38 Nevertheless, the Act does not provide redress for individuals injured by other wrongful acts (such as, negligence or breach of contract)39 or compensation to damages to emotional distress or any personal injury.40 Proceedings under the Racketeering Influenced and Corrupt Organisations Act 1970 begin in the criminal courts before additional sanctions in the civil courts are pursued. However, the defendant need not be criminally convicted before a civil plaintiff can sue for damages because the statute requires only that the criminal activities are chargeable or indictable under the state or federal law and not that the defendant has already been charged or indicted.41 In addition, the Act could be used against corporations other than criminal or racketeering enterprises; however, government entities are not capable of forming the malicious intent necessary to support a RICO action.42 In this respect, the civil regime under the Act is criticised for becoming a legal instrument that is being applied in contexts far remote from the Congress’ original intentions which are to reduce and eventually eliminate the influence of the Mafia, or drug gangs or other organised crime syndicates.43 Conspiracy Legislation in Other Countries Many countries take the Racketeering Influenced and Corrupt Organisations Act 1970 as an example and adopt the conspiracy legislation containing a list of predicate offences defined as ‘organised crime’. For example, section (4)1 of the Australian Crime Commission Act 2002 defines serious and organised crime as an offence,

37 18 USC § 1964(a). 38 18 USC § 1964(c); Brandenburg v Seidel 859 F 2d 1179 (4th Cir 1988); Holmes v Securities Investor Protection Corp. 503 US 258 (1992); Firestone v Galbreath 976 F 2d 279 (6th Cir 1992). 39 Grantham and Mann v American Safety Products 831 F 2d 596, 606 (6th Cir 1987); Mendelovitz v Vosicky 40 F 3d 182, 187 (9th Cir 1994). 40 Grogan v Platt 835 F 2d 844, 846 (11th Cir 1988); James v Meow Media Inc 90 F Supp 2d 798, 814 (WD Ky 2000); Moore v Eli Lilly & Co 626 F Supp 365, 367 (D Mass 1986); City and County of San Francisco v Philip Morris 957 F Supp 1130, 1138–39 (ND Cal 1997). 41 Sedima, SPRL v Imrex Co 473 US 479, 493 (1985). 42 Pedrina v Chun 97 F 3d 1296, 1300 (9th Cir 1996); Lancaster Community Hospital v Antelope Valley Hospital 940 F 2d 397, 404 (9th Cir 1991); Berger v Pierce 933 F 2d 393, 397 (6th Cir 1991). 43 In United States v Turkette, 452 US 576 (1981), it was held that a claim under the Racketeering Influenced and Corrupt Organisations Act 1970 applied to both legitimate and illegitimate enterprises.

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Under the Organised and Serious Crime Ordinance of Hong Kong (Cap 455), ‘organised crime’ means a Schedule 1 offence that (a) is connected with the activities of a particular triad society; (b) is related to the activities of 2 or more persons associated together solely or partly for the purpose of committing 2 or more acts, each of which is a Schedule 1 offence and involves substantial planning and organisation; (c) is committed by 2 or more persons, involves substantial planning and organisation and involves (i) loss of the life of any person, or a substantial risk of such a loss; (ii) serious bodily or psychological harm to any person, or a substantial risk of such harm; or (iii) serious loss of liberty of any person.

The list of Schedule 1 offences include common law offences (murder, manslaughter, kidnapping, false imprisonment, conspiracy to pervert the course of justice, conspiracy to defraud) and statutory offences (drug trafficking, gambling, lending money at an excessive interest rate, import and export of prohibited articles, counterfeiting, prostitution, theft, robbery, burglary, fraud, blackmail, handling stolen goods, assault, possession of arms, infringement of trade mark rights, dealing with the proceeds of drug trafficking or indictable offences, offences relating to making or dealing with infringing copies, providing services that assist the development, production, acquisition or stockpiling of weapons of mass destruction or chemical weapons). The Ordinance also criminalises the conspiracy, incitement, attempt, aiding, abetting, counselling or procuring the commission of any of the offences specified in Schedule 1. Criminalising Membership of an Organised Crime Group The Secret Societies Ordinance was originally made to deal with political disruptions in the British Empire. For example, after the Japanese invasion in 1942, Malaysia was marked by political turmoil from 1945 to 1957. Tensions from newly awakened

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political awareness sparked the formation and conflict of several political parties, such as the United Malays National Organisation (UMNO), Malayan Chinese Association (MCA) and Malaysian Indian Congress (MIC). To a certain extent, the political disruptions caused by these groups can be described as the acts of terrorism rather than organised crime. In other words, the Secret Societies Ordinance was originally made to target terrorism rather than organised crime. Nevertheless, the Secret Societies Ordinance in Hong Kong has always been used to target the activities of organised crime. The reason is that secret societies are often mistaken as organised crime groups since there is minimal terrorist activity and no significant terrorist groups exist in Hong Kong. Under the Society Ordinance of Hong Kong (Cap 151), ‘any person who is or acts as a member of an unlawful or triad society;44 or professes or claims to be a member of a triad society; or attends a meeting of an unlawful or triad society; or pays money or gives any aid to or for the purposes of an unlawful or triad society; or is found in possession of or has the custody or control of any books, accounts, writing, lists of members, seals, banners or insignia of or relating to any triad society or to any branch of a triad society, shall be guilty of an offence and liable on conviction on indictment.’ In addition, any person who incites, induces or invites another person to become a member of or assist in the management of an unlawful or triad society; and any person who uses any violence, threat or intimidation towards any other person in order to induce him to become a member or to assist in the management of an unlawful or triad society shall be guilty of an offence and liable on conviction on indictment. Similar provisions are found under the Societies Act of Singapore (Cap 311). Provisions which criminalise the membership of an organised crime group, such as the Mafia, can also be found in Italian anti-organised legislation. Article 416bis of the Criminal Code prohibits membership of the Mafia or Mafia-type associations. It states that ‘whoever is part of a Mafia-type conspiracy; or promotes or manages or directs such an association; or uses the power of intimidation arises from association membership and uses the system of omerta (code of silence) and the system of subordinate in order to commit crime or obtain control or unfair profit is punishable with maximum imprisonment of nine years.’ Legal Framework on Organised Crime Control in the United Kingdom The legal system in the United Kingdom does not recognise the concept of a criminal or proscribed organisation, membership of which or participation in which is not an offence in itself, with a few exceptions in the case of certain terrorist organisations under the anti-terrorism legislation. Besides, a single list of predicate offences, which is specifically classified as organised criminal activity or racketeering activity, does not exist. Instead individuals are charged on a personal basis upon the commission of a criminal offence, including offences under the Misuse of Drugs Act 1971, the Drug Trafficking Act 1994, the Criminal Justice Act 1993 or the Customs and Excise 44 Section 18(3) of the Society Ordinance of Hong Kong (Cap 151) states that ‘every society which uses any triad ritual or which adopts or makes use of any triad title or nomenclature shall be deemed to be a triad society.’

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Management Act 1979. When two or more persons are committing the offence, they may be charged under section 1 of the Criminal Law Act 1977 for conspiracy to commit the offence. The question of whether the fight against organised crime requires the concept of a ‘criminal organisation’ to be introduced into the English legal system was raised in the Home Affairs Committee on Organised Crime45 in 1995. The police service welcomed the idea of introducing such concept and they suggested that where there was evidence of association with others involved in criminal offences, such circumstances should amount to a criminal offence and the defendant should have the burden of proof to establish that his conduct was legitimate. They revealed the problem with the traditional legislation as follows: The proposal to make membership of a criminal organisation an offence stems from the difficulties experienced in instituting criminal proceedings of conspiracy against key organised crime figures who distance themselves from the criminal activities carried out by junior members, but enjoy the profits from those crimes. Police intelligence and investigation may indicate association between key figures and other members of a criminal enterprise and may also be coupled with wealth where this is no visible source of income. Currently these circumstances fall short of supporting proceedings for conspiracy or other substantive offences.46

However, the Government took the view that there was no need for organised criminal groups and organised crime to be approached differently from other crimes. As stated in the evidence given by the Home Office to the Home Affairs Committee on Organised Crime in 1995: The experience of organised criminal activity in Great Britain has not as yet suggested that a strategy of focusing on organised crime as a problem separate from serious crime in general by, for example, the introduction of legislative provisions that focus specially on organised criminal activity, is necessary or that such an approach would add significant value to the measures that are presently available to combat serious crime.47

Other countries, like Italy and the United States, have seen a need to introduce legislation concerning membership of a criminal organisation as a result of the influence of the more sophisticated criminal gangs like the Mafia. The Government in the United Kingdom insisted that conspiracy laws were adequate and provided a mechanism for dealing with such membership. The Crown Prosecution Service emphasised that there had not been any case in which a prosecution could not proceed because of the non-existence of an offence of membership of a corrupt criminal organisation. As stated in their evidence to the Home Affairs Committee 45 Home Affairs Committee Third Report on Organised Crime (HC Paper (1994–95) 18–I). 46 Police Superintendents’ Association and Police Federation ‘Supplementary Evidence from the Association of Chief Police Officers’ in Home Affairs Committee Third Report on Organised Crime: Minutes of Evidence and Memoranda (HC Paper (1994–95) 18–II) 233. 47 Home Office in Home Affairs Committee Third Report on Organised Crime: Minutes of Evidence and Memoranda (HC Paper (1994–95) 18–II) 80, para 22.

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on Organised Crime in 1995, ‘the laws of conspiracy are likely to be adequate for dealing with organised crime, since they have the flexibility to cover circumstances in which no substantive offence has been committed and also when many such offences have been committed pursuant to an executed agreement.’48 The issue of a potential offence of ‘racketeering’ in the United Kingdom was again analysed in the Home Office Report in 2002 on A Comparative Analysis of Organised Crime Conspiracy Legislation and Practice and their Relevance to England and Wales. The effectiveness of conspiracy law and practice in England and Wales was criticised due to the following reasons:49 1. Conspiracy contemplates an agreement to engage in conduct which relates to one or a series of closely related crimes, it does not contemplate the activities of a multifaceted criminal enterprise. It can accommodate certain broad conspiracies such as have been employed in terrorist prosecutions such as ‘conspiracy to cause explosions on the United Kingdom mainland’, but that is a single form of offence. 2. Each defendant in single conspiracy indictment has to be shown to be party to the same agreement. Proof of the agreement and its terms is usually indirect. It is thus often difficult to distinguish related or sub-conspiracies. 3. Agreement, in the sense of a meeting of two or more minds, does not accord with the common experience and how people actually associate in criminal endeavour. 4. Strict rules of evidence dislocate and obscure the presentation to the court of a full or clear picture.

The general view, at the time, was that although organised crime did exist in the United Kingdom, the problem was less developed and pervasive than in some other western countries. Organised criminals were active as loose networks of criminal enterprise, rather than in the form of large structured Mafia-type or Triad-like organisations. Besides, there had been little evidence of institutional corruption in public and private bodies, or infiltration by organised criminal activities in the United Kingdom. As a result, despite various discussions on the need for a potential offence of ‘racketeering’ and legislation concerning membership of a criminal organisation, the Government insisted that conspiracy laws were adequate in providing a mechanism for dealing with such membership. Indeed, the problem of unlawful and secret societies was seen to be more of a national security issue than an internal criminal matter. In addition, the content of telephone taps or other intrusive devices, which were essential to prove a connection between the defendant and the set of people performing the predicate acts, was not admissible in court. Therefore, it appeared, at the time, that racketeering legislation, like the Racketeering Influenced and Corrupt Organisations Act 1970, might be of little value in the United Kingdom, particularly when the list of specified predicate offences under the racketeering 48 Crown Prosecution Service in Home Affairs Committee Third Report on Organised Crime: Minutes of Evidence and Memoranda (HC Paper (1994–95) 18–II) 115, para 8.1–8.7. 49 M Levi & A Smith A Comparative Analysis of Organised Crime Conspiracy Legislation and Practice and their Relevance to England and Wales (Home Office London 2002) 16, available at , accessed 19 February 2007.

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legislation was constantly expanding. Furthermore, since there is a slight difference between the level of crime and the level of criminal organisation,50 legislation (such as the Racketeering Influenced and Corrupt Organisations Act 1970) targeted at reducing criminal organisation, organised crime infiltration and racketeering, might not necessarily be effective at addressing the more fundamental issues in reducing the level of crime.51 Criminalisation of Criminal Finance ‘Organised criminal activity is a particular kind of serious criminal activity which in Great Britain is primarily focused on drug trafficking and money laundering.’52 Thus, the English legal system focuses on money laundering and confiscation provisions in order to target the proceeds of criminal activity. It must be noted that the anti-money laundering and confiscation regimes and the law stated below are obsolescent. Money laundering offences occurred before 24 February 2003 has to be prosecuted under previous legislation, while money laundering offences occurred on or after 24 February 2003 can be prosecuted under the Proceeds of Crime Act 2002. Similarly, confiscation for offences committed on or after 24 March 2003 has to be made under the Proceeds of Crime Act 2002, even though confiscation for offences committed before 24 March 2003 will still be made under the previous legislation. These transitional arrangements will continue until the old law works out of the system completely. Money Laundering: The Criminal Law Dimension The first money laundering offences were contained in section 24 of the Drug Trafficking Offences Act 1986. This section was repealed and later re-enacted in section 50 of the Drug Trafficking Act 1994, now revised by section 328 of the Proceeds of Crime Act 2002. Other offences were created by section 14 of the Criminal Justice (International Cooperation) Act 1990, which together with the former section 24 offences, were consolidated into Part III of the Drug Trafficking Act 1994. The Drug Trafficking Act 1994 created three money laundering offences, (i) concealing or transferring the proceeds of drug trafficking (originally enacted in section 14 of the Criminal Justice (International Co-operation) Act 1990;53 50 As discussed in Chapter 2, in defining the term ‘organised crime’, there are uncertainties between the offence and the offender, in other words, whether ‘organised crime’ is referring to an act or a group. On one hand, ‘organised crime’ seems to refer to an act (a specified set of predicate crimes). On the other hand, ‘organised crime’ refers to the level of organisation and the infiltration of legitimate business by organised crime. 51 M Levi & A Smith A Comparative Analysis of Organised Crime Conspiracy Legislation and Practice and their Relevance to England and Wales (Home Office London 2002) 18. 52 Home Office in Home Affairs Committee Third Report on Organised Crime: Minutes of Evidence and Memoranda (HC Paper (1994–95) 18–II) 80, para 22. 53 Section 49, Drug Trafficking Act 1994.

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(ii) assisting another to retain benefit of drug trafficking;54 and (iii) acquisition, possession or use of proceeds of drug trafficking.55 Each of the three money laundering offences carried a maximum penalty of fourteen years imprisonment. All these offences under the Drug Trafficking Act 1994 were introduced in compliance with Article 3(b) of the United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (also known as ‘the Vienna Convention’), which required the contracting member states to establish drug money laundering offences. However, the limitation of these provisions was that the money laundering offences were confined to laundering the proceeds of drug trafficking offences56 and did not cover the proceeds of other crimes. The Government soon realised that it was not practical to distinguish drugs from non-drugs proceeds and introduced new offences into the Criminal Justice Act 1988 and Criminal Justice Act 1993, which applied to the proceeds of indictable nondrugs offence. The three money laundering offences created by the Criminal Justice Act 1988 were (i) assisting another to retain the benefit of criminal conduct;57 (ii) acquisition, possession and use of proceeds of criminal conduct;58 and (iii) concealing or transferring proceeds of criminal conduct.59 Criminal conduct was defined as any offence listed in schedule 4 of the Act60 or an indictable offence other than a drug 54 Section 50, Drug Trafficking Act 1994. 55 Section 51, Drug Trafficking Act 1994. 56 A drug trafficking offence is defined in section 1(3) of the Drug Trafficking Act 1994 as (a) an offence under section 4(2) or (3) or 5(3) of the Misuse of Drugs Act 1971 (production, supply and possession for supply of controlled drugs); (b) an offence under section 20 of that Act (assisting in or inducing commission outside United Kingdom of offence punishable under a corresponding law); (c) an offence under— (i) section 50(2) or (3) of the Customs and Excise Management Act 1979 (improper importation), (ii) section 68(2) of that Act (exportation), or (iii) section 170 of that Act (fraudulent evasion), in connection with a prohibition or restriction on importation or exportation having effect by virtue of section 3 of the Misuse of Drugs Act 1971; (d) an offence under section 12 of the Criminal Justice (International Cooperation) Act 1990 (manufacture or supply of substance specified in Schedule 2 to that Act); (e) an offence under section 19 of that Act (using ship for illicit traffic in controlled drugs); (f) an offence under section 49, 50 or 51 of this Act or section 14 of the Criminal Justice (International Cooperation) Act 1990 (which makes, in relation to Scotland and Northern Ireland, provision corresponding to section 49 of this Act); (g) an offence under section 1 of the Criminal [1977 c. 45.] Law Act 1977 of conspiracy to commit any of the offences in paragraphs (a) to (f) above; (h) an offence under section 1 of the Criminal Attempts Act 1981 of attempting to commit any of those offences; and (i) an offence of inciting another person to commit any of those offences, whether under section 19 of the Misuse of Drugs Act 1971 or at common law; and includes aiding, abetting, counselling or procuring the commission of any of the offences in paragraphs (a) to (f) above. Note that simple possession of drugs is not a drug trafficking offence. 57 Section 93A, Criminal Justice Act 1988. 58 Section 93B, Criminal Justice Act 1988. 59 Section 93C, Criminal Justice Act 1988. 60 There are six offences listed in schedule 4 namely (i) offences relating to sex establishments (The Local Government (Miscellaneous Provisions) Act 1982; (ii) supplying video recording of unclassified works (section 9 of the Video Recordings Act 1984; (iii)

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trafficking offence. The maximum penalty for these offences was fourteen years imprisonment. Additional criminal offences in relation to terrorist funds, sometimes referred to as ‘terrorist money laundering’, are contained in the Terrorism Act 2000 and the Anti-Terrorism, Crime and Security Act 2001 as mentioned in Chapter 3. Although money laundering legislation has been available since 1986, there have been few prosecutions and convictions for money laundering in the United Kingdom. The limitations of this early legislation are discussed in Chapter 6. In 2000, the Cabinet Office61 reviewed the anti-money laundering and confiscation regimes in the United Kingdom and generated policy implications for the Proceeds of Crime Act 2002, which consolidates, updates and reforms the criminal law in relation to money laundering. These new money laundering provisions are discussed in more details in Chapter 7. The Confiscation Regime Confiscation and forfeiture measures were designed to deprive the wrongdoers the fruits of their wrongs. There were three different types of asset recovery available under the traditional criminal legislation in the United Kingdom, namely (i) forfeiture of property; (ii) forfeiture of cash at borders under the Drug Trafficking Act 1994; and (iii) confiscation following criminal conviction. Forfeiture was an ancient legal concept. Until the late 19th century, all of a convicted felon’s property was automatically forfeited to the Crown. However, this concept was abolished by the Forfeiture Act 1870. The power to forfeit property was introduced again in the 1950s for dealing with illicit articles, such as pornography. Powers of forfeiture were still found in the Misuse of Drugs Act 1971, the Powers of Criminal Courts Act 1973, the Customs and Excise Management Act 1979 and the Immigration and Asylum Act 1999. In addition, forfeiture powers were also available on application of a customs officer under section 42 of the Drug Trafficking Act 1994 to recover cash at borders that represented the proceeds of drugs trafficking or was intended for use in drugs trafficking without the need for criminal conviction. In R v Cuthbertson62 (the ‘Operation Julie’ case), the defendants were convicted of offences of conspiring to produce and supply the drug LSD. The House of Lords held that forfeiture powers under section 27 of the Misuse of Drugs Act 1971 were restricted to the physical items used to commit the offence. Besides, the defendants had not been convicted of ‘an offence under the Act’ but of statutory conspiracies contrary to the Criminal Law Act 1977. Per Lord Diplock, ‘…section 27 can never have been intended by Parliament to serve as a means of stripping the drug traffickers

possession of video recording of unclassified works for the purposes of supply (section 10 of the Video Recordings Act 1984); (iv) using unlicensed premises for an exhibition which requires a licence (section 10(1)(a) of the Cinemas Act 1985); (v) trademark offences (The Trade Marks Act 1994); and (vi) copyright offences (The Copyright Patents and Designs Act 1988). 61 Cabinet Office, Performance and Innovation Unit Recovering the Proceeds of Crime (Cabinet Office London 2000), available at , accessed 8 February 2007. 62 R v Cuthbertson [1980] 2 All ER 401.

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of the total profits of their unlawful enterprises.’63 As a result of this ruling, the drug trafficking proceeds of over £750,000 were released even though these funds were traced into the hands of the offenders and then restrained. The Cuthbertson case was a turning point for the modern law of confiscation. Following this case, the Hodgson Committee was formed to review the limited forfeiture powers in recovering the proceeds of crime. The Government recognised that the profits from drug trafficking were so great that the deterrent effect of even a lengthy imprisonment was insignificant as the convicted criminal knew that the illicit gains would be available to him on his release. Based on the Hodgson Report,64 the confiscation regime was enacted in the United Kingdom in 1986. Confiscation Proceedings The first confiscation legislation was introduced under the Drug Trafficking Offences Act 1986, which was amended and consolidated by the Drug Trafficking Act 1994. It imposed a mandatory obligation on the court to confiscate the proceeds of drug trafficking offences.65 It was a conviction-based system of confiscation with discretionary statutory assumptions, which allowed the Crown Court to make certain assumptions after a person had been convicted of a drug trafficking offence. The Crown Court was allowed to assume that all assets acquired and all transfers and expenditure made in the six years prior to the institution of proceedings and all property currently held by the defendant were proceeds of drug trafficking. The onus was on the defendant to prove to the civil standard that his wealth had been legitimately acquired in the relevant period, if it was to be excluded from the assessment.66 The Court had the discretion not to apply these statutory assumptions if they would lead to a serious risk of injustice. In addition, the prosecution had the power to require the defendant to submit information as to the source of his assets. If the Court was satisfied that the source of the assets was not drug trafficking, the statutory assumptions could not be relied on.67 Once the Court decided that the defendant had benefited from drug trafficking, it then calculated the value of benefits (the amount to be recovered)68 and the amount available to satisfy the confiscation order (the amount to be realised).69 If the defendant established to the civil standard that the amount to be realised was less than the total amount of his benefit, then the Court was obliged to make a confiscation order of the amount to be realised, or a nominal amount if the amount that might be realised

63 R v Cuthbertson [1980] 2 All ER 401, 406. 64 D Hodgson Profits of Crime and their Recovery (Heinemann London 1984). 65 For the definition of a drug trafficking offence, see n 55 above. 66 R v Comiskey [1991] Crim LR 484; R v Redbourne (1993) 96 Cr App R 201; R v Barwick [2001] Crim LR 52; R v Barnham [2005] EWCA Crim 1049; R v Ripley [2005] EWCA Crim 1453. 67 R v Johnson (1990) 91 Cr App R 332. 68 The amount to be recovered is the amount the Court assesses to be the proceeds of drug trafficking. 69 The amount to be realised is the total value of all the realisable property held by the defendant at the time the confiscation order is made, together with the value of gifts caught by section 8(1) of the Act.

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is nil.70 Any realisable property71 in the possession of the defendant, regardless of whether it had been legally or illegally obtained, could be used to satisfy the order. A confiscation order was an in personam order,72 thus, the government did not have the right of possession of the defendant’s property in cases of non-payment, unless the property was being handed over pursuant to a receivership order, or the defendant had expressly consented to the property being forwarded to the Court. Where the Court considered that it required further information before determining whether the defendant had benefited from drug trafficking, or the amount to be recovered, it might postpone the confiscation proceeding for a period not exceeding six months from the date of conviction.73 The application for postponement of the confiscation determination must be made before the defendant was sentenced. A defect in the procedure for obtaining a postponement could result in a confiscation order being quashed, if it was unfair to the defendant. In R v Williamson,74 confiscation orders were quashed by the Court of Appeal where the judge had failed to postpone the confiscation hearing prior to sentencing. The Criminal Justice Act 1988 extended the confiscation legislation to include all non-drug indictable offences and specified summary offences from which peculiarly high profits could be gained. However, there were no mandatory statutory assumptions in such cases to catch the proceeds of whole course of criminal activity other than those acquired in the course of the offence for which the defendant was convicted. Under the Criminal Justice Act 1988, it was the duty of the Crown Court to consider confiscation when a defendant was convicted in any proceedings before the Crown Court or Magistrates Court of a ‘relevant offence’.75 There were two types of confiscation, namely (i) conviction determination and (ii) course of criminal conduct determination. A conviction determination enabled the Court to confiscate 70 R v Comiskey [1991] Crim LR 484; R v Barwick [2001] Crim LR 52; R v Smith [2001] UKHL 68; R v Versluis [2004] EWCA Crim 3168; R v McKinnon [2004] Crim LR 485; R v Atobrah [2005] EWCA Crim 3321; R v Barnham [2005] EWCA Crim 1049; R v Ripley [2005] EWCA Crim 1453. 71 Realisable property means free property which the defendant holds or has given to another person. Property is free unless it is the subject of a forfeiture or deprivation order under other legislation. Realisable property also includes any business operated by the defendant as a sole proprietor or his share in a partnership or limited company. 72 A confiscation order in the United Kingdom, contrary to that in the United States, is an in personam order against the defendant himself rather than an in rem order against the defendant’s realisable property. 73 R v Kelly [2000] Crim LR 392; R v Miranda [2000] Crim LR 393; R v Lingham [2000] Crim LR 696; R v Gadsby [2001] EWCA Crim 1824; R v Jagdev [2002] EWCA Crim 1326; R v Pisciotto [2002] EWCA Crim 1592; R v Knights & Maguire [2003] EWCA Crim 2222. 74 R v Williamson [2003] EWCA Crim 644, also see R v Steele and Shevki [2001] 2 Crim App R (S) 40; R v Ross [2001] 2 Crim App R (S) 484; Sekhon and Others v R [2002] EWCA Crim 2954; R v Haisman, Lant and Miller [2003] EWCA Crim 2246. 75 A ‘relevant offence’ is defined as an offence listed in schedule 4 of the Criminal Justice Act 1988, if convicted before a magistrate court; or an indictable offence, other than a drug trafficking offence, if convicted before a crown court (including offences taken into consideration).

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benefit arising only from the offences the defendant was convicted of, along with any offences taken into consideration. Such proceedings could be triggered by the prosecutor or the Court. A course of criminal conduct determination could only be triggered by the prosecutor with written notice containing a declaration that the case was one where it was considered appropriate for the assumptions to be made. This determination not only allowed the court to confiscate benefit arising from offences the defendant was convicted of and any offences taken into consideration (that is, the conviction determination), but also offences with which the defendant had not been charged or convicted. A defendant was considered to have followed a course of criminal conduct if he was convicted in the current proceedings of at least two ‘qualifying offences’;76 or was convicted of one qualifying offence and had been convicted of at least one other qualifying offence during the previous six years. If the Court decided to make a confiscation order under the Criminal Justice Act 1988, it had to decide how much money was available to satisfy the order. The amount the defendant was required to pay under the confiscation order must not exceed the value of benefit, or the amount that might be realised, whichever was less at the time the order was made. Any realisable property77 in the possession of the defendant, regardless of whether it had been legally or illegally obtained, could be used to satisfy the order. The procedure for obtaining a postponement of the confiscation determination was the same as that under the Drug Trafficking Act 1994. The Criminal Justice Act 1988 imposed no time limit on the making of a compensation order by the Crown Court.78 The Criminal Justice (International Cooperation) Act 1990 enabled mutual legal assistance in confiscation, furthered drug money laundering offences and contained provisions for drug cash seizure on import or export. The Criminal Justice Act 1993 put in place criminal provisions dealing with money laundering in compliance with Article 3 of the Vienna Convention and enhancement to all crime confiscation provisions. The Parliament, under the Criminal Justice Act 1993, expressly made the civil standard of proof that the proceeds were of criminal provenance sufficient for a confiscation order to be made.79 The Drug Trafficking Act 1994 consolidated the provisions of the Drug Trafficking Offences Act 1986 and the Criminal Justice (International Cooperation) Act 1990, as well as strengthening the confiscation legislation by replacing discretionary assumptions in drug-trafficking cases with mandatory assumptions, as recommended by the First Report of the Home Office Working Group on Confiscation80 in 1991. In other words, the Court was allowed to assess and confiscate not only the proceeds of the particular drug-related offence 76 A qualifying offence refers to a relevant offence committed after 1 November 1995 and from which the court is satisfied that the defendant has benefited. 77 Realisable property is the total value of all the realisable property held by the defendant at the time the confiscation order is made, together with the value of gifts caught by section 74(10) of the Act. Also see R v Stannard [2005] EWCA 2717. 78 R v Hussain [2006] EWCA Crim 2405; R v Soneji [2005] 4 All ER 321. 79 R v Dickens [1990] 2 QB 102. 80 Home Office Working Group on Confiscation was established following the Home Affairs Committee’s Seventh Report Drug Trafficking and Related Serious Crime (HC Paper 370, 1988–89).

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for which a person had been convicted, but also all the income arising from drug trafficking for a period of six years before the offence. It was contended in Welch v United Kingdom81 that the confiscation provisions had raised a strong indication of a regime of punishment and whether or not the statutory assumptions were consistent with the presumption of innocence. It was held that since a confiscation hearing was not a trial of the defendant for a criminal offence, the presumption of innocence should not apply. The Judicial Committee of the Privy Council in McIntosh v Lord Advocate82 took the view that since confiscation proceedings followed a conviction, Article 6 of the European Convention of Human Rights did not apply, thus no derogation from the presumption of innocence was involved. This ruling was followed by the European Court of Human Rights83 and the House of Lords.84 The Second Report of the Home Office Working Group on Confiscation in 1992 recommended that discretionary assumptions for non-drug trafficking cases to be introduced in the Proceeds of Crime Act 1995. The Proceeds of Crime Act 1995 provided greater powers of investigation, as inserted in the Criminal Justice Act 1988, and further alignment of all crime provisions with the Drug Trafficking Act 1994. Restraint Orders The purpose of a restraint order was to freeze a defendant’s assets so that they might be used to satisfy a confiscation order. Restraint orders under the Drug Trafficking Act 1994 and the Criminal Justice Act 1988 were obtained in the High Court and the proceedings were subject to the Civil Procedure Rules. Section 26(1) of the Drug Trafficking Act 1994 and section 77(1) of the Criminal Justice Act 1988 provided that a restraint order might prohibit any specified person or persons from dealing with any realisable property held by him, subject to such conditions and exceptions as may be specified in the order. But the ownership of the restrained assets belonged to the specified person. Section 26(2) of the Drug Trafficking Act 1994 and section 77(3) of the Criminal Justice Act 1988 stated that a restraint order might apply to all realisable property (whether the property was specified in the order or not) held by or being transferred to the specified person after the making of the order. In other words, the Court had the power to restrain any other person or body holding assets in which the defendant had an interest, including limited companies.85 Besides, the assets could be anywhere in the world. The Court 81 Welch v United Kingdom [1995] 20 EHRR 247; R v Ko Chi Yuen [1994] HKLY 198. 82 McIntosh v Lord Advocate [2001] 3 WLR 107. 83 Phillips v United Kingdom [2001] Crim LR 817. 84 R v Benjafield [2002] 2 WLR 325; R v Rezvi [2002] 1 All ER 801. In addition, State must remain within reasonable time limits, see Attorney General’s Reference (No 2 of 2001) [2003] UKHL 68; R (Lloyd) v. Bow Street Magistrates’ Court [2004] 1 Cr App R 11; Crowther v United Kingdom (Application No 53741/00) (The Times, 11 February 2005); Re Sagger [2005] EWCA Civ 174. 85 Although a limited company is a legal entity on its own and its assets will not normally constitute ‘realisable property’ of the defendant within the meaning of the Drug Trafficking Act 1994 and the Criminal Justice Act 1988, it was held in Re H and others [1996] 2 All ER 391 that when the limited company has been used to facilitate or conceal the criminal activity, the court could lift the corporate veil and treat the assets of the company as realisable property of the defendant. Also see Salomon v Salomon [1987] AC 22; Adams v Cape Industries plc

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also had the power to make an order requiring the defendant to repatriate all assets held abroad within the jurisdiction,86 or alternatively, the defendant was required to cooperate with the management receiver appointed by the court under section 26(7) of the Drug Trafficking Act 1994 and section 77(8) of the Criminal Justice Act 1988 in repatriating the assets. Receivers appointed by the Court were independent officers of the Court and had wide ranging powers including (i) taking possession of property; (ii) preserving, managing or dealing with property; (iii) starting, carrying on or defending legal proceedings in respect of property; (iv) realising so much of the property as necessary to meet their remuneration and expenses; and (v) requiring the defendant and any person holding realisable property to take all reasonable and necessary steps to enable the receivership to be conducted properly. Under section 25(1) of the Drug Trafficking Act 1994, the High Court might grant restraint and charging orders when the following conditions were satisfied: (a) proceedings had been instituted in England and Wales against the defendant for a drug trafficking offence, or an application had been made by the prosecutor in respect of the defendant under sections 13, 14, 15, 16 or 19 of this Act; (b) the proceedings had not, or the application had not, been concluded; and (c) the Court was satisfied that there was reasonable cause to believe87 that (i) in the case of an application under section 15 or 16 of this Act that the court would be satisfied as mentioned in section 15(4) or, as the case may be, 16(2) of this Act; or (ii) in any other case that the defendant had benefited from drug trafficking. Similar provisions were found in Part VI section 76(1) of the Criminal Justice Act 1988 (as amended by the Proceeds of Crime Act 1995), which gave the High Court the power to grant restraint orders in relation to defendants against whom criminal proceedings had been or were to be instituted for criminal offences other than drug trafficking offences. A restraint order would not be required in all cases. Decisions regarding whether or not to apply for an order and the timing of an application were of strategic importance to a case. A restraint order might be made prior to the confiscation order, or made for the first time after a confiscation order had been granted but prior to it being satisfied. Besides, there was no minimum monetary value for restraint. An application for restraint orders was part of the statute and there was no express provision in the Drug Trafficking Act 1994 or the Criminal Justice Act 1988 requiring the prosecutor to establish a risk of dissipation of assets as a condition to obtaining an order. However, in Re AJ & DJ (unreported) 9 December 1992, the Court of Appeal held that it was necessary for the prosecutor to establish a risk of dissipation. In fact, the longer the prosecutor delayed in making his application for a restraint order, the more difficult it would be to establish the fact that there was a risk of assets being dissipated. The

[1991] 1 All ER 929; R v Omar [2004] EWCA Crim 2320; R v Stannard [2005] EWCA Crim 2717; R v K [2005] EWCA Crim 619. 86 DPP v Scarlett [2001] 1 WLR 515. 87 In proving the requirement for reasonable cause to believe, the prosecutor has a lesser burden than having to establish the defendant has a case to answer. It will suffice to show reasonable grounds for believing that the defendant has committed a drug trafficking offence, as inference can be drawn in relation to his benefit from drug trafficking. See Lister v Perryman (1870) LR 4 HL 521; Johnson v Whitehouse (1984) RTR 38.

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defendant or any third parties who held or had an interest in the realisable property or hold property which was a gift caught by the Act might apply for the variation or discharge of the restraint order. Charging Orders Unlike the restraint orders, charging orders did not prevent the property in question being sold. A charging order only gave the prosecuting authority an interest in the property to which it related and any purchaser would take the property subject to the Crown’s interest. Section 27(5) of the Drug Trafficking Act 1994 and section 78(5) of the Criminal Justice Act 1988 specified the types of property that could be the subject of charging orders including (a) land in England and Wales; or (b) securities of any of the following kinds: (i) government stock; (ii) stock of any body (other than a building society) incorporated within England and Wales; (iii) stock of any body incorporated outside England and Wales or of any country or territory outside the United Kingdom being stock registered in a register kept at any place within England and Wales; and (iv) units of any unit trust in respect of which a register of the unit holders was kept at any place within England and Wales. If a confiscation order had been made, the charge must not exceed the amount of the order, whereas if no confiscation order had been made, the charge could extend to the full value of the property in question. Thus, the extent of the charge depended largely on the stage of the proceedings. Like the restraint orders, charging orders under the Drug Trafficking Act 1994 and the Criminal Justice Act 1988 were obtained in the High Court and the proceedings were subject to the Civil Procedure Rules. Section 25(1) of the Drug Trafficking Act 1994 and section 76 of the Criminal Justice Act 1988 provided that charging orders might be made in precisely the same circumstances as restraint orders. Nevertheless, both orders could not be granted in respect of the same property88 as stated in section 26(3) of the Drug Trafficking Act 1994 and section 77(4) of the Criminal Justice Act 1988. Section 27(8) of the Drug Trafficking Act 1994 and section 78(8) of the Criminal Justice Act 1988 provided for an application for the variation or discharge of a charging order made by the defendant or by any party affected by it. Conclusions The general view, under the traditional criminal justice system, was that although organised crime did exist in the United Kingdom, the problem was less developed and pervasive than in some other western countries, such as Italy and the United States. Besides, there had been little evidence of institutional corruption in public and private bodies or infiltration by organised criminal activities in the United Kingdom. As a result, the Government took the view that the experience of organised criminal activity in the United Kingdom had not yet suggested that a strategy of focusing on organised crime as a problem separate from other serious crimes was necessary. In addition, there had been some debates as to whether the racketeering legislation, similar to the Racketeering Influenced and Corrupt Organisations Act 1970 in the 88 Re a Defendant, The Times 7 April 1987.

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United States, might add any value to the existing legislation in the United Kingdom. Despite various discussions on the need for a potential offence of ‘racketeering’ and legislation concerning membership of a criminal organisation, the Government insisted that conspiracy laws were adequate in providing a mechanism for dealing with such membership and other organised criminal activities. However, the Government soon recognised the importance of targeting and disrupting the funding for organised criminal syndicates and other serious crimes, including terrorism. The Cuthbertson case and the Report from the Hodgson Committee served as a turning point for the modern law of confiscation. Various legislation on money laundering and confiscation has been formed since 1986 and amended by subsequent legislation. However, these confiscation regimes had not made a significant impact on criminal assets. The number of confiscation orders made and the amount of assets recovered were relatively low compared to other countries, such as Italy and the United States. Besides, there were only few prosecutions and convictions for money laundering offences. The limitations of these early money laundering and confiscation provisions are discussed in Chapter 6. Only in the last decade, the Government realised that the harm caused by organised crime to the society could no longer be ignored and that the extent of the problem had actually been understated for years. Thus, numerous new offences and wider investigatory powers were introduced in the Proceeds of Crime Act 2002 and the Serious Organised Crime and Police Act 2005. Nevertheless, the concept of ‘racketeering’ or ‘membership of a criminal organisation’ has not yet been adopted in the English legal system. No matter how much legislation has been passed by the Parliament in the last ten years, law can only be effective if the society as a whole fully adopts and implements the legislation properly and allows its legal mechanism to evolve according to any changes, such as the impact of globalisation and technology innovation. In fact, the legal approach only gives a snapshot of the reality but does not necessarily solve the problem.

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Chapter 6

Controlling Organised Crime: The Traditional Criminal Justice System This chapter analyses the adequacies of the traditional criminal justice system in addressing and combating the threat posed by organised crime. The attitude of the law enforcement agencies towards the problem of organised crime has changed over time. The organisational structure of law enforcement has also altered to accomplish the different strategies and policies. Various task forces and national agencies have been established in the last two decades throughout the country and cross-agency cooperation is the approach adopted today. The effectiveness of these task forces and the cross-agency cooperation strategies are evaluated. There have been a number of legislation, rules and regulations established in the United Kingdom to deal with money laundering and terrorist financing. On one hand, it is argued that adequate laws and regulations against money laundering and terrorist financing are in place, but the main problem identified is the lack of enforcement. On the other hand, it is unsure whether the traditional legal instruments are sufficient in depriving criminals from their ill-gotten gains, and in turn, disrupting their activities. The adequacies of the traditional criminal legal framework are examined in this chapter. In addition, it is clear that no single industry or government can win the war on organised crime and terrorism alone, a cohesive approach in both the public and private sectors are vital. But how far should corporate responsibility go in patrolling organised crime (a matter of internal security) and terrorism (a matter of external security) or is it worthwhile to increase the burden of compliance on the financial industry? Adequacies of the Law Enforcement Structures Historical Response to Organised Crime Traditional British policing emphasised the principle of local and community policing and was bound by limited resources and legal jurisdiction. The different regional police forces were independent and there was the lack of a centralised intelligence and investigatory capability to assess and interdict organised crime. Besides, the police did not give sufficient weight to the use of intelligence in creating profiles and developing the real picture of syndicated and organised activities. They were not keen to take on money laundering cases, as such cases were thought to be ancillary to the main crime being targeted or that the cases were too complex to investigate since they had to depend on the financial sectors for the information they required to

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proceed. They were even reluctant to recognise the true extent of the problem and to accept the fact that their resources and structures were ill-equipped and incapable in solving the problem of organised criminal activities and money laundering. There had also been substantial institutional and political opposition among senior management to the development of resources specially designed to assess and control organised crime. In addition, confusion over the definition and perception of organised crime and terrorism also hindered the search for intelligence. Thus, the role of traditional police forces in interdicting organised crime was often locked at street level and terrorism was not seen as a major objective within the forces. Furthermore, there was the issue of resource overlap and coordination among different law enforcement agencies. For example, in the fight against drugs, the Customs were responsible for the prevention and detection of illegal import and export of controlled drugs and international drug smuggling; while the Police were responsible for enforcing the law against the supply, manufacture and possession of controlled drugs. However, the two law enforcement agencies lacked the necessary coordination and trust. The distinction between the importation of drugs and the distribution of drugs often caused overlaps and conflicts between the Customs and the Police in their investigation and prosecution of drug offences. As a result, the problem of organised crime and terrorism was generally understated by law enforcement and little cooperation was found among different agencies. Changing Attitude of Law Enforcement Agencies Due to the increasing concern of organised crime as a social problem, the law enforcement agencies had changed their attitudes towards this matter over the years. The police forces began to realise that good quality intelligence-led and proactive police service would result in an increasingly accurate crime pattern analysis underpinning crime prevention and reduction strategies.1 A task force approach, similar to the Organised Crime Drug Enforcement Task Force (OCDETF)2 in the United States, was adopted. Different task forces were then set up within the British law enforcement agencies to tackle organised crime and terrorism. Regional Crime Squads (RCS) were established in 1964 as a result of increasing criminals committing crime across police forces borders. In the late 1970s, the first national effort in combating international drug trafficking was established, it was known as the National Drug Intelligence Unit, with a national remit confined to drugs and drugrelated matters. The Metropolitan Police SO1 Branch (International and Organised Crime) and SO11 Branch (Criminal Intelligence) were established at New Scotland

1 Her Majesty’s Inspector of Constabulary Policing With Intelligence: Criminal Intelligence – A Thematic Inspection on Good Practice (HMIC United Kingdom 1997). 2 The Organised Crime Drug Enforcement Task Force programme was created in 1982 to merge and leverage Federal law enforcement assets into a comprehensive attack against significant drug trafficking problems in the United States. The Organised Crime Drug Enforcement Task Force cases involve federal, state and local law enforcement members working together in a cooperative, coordinated and sustained manner. The Organised Crime Drug Enforcement Task Force serves as the model for collaborative investigative techniques.

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Yard specialising in developing intelligence and prosecuting groups of organised criminals. The Serious and Organised Crime Command of the Metropolitan Police were also formed to provide a fast time proactive response to serious and organised crime.3 The Metropolitan Police SO13 Branch (Anti-Terrorist) was established with the remit to investigate all acts of terrorism within the Metropolitan Police area (including economic terrorism, politically motivated crimes and some cases of kidnap and extortion) and to assist with investigations in other areas of the country. The Commander of the Anti-Terrorist Branch was appointed by the Association of Chief Police Officers (ACPO) as the national coordinator for the investigation of acts of terrorism and cases involving animal rights extremism. Money Laundering Investigation Teams were also established in the National Crime Squad4 (NCS) and Her Majesty’s Customs and Excise (HMCE) to conduct financial investigations. Indeed, the control of money laundering and terrorist financing had altered the way law enforcement officers conduct investigations in criminalities which generated significant amounts of proceeds. They began to focus on the identification of the proceeds, which would be used as a lead to uncovering the offender in the crime that had generated the proceeds.5 Multi-Agency Approach In the 1990s, the British Government adopted new organisational models and investigative strategies to interdict orgranised crime. Such new policies emphasised the importance of cross-agency and multi-agency approach. The importance of full coordination and cooperation between different law enforcement agencies, various national agencies, security services and other professionals (such as lawyers, accountants, and tax experts) were essential in the fight against organised crime.6 An early example of multi-agency approach was shown in the Terrorist Finance Unit7 in Northern Ireland. The National Criminal Intelligence Services (NCIS) established on 1 April 1992 was seen as a challenge to conventional police powers and organisation structures. Other coordination efforts, which had provided opportunities for exchange of information and sharing of experience, include the Metropolitan Police Joint Action Group on Organised Crime, the Metropolitan Police Joint Action Group on Financial Crime, the Financial Fraud Information Network (FFIN) and the Fraud Advisory Panel. Indeed, the Metropolitan Police Joint Action Group on Organised

3 More information about the Serious and Organised Crime Command of the Metropolitan Police can be found at , accessed 28 February 2007. 4 The six Regional Crime Squads were amalgamated into the National Crime Squad on 1 April 1998. 5 T Buranaruangrote ‘Money Laundering Controls: Evolution and Effective Solution to Organised Crime (2003) 46 Essays in International Financial and Economic Law 168. 6 Home Affairs Committee Third Report on Organised Crime (HC Paper (1994–95) 18–I). 7 The Terrorist Finance Unit, originally known as the Anti-Racketeering Unit, was established in 1987 and began its operations in 1989.

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Crime, which involved representatives from 25 different bodies,8 was seen as a major departure in the organisation structure of policing in the United Kingdom. Instead of focusing on formal bureaucratic cooperation, it provided a dynamic and informal forum for inter-agency cooperation. The Terrorist Finance Unit in Northern Ireland was formed in 1987 to tackle the racketeering infrastructure and terrorist-related organised crime. It adopted a ‘coordinating interagency’ model of policing9 and was made up of specialist financial investigators, researchers and policy analysts. The Terrorist Finance Unit collated and analysed intelligence on terrorist finance in Northern Ireland, developed and secured the implementation of regulation and enforcement measures, investigated financial affairs and advised Ministers in the development of terrorist finance legislation. Another example in Northern Ireland was the Organised Crime Task Force (OCTF) established in September 2000. It had also adopted a multi-agency approach bringing together government, law enforcement and a wide range of other agencies to tackling organised crime, which was essential to making the transition to a normal, stable and peaceful society in Northern Ireland. Prior to the implementation of the National Criminal Intelligence Service in 1992, there was no national overview on the impact of organised criminal activity upon the United Kingdom. The role of the National Criminal Intelligence Service was to develop and assess information and intelligence on serious crime and major criminals and to disseminate both strategic and tactical intelligence and information to the police, other law enforcement agencies and government departments leading to arrest and prosecution. The Organised Crime Unit (OCU) of the National Criminal Intelligence Service was the only national group of law enforcement officers (including intelligence officers from the Police, the Customs, the Immigration Service and the Home Office) monitoring the activities of organised crime in a systematic and empirical way across the United Kingdom. The National Criminal Intelligence Service also liaised closely with different government departments, the Gaming Board, the Foreign and Commonwealth Office, as well as 8 The Metropolitan Police Joint Action Group on Organised Crime involves representatives from 25 different bodies namely Metropolitan Police, City of London Police, Royal Ulster Constabulary, National Criminal Intelligence Service, Crown Prosecution Service, Home Office – England and Wales, Northern Ireland Office, Foreign and Commonwealth Office, Department of Social Security, Her Majesty’s Customs and Excise, Her Majesty’s Immigration and Nationality Department, United Kingdom Passport Agency, Inland Revenue, Her Majesty’s Treasury, Department for Business, Enterprise and Regulatory Reform, Bank of England, Financial Fraud Information Network (FFIN), Securities and Investment Board, Serious Fraud Office, Post Office Investigation Department, Solicitor General – Guernsey (Channel Islands), Attorney General’s Chambers – Jersey (Channel Islands), Attorney General’s Chambers – Isle of Man, The Gaming Board for Great Britain and Credit Industry Fraud Avoidance Scheme (CIFAS). 9 Northern Ireland Office in Home Affairs Committee on Organised Crime: Minutes of Evidence and Memoranda (HC Paper (1994–95) 18–II) 166; P Norman ‘The Terrorist Finance Unit and the Joint Action Group on Organised Crime: New Organisational Models and Investigative Strategies to Counter “Organised Crime” in the UK’ (1998) 37(4) The Howard Journal 375.

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foreign law enforcement agencies, including Interpol and Europol. Together with the Government’s central intelligence machinery,10 the National Criminal Intelligence Service provided a network for the exchange and discussion of the information on all forms of organised crime. However, the National Criminal Intelligence Service did not have an operational arm, thus, operational work was undertaken by the Customs, the National Crime Squad or local police forces. Other national agencies involved include the Inland Revenue, the Department of Work and Pensions, the Serious Fraud Office, the Department for Business, Enterprise and Regulatory Reform, the Bank of England and the Financial Services Authority. Complexity of Multi-Agency Cooperation The concept of multi-agency or inter-agency approach is no doubt a brilliant idea because no single law enforcement agency alone is capable of dealing with the complex nature of organised crime. However, there might be practical, institutional and regulatory problems11 between different law enforcement agencies when adopting such an approach. British policing was never designed to facilitate the free flow of intelligence information among law enforcement agencies and indeed significant barriers (such as the compatibility of the computer systems and other electronic devices) exist in their communications structures. Though Memoranda of Understanding are drawn up between different government departments and agencies to provide gateways for cooperation and information sharing, much depends upon the resources and capabilities of the various agencies in implementing these agreements. Each agency might have their own protocols and procedures in communicating information, which might not be adaptable to other agencies. The Data Protection Act 1998 also hinders the free flow of information to certain extent. Thus, limited sharing of intelligence remains a major problem in this multi-agency approach. Differences in priorities and overlaps in resources deployed for investigations are common problems in cooperative operations, which sometimes lead to conflicts among different agencies. A typical example is the overlap of resources between the Special Branches and the Security Service who ‘are working in exactly the same fields with identical statutory intelligence-gathering powers’ in relation to terrorist investigations. Besides, there is no single national decision-making or policymaking body that is ultimately responsible and accountable for the overall counterterrorist functions in the United Kingdom.12 Another element which might impede 10 Cabinet Office, National Intelligence Machinery (HMSO London 2001), available at , accessed 16 February 2007. 11 Interesting dilemmas for federal, state and local law enforcement in the United States are found in their inter-agency efforts against transnational organised crime, see K Schlegel ‘Transnational Crime: Implications for Local Law Enforcement’ (2000) 16(4) Journal of Contemporary Criminal Justice 365. Also see VE Henry ‘The Need for a Co-ordinated and Strategic Local Police Approach to Terrorism: A Practitioner’s Perspective’ (2002) 3(4) Police Practice and Research 319. 12 P Swallow ‘Proactive Terrorist Investigations and the Use of Intelligence’ (2003) 10(4) Journal of Financial Crime 378.

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cooperation at the inter-force level is the attitude problem among different agencies towards the concept of cross-agency approach. Agencies adopting this approach are likely to lose some degree of autonomy and control. Sometimes they might even need to compromise their powers or status in certain situations. Training is another issue, not all necessary disciplines and skills are readily available in any and every agency in order to achieve optimal results in cooperative operations. For example, customs officers (such as drug liaison officers and VAT investigators) are better trained than police officers in dealing on the international arena and tax investigators are more capable in financial investigations than most police officers. Furthermore, there is the lack of coordination, central direction and transparency among the different departments and agencies in their remit of controlling crime, which might pose challenges to the existing structures of accountability. In order to understand the full effect of organised crime groups and to interdict these criminal activities, a long-term commitment of intelligence operatives and covert operations is required. Thus, it was suggested in 1995 that a new body (National Crimes Authority) should be created to ‘coordinate intelligence information, identify threats, develop strategic plans, direct and support multi-agency investigations, monitor prevent systems, and formulate and develop innovative and reform measures.’13 This concept is finally implemented in 2006 with the establishment of the Serious Organised Crime Agency (SOCA) under the Serious Organised Crime and Police Act 2005, which is discussed in Chapter 9. Adequacies of the Criminal Legal Framework Organised crime is about economic gain and terrorists require funding for their activities, besides, both organised criminals and terrorists launder their proceeds of crime in a similar manner to avoid detection and prosecution. It follows that the best strategy is to make crime less attractive for organised crime and to disrupt funding for future terrorist activities. A range of statutory provisions has been in place in the United Kingdom since 1986 to deal with money laundering and to allow confiscation of the proceeds of criminal activity, as discussed in Chapter 5. However, ‘these powers have developed in a piecemeal fashion, are not well understood, and are spread across a range of statutes with differences in the treatment of the proceeds of drugs and non-drugs crime.’14 Besides, there have been significant deficiencies in their application. It was suggested that such legal systems would evolve through a series of different proceeds of crime models.15 13 BAK Rider in Home Affairs Committee Third Report on Organised Crime: Minutes of Evidence and Memoranda (HC Paper (1994–95) 18–II) 193. 14 Cabinet Office, Performance and Innovative Unit Recovering the Proceeds of Crime (Cabinet Office London 2000) para 1.15. Hereafter referred to as the ‘PIU Report’. The full report is available at , accessed 8 February 2007. 15 RE Bell ‘An Evolving Series of Proceeds of Crime Models’ (2000) 8(1) Journal of Financial Crime 21; RE Bell ‘Discretion and Decision Making in Money Laundering Prosecutions’ (2001) 5(1) Journal of Money Laundering Control 42.

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Limitations of the Money Laundering Legislation Various provisions on money laundering were formed since 1986. However, there had been very few prosecutions and convictions for money laundering offences in the United Kingdom compared to Italy and the United States. ‘In the period 1987 to 1998, there were only 357 prosecutions and 136 convictions. There has, however, been an increase in both prosecutions and convictions since 1994 owing to increased awareness and education around the enhanced provisions of the Criminal Justice Act 1993, which extended money laundering offences to cover the proceeds of all indictable offences… And the conviction rate of 44% is also low by comparison with an average Crown Court conviction rate of 76%, indicating the difficulties of dealing with the complexity of money laundering offences in court.’16 The concept of ‘predicate offence’ found in the traditional money laundering legislation was one of the few reasons which had created practical difficulties for investigators and prosecutors in the United Kingdom.17 The mens rea required the prosecution to prove either knowledge or suspicion that the property in question was the proceeds of crime and the prosecutors often had to allege two different offences as alternative counts. As illustrated clearly in R v El-Kurd,18 the two types of predicate offences (drug trafficking and serious crime) for money laundering charges made it difficult for the prosecution to prove definitely that the proceeds originated from drug trafficking and not any other criminal conduct when there was no conclusive evidence as to the source of those funds, even though it was clear that the money was illicit. However, the Court of Appeal stated that the prosecution did not need to prove the predicate offence or the precise source of the money as long as the jury was satisfied that the money was derived from either drug trafficking or other criminal conduct. Where there was evidence that the defendant was party to both a conspiracy to launder the proceeds of drug trafficking and party to a conspiracy to launder the proceeds of criminal conduct, the appropriate course for the prosecution was a single count of conspiracy to launder money illicitly obtained. This would avoid the necessity for any choice to be made as to whether the funds derived from drug trafficking or other criminal conduct. This decision was reinforced in R v Hussain & Bhatti19 where the court ruled that it was appropriate for the prosecution to choose a charge of conspiracy to contravene the drug trafficking money laundering provisions or alternatively the non-drug trafficking money laundering provisions and was not bad for duplicity. By applying the concept of particular ‘predicate offence’ to money laundering offences, it not only made prosecution more difficult, but also reduced the number

16 The PIU Report (n 13 above) para 9.7–9.8. 17 Northern Ireland does not have the problem caused by the concept of ‘predicate offence’ as the laundering offences under the Proceeds of Crime (Northern Ireland) Order 1996 refer to laundering the proceeds of criminal conduct triable on indictment. See RE Bell ‘Abolishing the Concept of “Predicate Offence”’ (2002) 6(2) Journal of Money Laundering Control 137, 140. 18 R v El-Kurd [2001] Crim LR 234 (CA). 19 R v Hussain & Bhatti [2002] Crim LR 407.

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of suspicious activity reports submitted to the authorities, which in turn, decreased the amount of financial intelligence disseminated to law enforcement agencies. Thus, a single offence of money laundering should be created and the test for money laundering should be simplified. Limitations of the Confiscation Regime A number of confiscation provisions were formed since 1986. However, the confiscation regime had not made a significant impact on criminal assets. The Drug Trafficking Act 1994 imposed a mandatory obligation on the court to confiscate the proceeds of drug trafficking offences. It was a conviction-based system of confiscation with discretionary statutory assumptions, which allowed the Crown Court to make certain assumptions after a person had been convicted of a drug trafficking offence. The major weakness of this early legislation was that only the proceeds of drug trafficking could be confiscated and it failed to attack the proceeds of non-drug trafficking crime. Besides, confiscation was only possible after conviction. The Criminal Justice Act 1988 then extended the confiscation legislation to include all non-drug indictable offences and specified summary offences from which peculiarly high profits could be gained. Though confiscation may be in respect of both drug trafficking and non-drug trafficking crime, it was still only possible after an offence had been proven to a criminal standard (that is, beyond reasonable doubt). As a result, the assets of the masterminds of the organised crime groups could not be confiscated because they often distant themselves from the crimes and so there would not be enough evidence to convict them. In fact, few people had the expertise in the process of deciding on benefit and realisable assets and many find it confusing and unattractive.20 In the Home Affairs Committee Third Report on Organised Crime, the Regional Crime Squads21 suggested that the Government should consider similar legislation like the Racketeer Influenced and Corrupt Organisations Act 1970 in the United States. The Racketeer Influenced and Corrupt Organisations Act 1970 combines both civil and criminal law together into removing the proceeds of crime and does not rely on the individual being convicted, but allows civil forfeiture on the balance of probabilities without a prior criminal conviction. Another weakness identified by the Home Affairs Committee Third Report on Organised Crime was that the rate of recovery of sums ordered to be confiscated was much lower than the sums ordered. ‘For orders made under the Drug Trafficking Offences Act 1986 between April 1987 and March 1993, the figures were £43.4 million ordered and £14.0 million recovered. For orders under the Criminal Justice Act 1988 (that is, for other serious crime), accurate statistics were not available for the first two years of operation, but for subsequent years (April 1991 to March

20 M Levi and L Osofsky Investigating, Seizing and Confiscating the Proceeds of Crime Crime Detection and Prevention Series Paper 61 (Home Office Police Research Group 1995). 21 Regional Crime Squads in Home Affairs Committee Third Report on Organised Crime: Minutes of Evidence and Memoranda (HC Paper (1994–95) 18–II) 135.

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1993) the figures were £1.7 million and £0.5 million respectively.’22 The Home Office explained that appeals, complications in property sales, receivers’ costs and overvaluation of property assets had contributed to the low figures in sums recovered. The Report recommended that a full study on the rate of recovery of confiscated funds was necessary to evaluate the effectiveness of the confiscation regime. In fact, the confiscation regime has been kept under regular review by the Home Office Working Group on Confiscation. Similar results in the PIU Report in 2000 also showed that the confiscation regime was not making a significant impact on criminal assets. Between 1994 and 1998, confiscation orders were made in only 20% of drugs cases and only 0.3% of other serious crime cases. The collection rate was also significantly lower than the amounts ordered to be confiscated, at an average, only 40% of the amounts ordered by the courts to be seized were collected in drugs cases and the average collection rate for other serious crime was only 30%.23 According to the Asset Recovery Strategy and Committee, unenforced confiscation orders amounted to over £130 million in 2001. Such poor performance was due to a lack of available resources and skills, poor procedures and inadequate inter-agency cooperation. There were also inappropriate restrictions on the ability of courts to restrain defendants from disposing of their assets. Another issue raised in the Home Affairs Committee Third Report on Organised Crime was the use of confiscated funds. It was criticised that confiscated funds placed in the Treasury’s Consolidated Fund were not made available specifically for the fight against organised crime and that only international drug-related confiscated funds placed in the Seized Assets Fund were directly devoted to the fight against drug trafficking. It was proposed that confiscation funds be made available to agencies fighting serious crime. However, the Crown Prosecution Service indicated that there might be the danger of distorted police priorities in focusing on cases where money was likely to be recovered. There was also the concern that it might be wrong in principle by paying the police directly in case enquiries.24 Investigation, Prosecution and Trial Process Financial investigation, in addition to traditional investigation techniques, is an important tool for asset identification and recovery. Financial investigators need to be involved at an early stage to identify and freeze assets for confiscation. However, under the traditional law enforcement structures, financial investigation was not seen as central in the whole investigation process and the career path for financial investigators was rather uncertain. Financial investigators from Her Majesty’s Customs and Excise and the Serious Fraud Office were sometimes involved at an early stage, while police service financial investigators did not come into the picture at a relatively late stage, sometimes even after charge. There were also differences 22 Home Affairs Committee Third Report on Organised Crime (HC Paper (1994–95) 18–I), para 137, xlix. 23 The PIU Report (n 13 above) Chapter 4. 24 Crown Prosecution Service in Home Affairs Committee Third Report on Organised Crime: Minutes of Evidence and Memoranda (HC Paper (1994–95) 18–II) 252.

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in the allocation of budget for financial investigation among different agencies. Some law enforcement agencies might not have the necessary resources to conduct financial investigations. Her Majesty’s Customs and Excise spent about 2.3% of the total National Investigation Service budget on financial investigation (which was about 0.3% of the overall Customs budget), while only between 0.05% and 0.3% of the total budget was allocated specifically for financial investigations within the police forces.25 Furthermore, given the complexity and the sophistication of the cases, financial investigation required specialist skills. However, there was no universally recognised qualification and the standard of training in financial investigation varied greatly among agencies. As a result, ‘financial investigation is underused, undervalued and underresourced in the UK. There is also a shortage of people with the right skills and little cross-agency cooperation or sharing of best practice.’26 It was recommended that greater emphasis should be put on financial investigation to make it central to law enforcement investigations and a national training programme on financial investigation should be established. Under the traditional confiscation legislation, Police and Customs officers could obtain search warrants or orders requiring production of specific documents with reasonable grounds for suspicion and connected with the offences charged to assist the investigations. Police could also apply for an order under the Police and Criminal Evidence Act 1984 to obtain documents to assist the investigations. However, these powers were not available to civilian or non-constable financial investigators. There were certain specialist investigation powers available for complex cases, for example, (i) the Serious Fraud Office financial investigators could compel individuals to cooperate with serious fraud investigations by producing documents, attending interviews and answering to questions under section 2 of the Criminal Justice Act 1987; (ii) officers of the Department for Business, Enterprise and Regulatory Reform had powers to compel production of documents and answers to questions when investigating Companies Act breaches; and (iii) the Financial Services Authority officers had similar powers when investigating unauthorised financial services activity, market abuse, insider dealing and breaches of Money Laundering Regulations. The safeguard for such specialist investigation powers was that any self-incriminating material and legal privilege material could not be used against the compelled person in criminal proceedings. However, these specialist powers were not available to the police when investigating other serious crimes. Therefore, it was suggested that wider investigative powers (such as, compulsory disclosure orders and general bank circulars) should be made available to law enforcement agencies as well as civilian financial investigators. The question of disclosure of information and the intimidation of witnesses might prevent the prosecution of members of organised criminal groups.27 Most successful prevention and prosecution of organised criminal activity depended on intelligence gathered from informants and through surveillance. However, the requirement to 25 The PIU Report (n 13 above) para 7.8. 26 The PIU Report (n 13 above) para 7.2. 27 Report of the Royal Commission on Criminal Justice Cm2263 (HMSO London 1993 July).

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disclose such information to the courts would have serious implications on the effectiveness of intercept and possible reveal of capabilities of police methods might prevent prosecutions from going ahead. In addition, under the evidential rules in the Regulation of Investigatory Powers Act 2000, the content of telephone taps or other intrusive devices, which might be necessary to prove a connection between the defendant and the set of people performing the predicate acts, was not admissible in court as evidence.28 This had led to the debates as to whether the recognition of the concept of ‘criminal organisations’ or ‘racketeering’ was necessary in the English criminal law. Law enforcement agencies sometimes found it difficult to get witnesses to cooperate in organised crime trials because organised criminals were ready to use threat or violence to intimidate the witnesses or jurors so as to prevent prosecutions.29 Witness and jury protection schemes had been set up since the Diplock type trials in Northern Ireland to ensure that the best evidence was given in court, thus, increasing the number of successful prosecutions.30 Though various witness protection schemes existed in different law enforcement agencies, their arrangements and standards were different.31 It was suggested that a more effective national witness protection programme with common standards and national guidelines should be established in order to improve the support and protection to witnesses.32 Adequacies of the Money Laundering Regulatory Regime Regulations and Rules: Detection and Prevention of Money Laundering In order to control organised crime effectively, the problem must be addressed on many fronts and not solely by the use of traditional criminal law offences. The more sophisticated the organisation, the more likely it would involve legitimate 28 A Tomkins ‘Intercepted Evidence: Now You Hear Me, Now You Don’t’ (1994) 57 Modern Law Review 941. 29 An offence of witness intimidation was introduced under section 51 of the Criminal Justice and Public Order Act 1994. Under sections 39 to 41 of the Criminal Justice and Police Act 2001, it is a criminal offence if a person knowingly performs an act intended to intimidate another person who is or may be a witness in civil or criminal proceedings and the penalty is up to five years imprisonment. 30 SC Greer Supergrasses: A Study of Anti-Terrorist Law Enforcement in Northern Ireland (Oxford University Press Oxford 1994); SC Greer ‘Where the Grass is Greener? Supergrasses in Comparative Perspective’ in R Billingsley, T Nemit and P Bean (eds) Informers, Policing, Policy and Practice (Willan Publishing Devon 2001). 31 Home Office Speaking Up for Justice: Report of the Interdepartmental Working Group on the Treatment of Vulnerable and Intimidated Witnesses in the Criminal Justice System (Home Office London 1998). 32 Home Office One Step Ahead: A 21st Century Strategy to Defeat Organised Crime Cm6167 (HMSO London 2004 March) para 6.4; N Fyfe and J Sheptycki Facilitating Witness Co-operation in Organised Crime Cases: An International Review (Home Office Online Report 27/05), available at , accessed 20 February 2007.

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business to launder the proceeds of crime. As a result, a regulatory regime imposing obligations on financial institutions in the fight against money laundering has been formed outside the traditional legal framework. The origins of such regulatory system can be traced back to the American ‘War on Drugs’ in the 1980s, which led to the formation of the Financial Action Task Force (FATF) under the auspices of the Organisation for Economic Cooperation and Development (OECD) in 1989. The Financial Action Task Force (FATF) has put huge efforts to outline the role of financial institutions in the fight against money laundering activities as discussed in Chapter 3. However, forming an effective regulatory regime can be difficult. ‘The trick of regulation is to minimise the illegitimate exploitation without wrecking the economic dynamism’33 and it often involves ‘a strategy for mixing punishment and persuasion’.34 London, as a major international financial centre, has an important part in deciding and promoting anti-money laundering strategies. Many countries, including the United Kingdom, have adopted the 40 FATF Recommendations and loosen their bank secrecy provisions as well as imposing obligations on financial institutions to record any suspicious activity reports (SARs). Money Laundering Regulations 1993: Financial Sectors The money laundering legislation in the United Kingdom has encompassed a regulatory system and reporting structure imposing obligations on financial institutions to report suspicious transactions. The Drug Trafficking Offences Act 1986 made it possible for banks and other financial institutions to report suspicious transactions to the police without breaching duties of confidentiality towards their clients. The Criminal Justice Act 1993 then made this reporting obligation mandatory. The first Money Laundering Regulations 1993, in compliance with the European Money Laundering Directive 91/308/EC, came into force on 1 April 1994. The aim of the Regulations is to prevent the use of the financial system for the purpose of money laundering and to facilitate the identification, monitoring and reporting of suspicious transactions by financial sector entities. There are no de minimis thresholds for reporting. The Regulations make it a criminal offence on all financial institutions for failing to have procedures in place to combat money laundering. Unlike the money laundering offences which apply to all persons, the Money Laundering Regulations 1993 were limited to ‘persons who in the course of relevant

33 M Levi ‘Money Laundering: Risks and Counter-Measures’ in A Graycar and P Grabosky (eds) Money Laundering in the 21st Century: Risks and Countermeasures (Australian Institute of Criminology Canberra 1996) 3. 34 J Braithwaite ‘Convergence in Models of Regulatory Strategy’ (1990) 2 Current Issues in Criminal Justice 59.

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financial business35 carried on within the United Kingdom form a business relationship36 or carry out a one-off transaction.’37 The Money Laundering Regulations 2001 (SI 2001/3461) supplement the provisions of the Money Laundering Regulations 1993 and add certain categories of money service business, including bureaux de change, to the meaning of relevant financial business. Money Laundering Regulations 2003: Financial and Non-Financial Sectors Serious and organised criminals make use of financial and legal professionals to launder money, either by providing expertise or lending credibility to financial targets. The service known to be in greatest demand in 2002 was conveyancing.38 The Financial Action Task Force Typologies Report 2000–2001 stated that lawyers, accountants and other professionals offering financial advice had been involved in complex money laundering schemes. Money launderers require a wide range of services from lawyers39 depending on the legislation and practice in the jurisdiction. Some of the common ones include (i) advice on how to avoid suspicious transactions or leaving a traceable money trail; (ii) use of client accounts as an intermediary for introducing funds into the banking system; (iii) purchase or sale of property; (iv) creation of corporate vehicles and trusts; (v) lawyer-client privilege;40 (vi) guarantees; (vii) introductions; (viii) powers of attorney; and (ix) false legal documentation.41 Indeed, solicitors are important gatekeepers to the business and financial community. However, only 57 solicitors’ firms out of 12,500 in the United Kingdom made disclosures in 1999.42 The reasons for the low level of disclosures are mainly due 35 ‘Relevant financial business’ is defined in Regulation 4(1) and includes (a) deposittaking business under the Banking Act 1987; (b) acceptance of deposits by a building society; (c) the business of the National Savings Bank; (d) business carried on by a credit union; (e) investment business under the Financial Services Act 1986; (f) any activity carried on for the purpose of raising money under the National Loans Act 1968; (g) any home regulated activity carried on by a European Institution in respect of which the requirements of para 1 of Schedule 2 to the Banking Coordination (Second Council Directive) Regulations 1992 have been complied with; (h) the activities listed in points 1 to 2 or 14 of the Annex to the Second Banking Coordination Directive; (i) and insurance business carried on by a person authorised under Articles 6 or 17 of the First Life Directive. 36 ‘Business relationship’ means any arrangement for the carrying out of transactions on a regular basis where the total amount of any payments to be made by any person to any other in the course of the arrangement is not known at the outset. 37 ‘One-off transaction’ means any transaction other than one carried out in the course of an existing business relationship. 38 National Criminal Intelligence Service UK Threat Assessment 2003 (NCIS London 2003) 64. 39 The famous case in 1998 involved the London solicitor, Michael Relton, who was convicted of conspiracy to handle stolen goods and the laundering of the proceeds of the Brinks-Mat gold bullion robbery. 40 J Fisher ‘Legal Privilege in Criminal Case Generally, and Money Laundering Cases in Particular’ (2000) 4(1) Journal of Money Laundering Control 26. 41 RE Bell ‘The Prosecution of Lawyers for Money Laundering Offences’ (2002) 6(1) Journal of Money Laundering Control 17, 19–21. 42 The PIU Report (n 13 above) para 9.32.

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to the (i) lack of anti-laundering awareness in the legal profession; (ii) a general culture of non-suspicion in some law firms; (iii) solicitors’ duty of confidentiality to clients; (iv) confusion over money laundering and tax evasion; and (v) inadequate legislation.43 In order to tighten the anti-money laundering regime, the Money Laundering Regulations 2003, in compliance with the Second European Money Laundering Directive 2001/97/EC, came into force on 1 March 2004 and replaced the Money Laundering Regulations 1993 and the Money Laundering Regulations 2001. The Money Laundering Regulations 2003 have extended the statutory obligations to cover financial services, money transfer agents, auditors, external accountants and tax advisors, real estate agents, notaries and other legal professionals acting in any financial or real estate transaction, dealers of high value goods (when payment in cash of 15,000 euros is made) and casinos. Instead of using the term ‘relevant financial business’, the new Regulations use the phrase ‘relevant business’44 to indicate that the Regulations do not only apply to financial institutions, but also apply to a wider non-financial sector. The Money Laundering Regulations 2003 impose a number of statutory obligations on the relevant business to facilitate the identification, monitoring and reporting of suspicious activity reports. Regulation 3(1) states that every person who carries on relevant business in the United Kingdom must (i) comply with the requirements of Regulations 4 (identification procedures), 6 (record-keeping procedures) and 7 (internal reporting procedures); (ii) establish procedures of 43 RE Bell ‘The Prosecution of Lawyers for Money Laundering Offences’ (2002) 6(1) Journal of Money Laundering Control 17. 44 ‘Relevant business’ is defined in Regulation 2(2) and includes (a) the regulated activity of accepting deposits; effecting or carrying out contracts of long-term insurance; dealing in investments as principal or as agent; arranging deals in investment; managing investments; safeguarding and administering investments; sending dematerialised instructions; establishing (and taking other steps in relation to) collective investment schemes; or advising on investments; when carried on by an authorised person with permission under the Financial Services and Markets Act 2000 to carry on that activity; (b) the activities of the National Savings Bank; (c) any activity carried on for the purpose of raising money authorised to be raised under the National Loans Act 1968(a) under the auspices of the Director of Savings; (d) any activities carried on by way of operating a bureau de change; transmitting money by any means or cashing cheques which are made payable to customers; (e) any of the activities in points 1 to 12 or 14 of Annex 1 to the Banking Consolidation Directive 2000/12/EC; (f) estate agency work; (g) operating a casino by way of business; (h) any activity of a person who acts as an insolvency practitioner within the meaning of section 388 of the Insolvency Act 1986(b) or article 3 of the Insolvency (Northern Ireland) Order 1989(c); or a person appointed to give advice about the tax affairs of another person; (i) the provision of accountancy services by a body corporate or unincorporate or, in the case of a sole practitioner, by an individual; (j) the provision of legal services by a body corporate or unincorporate or, in the case of a sole practitioner, by an individual and which involves participation in a financial or real property transaction; (k) the provision by way of business of services in relation to the formation of a company or the formation, operation or management of a trust; or (l) the activity of dealing in goods of any description by way of business to the extent that the activity involves accepting payment in cash of 15,000 euro or more.

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internal control and communication as may be appropriate for forestalling and preventing money laundering, such as the ‘Know Your Staff’ procedures involving a comprehensive background check during the recruitment process; and (iii) to train relevant employees in their legal obligation under these Regulations and of section 340(11) of the Proceeds of Crime Act 2002 and in the procedures for recognising and dealing with transactions which may be related to money laundering.45 Regulation 4 states that a person who carries on relevant business must set up procedures (such as ‘Know Your Customers’ procedures) for verifying the identification of applicants for business in a business relationship, or in respect of any one-off transaction that the person who carries on the relevant business knows or suspects that the transaction involves money laundering or that a payment of 15,000 euro or more is to be made to or by the applicants for business, or the linked transactions involve 15,000 euro or more.46 Regulation 6 states that a person who carries on relevant business must set up record-keeping procedures for evidence of identity and transactions to be kept for a period of at least five years.47 Regulation 7 states that a person who carries on relevant business must maintain internal reporting procedures for suspicious transactions, including the appointment of a Money Laundering Reporting Officer (MLRO). Anyone in the organisation of the relevant business who knows or suspects that a transaction involves money laundering must report the matter to the designated Money Laundering Reporting Officer. The Money Laundering Reporting Officer is responsible for determining whether or not the information in the matter gives rise to such knowledge or suspicion and reporting to a constable or disclosing to the relevant authority.48 Any person who contravenes the Regulations is guilty of an offence that is punishable on indictment with a maximum penalty of two years’ imprisonment, or a fine, or both, and on summary conviction, by a fine not exceeding the statutory maximum.49 In deciding whether a person has committed an offence under this regulation, the court must consider whether he has followed any relevant guidance,

45 ‘There is a direct correlation between the level of training in money laundering control received by the Money Laundering Reporting Officers and their efficiency in reporting suspicious transactions to the authorities’, see R Bosworth-Davies ‘Living With the Law: A Survey of Money Laundering Officers and their Attitudes Towards the Money Laundering Regulations’ (1998) 1 Journal of Money Laundering Control 245; D Miller ‘Training and Competence – the Compliance Officer’s Perspective’ (1997) 5 Journal of Financial Regulation and Compliance 136. 46 Regulation 4, Money Laundering Regulations 2003. 47 Regulation 6, Money Laundering Regulations 2003. 48 Regulation 7, Money Laundering Regulations 2003. 49 Regulation 3(2), Money Laundering Regulations 2003.

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which is issued by a supervisory authority50 or any other appropriate body.51 Such guidance must be approved by the Treasury and published in a manner approved by the Treasury.52 The alleged offender might have a defence if he can show that he has taken all reasonable steps and exercised all due diligence to avoid committing the offence. It was held by the House of Lords in Director General of Fair Trading v Pioneer Concrete (UK) Ltd 53 that as long as the Money Laundering Reporting Officer was acting within the scope of his employment when he failed to file the report, the company could be liable. Thus, the Regulations provide for corporate liability which means that its personnel as well as the financial institution itself may be prosecuted for contravening the Money Laundering Regulations and may be liable to the same penalties. FSA Money Laundering Rules The Financial Services Authority has established the Money Laundering Rules which came into force on 30 November 2001 (N2).54 The Financial Services Authority Rules only apply to ‘authorised persons’55 carrying on ‘regulated activities’.56 The purpose is to ensure that businesses regulated by the Financial Services Authority have in place effective anti-money laundering systems and controls. The Financial Services Authority Handbook of Rules and Guidance contains a number of different Sourcebooks, Manuals and Modules with which regulated firms have to comply. The duties imposed by the Rules are similar to those of the Money Laundering Regulations; however, the Rules constitute separate elements to the regulatory architecture. The Rules expand the Financial Services Authority’s enforcement action from criminal prosecution to allowing civil action by private persons for damages resulting from breaches of the Rules.57

50 Regulations 2(7) and 2(8) of the Money Laundering Regulations 2003 define the following as a supervisory authority: (a) the Bank of England; (b) the Authority; (c) the Council of Lloyd’s; (d) the Office of Fair Trading; (e) the Occupational Pensions Regulatory Authority; (f) a body which is designated professional body for the purposes of Part 20 of the FSMA 2000; (g) the Gaming Board for Great Britain; (f) the Treasury and (g) the Secretary of State. 51 Regulation 3(4) of the Money Laundering Regulations 2003 defines an appropriate body as any body which regulates or is representative of any trade, profession, business or employment carried on by the alleged offender. 52 Regulations 3(3), Money Laundering Regulations 2003. The Joint Money Laundering Steering Group (JMLSG) provides practice assistance and guidance in interpreting the Money Laundering Regulations. The Guidance Notes published by the Joint Money Laundering Steering Group will be of relevance to a court in determining whether there has been a breach of the Money Laundering Regulations and whether there have been reasonable grounds for suspicion of money laundering. 53 Director General of Fair Trading v Pioneer Concrete (UK) Ltd [1994] 3 WLR 1249. 54 Section 146, Financial Services and Markets Act 2000. 55 Section 31, Financial Services and Markets Act 2000. 56 Section 22(1) and Schedule 2, Financial Services and Markets Act 2000. 57 Section 150, Financial Services and Markets Act 2000.

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In January 2006, the Financial Services Authority published the Policy Statement58 which indicated that there was a strong support to abolish the Money Laundering Sourcebook and replace it with high-level provisions in the Senior Management Arrangement, Systems and Controls Sourcebook (SYSC). As a result, the Financial Services Authority decided to withdraw the Money Laundering Sourcebook. Limitations of the Anti-Money Laundering Disclosure Regime Shortcomings of the SAR Disclosure Regime The anti-money laundering disclosure regime or the SAR regime has been in place since 1986. It is an important tool in identifying the flow of illegal and illicit money within the United Kingdom economy and a key element in the asset recovery strategy. Several reports have examined the effectiveness of the SAR regime and similar weaknesses are identified in each report. Certain areas of dissatisfaction were identified in the Home Affair Committee Third Report on Organised Crime in 1995. The first problem related to the extent of effective enforcement of the legislation among the different types of financial institution. A typical loophole was found in the bureaux de change, which were often used for activities of underground banking system. The second problem was the capability of the SAR regime in identifying the proceeds of crime. Instead of depositing large quantities of cash with banks, money launderers used other financial instruments or ‘front companies’ in placing money or deposited cash in smaller amounts, thus, making suspicions less visible. The third problem was the amount of resources available for the investigation of SARs. Since the amount of disclosures received largely exceeded the number of SARs expected, the National Criminal Intelligence Service were overwhelmed with the voluminous financial data sets in generating case leads and identifying money laundering patterns. Feedback to the reporting financial institutions was delayed for weeks. In addition, the lack of priority given to SARs by individual police forces also affected the effectiveness of the whole reporting system. The fourth problem was that only a few reports had triggered new investigations or had any major impact on existing investigations, thus, there was the need to reduce the number of SARs which turned out to have no criminal connection. In order to tighten up the suspicious reporting system, a ‘three level disclosure priority’ system and a more systematic feedback mechanism between the investigating agencies and the reporting institutions were suggested.59 According to the PIU Report in 2000, an average of 15,000 disclosures were generated each year, however, these had led to only very few money laundering prosecutions and convictions. These SARs were not received in equal measure from all types of institutions required to disclose.60 Bureaux de change and money 58 Financial Services Authority Reviewing our Money Laundering Regime – Feedback on Chapter 2 of CP05/10 and made text Policy Statement 06/1(2006 January) available at , accessed 22 February 2007. 59 M Levi in Home Affairs Committee Third Report on Organised Crime: Minutes of Evidence and Memoranda (HC Paper (1994–95) 18–II) 187. 60 The PIU report (n 13 above, table 9.2) showed that 125 banks, 53 building societies, 33 insurance companies, 18 London Stock Exchange member firms in the regulated sector; 28

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transmission agents were still not regulated. An extension of the disclosure obligation to bureaux de change, companies and company formation agents, lawyers and accountants, were recommended. Besides, the quality and quantity of disclosures across all institutions required improvements. The National Criminal Intelligence Service should work closely with the Financial Services Authority to further educate the financial sector in complying with the disclosure obligations and a formal information exchange gateway between the National Criminal Intelligence Service and the Financial Services Authority was essential.61 The problem of resources shortage for handling SARs still remained. There were significant delays in processing SARs and a backlog of 2,700 disclosures was recorded in 1999.62 It was recommended that the National Criminal Intelligence Service should target ‘a turnaround time for disclosures of 24 hours in 75% of its most urgent cases and five days for the reminder’ with full feedback to the reporting institutions. In addition, the National Criminal Intelligence Service should recruit more specialist civilian staff in producing financial intelligence packages and strategic threat assessments. Furthermore, law enforcement agencies should be encouraged to make use of disclosures in investigating money laundering offences and prosecutors should recognise the public interest in pursuing money laundering offences. Due to the 11 September attacks in the United States, the Financial Services Authority’s new regulatory regime from N2,63 the implementation of new statutory obligations under the Money Laundering Regulations and the enactment of the Proceeds of Crime Act 2002, the volume of SARs had increased dramatically. The number of disclosures was at an average of 15,000 per annum between 1995 and 2000, however, this increased to 29,976 disclosures in 2001, 56,023 disclosures in 2002, 94,708 disclosures in 2003, 154,536 disclosures in 200464 and nearly 200,000 disclosures in 2005. Since both the National Criminal Intelligence Service and the law enforcement agencies were equipped only with the resources and processes designed to deal with a much lower level of disclosures, the rapid growth in the number of SARs had swamped the National Criminal Intelligence Service resulting in a backlog of 58,000 reports. As a result, the Government commissioned the bureaux de change and money transmission agents, 57 solicitors, 17 accountants, 1 company formation agents and 112 other organisations in the non-regulated sector were disclosing in 1999. 61 A partnership agreement for closer cooperation in fighting financial crime was signed by the National Criminal Intelligence Service and the Financial Services Authority on 30 July 2001. See ‘Financial Crime-Fighting Agreement Signed by NCIS and FSA’ (2001) 9(2) Journal of Financial Crime 178. 62 The PIU Report (n 13 above) para 9.24. 63 N2 refers to the implementation of the Financial Services and Markets Act 2000 at midnight on 30 November 2001. 64 Figures obtained from House of Commons Hansard Written Answers for 16 March 2004 (pt 5) ‘Suspicious Transaction Reports’, details can be found at , accessed 20 February 2007. Also see HM Fleming UK Law Enforcement Agency Use and Management of Suspicious Activity Reports: Towards Determining the Value of the Regime (University College London 30 June 2005).

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KPMG LLP to conduct a comprehensive review of the effectiveness of the SAR regime and to make recommendations as to how it could be improved.65 The KPMG Report identified a number of issues which hindered the effectiveness of the disclosure regime including (i) no ownership and lack of overall management of the disclosure regime; (ii) massive growth of disclosures and over-reporting; (iii) under-reporting in certain regulated community; (iv) poor quality of disclosures; (v) little feedback to disclosing entities; (vi) lack of specialist staff in producing high quality intelligence packages; (vii) timeliness of processing disclosures; (viii) low priority given to the disclosure regime by some law enforcement agencies; and (ix) increasing compliance costs and competing priorities. The KPMG Report made 21 recommendations highlighting the need for reform in the SAR regime. These recommendations were required to be taken forward in a timely manner (between 6 and 12 months) with increases in resources and enhancements to existing computer systems. The list of recommendations was as follows:66 1. Establishment of a Task Force. 2. Government commitment to the aims and objectives of the SAR regime. 3. Structuring and strengthening the management of Economic Crime Branch (ECB). 4. Establishment, staffing and role of separate ECB Data Management Centre (DMC). 5. Increase in provision of electronic reporting of SARs. 6. Automatic search and initial allocation processing at the DMC for SARs input into ELMER.67 7. Establishment, staffing and role of ECB Liaison Unit. 8. Development of fewer intelligence packages by ECB. 9. Establishment, staffing and role of Intelligence Development Unit. 10. Proactive management of the backlog of work in progress. 11. Education regarding the SAR regime. 12. Standardisation of reporting processes. 13. Feedback to be provided to disclosing entities. 14. Sectoral analysis of providers of SARs. 15. Merging of Financial Intelligence Units (FIUs) on a regional basis. 16. Use of ARA Centre of Excellence to develop guidance and training on use of SARs. 17. Law enforcement agency (LEA) access to and use of ELMER terminals. 18. Monitoring LEA results and establishment of new service level agreements.

65 The KPMG LLP was appointed to review and report on the effectiveness of the regime for handling SARs on 15 November 2002. The report was published on 1 July 2003 titled Money Laundering: Review of the Reporting System, which is referred to as the ‘KPMG Report’. 66 KPMG LLP Money Laundering: Review of the Reporting System (KPMG LLP UK 2003 July). 67 ELMER is the database used by the Economic Crime Branch at the National Criminal Intelligence Service to hold Suspicious Activity Report information.

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19. LEA objectives to be set by the Home Office which impact upon the use of SARs. 20. Use of information available through ELMER to advertise successes of the SAR regime. 21. Use of successes derived from the SAR regime to support and assist resource allocation decisions. The above KPMG recommendations could be divided into four parts. The first part emphasised on delivering the aims of the SAR regime and the implementation of the recommendations of the KPMG review. In response to the first two recommendations, the Home Office had established a new Anti-Money Laundering Task Force to streamline and modernise the system for reporting suspicious financial activity. The Task Force was made up of representatives from the private sector, law enforcement agencies and the Government with the aim of overseeing a thorough modernisation of the SAR system and ensuring maximum intelligence and benefit to law enforcement agencies in the fight against crime was delivered by the system.68 The second part of the recommendations dealt with the role of the Economic Crime Branch (ECB) of the National Criminal Intelligence Service. A series of fundamental changes to the structure and processes of Economic Crime Branch with increased resources and better management were recommended to enable the Economic Crime Branch to meet the aims of the regime, deal with the backlog of 58,000 SARs, streamline the development of SARs and ensure that the law enforcement agencies receive SARs in a timely fashion with the right intelligence to investigate. The Economic Crime Branch should be split into three core parts, namely the Data Management Centre, the Liaison Unit and the Intelligence Development Unit. The Data Management Centre should be equipped to carry out rapid and efficient data processing with automatic allocation of SARs to the law enforcement agencies. It should also act as a repository for the intelligence contained in SARs. The Liaison Unit should act as a conduit for communicating the law enforcement agencies requirements to the private sector, reviewing and allocating all SARs within ELMER and recommending which SARs should be developed further. The Intelligence Development Unit should develop fewer intelligence packages with higher quality information. The third part of the recommendations focused on improving the quality of reporting of SARs through (i) education by the Liaison Unit, regulators and trade bodies on the aims and needs of the SAR regime; (ii) use of standard prescribed reporting forms by industry type in which the disclosing entities should distinguish between fast-track, high impact and standard disclosures; (iii) feedback provided to disclosing entities through periodic reports on individual performance and the outcomes of SARs disclosed, reasons for rejection of poor quality SARs, information on money laundering typologies and the law enforcement agencies intelligence needs; and (iv) assessing the nature of measures in place for encouraging compliance with the SAR regime and increasing the quality of reporting. The fourth part of the recommendations stressed on improving the results from the law enforcement agencies use of SARs. Those law enforcement 68 Home Office Press Release Cracking Down on Crooked Money Transfers Reference: 188/2003 (Home Office 8 July 2003).

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agencies without sufficient resources and expertise should consider merging their Financial Intelligence Units so as to ensure the receipt, assessment and investigation of high quality SARs. The Assets Recovery Agency’s Centre of Excellence should issue national guidelines to maximise the benefits of high quality SARs in the law enforcement agencies. All Financial Intelligence Units should have access to ELMER terminals, which would enable them to search any SARs, record their progress with individual SARs and provide feedback on cases directly on ELMER. The Home Office should also include money laundering and confiscation issues in the National Policing Plan. Besides, the successes of the SAR regime should be advertised and used to assist and support resource allocation decisions.69 Another report concluded that the SAR regime appeared to be under-utilised by most law enforcement agencies and systematic information maintained by the law enforcement agencies on their use of SARs was limited and of poor quality, besides, communication and feedback between and within the law enforcement agencies, the National Criminal Intelligence Service, the Association of Chief Police Officers, the government and the industry was below optimal. There was plenty of room for improvements and 15 recommendations were suggested to combat deficiencies in law enforcement agencies aspects of the regime.70 The Lander Report71 also identified the problem of a communication gap which resulted in the lack of feedback regarding the quality and quantity of SARs. In addition, there was a lack of publicity of successful prosecutions and convictions. It was recommended that more resources needed to be deployed to anti-money laundering by regulators and the Serious Organised Crime Agency. Indeed, the anti-money laundering requirements could be more effective with a collective and joined-up pooling of anti-money laundering intelligence about client activity. Burdens on the Regulated Sectors Recent legislative changes have a major impact through creating a ‘heightened awareness’ by institutions that money laundering is a serious issue. The new powers of the Financial Services Authority to prosecute non-compliant financial institutions have brought about a radical shift in their antimoney laundering practices. Most regulated sectors agree on the principles of the regulatory regime, however, the existing procedures in compliance are deficient, resulting in disproportional and highly expensive costs in the areas of administration, training and provision of storage space for records. The KPMG Report showed that the regulated sector spent more on ongoing compliance costs (about £90 million per year) than laundered money that was recovered (about £11.5 million recovered

69 For details of the recommendations, see KPMG LLP Money Laundering: Review of the Reporting System (KPMG LLP UK 2003 July). 70 For details of the recommendations, see HM Fleming UK Law Enforcement Agency Use and Management of Suspicious Activity Reports: Towards Determining the Value of the Regime (University College London 30 June 2005). 71 Sir Stephen Lander Review of the Suspicious Activity Reports Regime (SOCA London 2006 March), available at , accessed 8 February 2007.

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and £70 million restrained).72 Private financial institutions have been burdened ‘by disclosure duties, the lifting of bank secrecy privileges and the freezing of client accounts which require extra resources. The resulting decrease in profits has been exacerbated by the inclination of clients from countries that are high on the suspect lists to move their funds to other jurisdictions, although the obligations contained in Security Council Resolution 1373 ensure that the same rules will be applied worldwide. Moreover, monitoring the various lists, which are often updated, may be within the capability of large investment banks equipped with the requisite legal personnel and know-how to develop information technology software to check lists against customer information, but such tracking is very difficult for small and mediumsized firms.’73 Besides, the attitude towards the anti-money laundering regime is linked to the size and type of the financial institutions. ‘Larger banks tended to have more positive attitudes as the AML compliance work is more easily incorporated into existing compliance departments and bank systems. Small and medium-size wholesale banks generally viewed the AML regulations as only partially relevant for their type of business.’74 In particular, financial institutions indicated that the requirement to ‘Know Your Customer’ (KYC) has been given too high a priority and there are many negative implications which could result in client alienation and lost business. The costs of compliance seem to outweigh the risks and more flexibility is required within the rules. Besides, it is unclear as to how successful the ‘Know Your Customers’ procedures are in combating the more sophisticated money launderers since such requirements are easily circumvented with false identification and a good cover story. A risk-based approach focusing on the profile of the customers rather than just the identification details is suggested.75 Furthermore, the question of ‘who regulates the enlarged regulated sector’ under the Money Laundering Regulations 2003 arises in certain sectors, including trust and company service providers, estate agents and providers of safety deposit boxes. Although there are different trade bodies representing each of these sectors, there is no legal requirement for them to register with a trade body and there is no regulator in these sectors to ensure that effective systems are in place to combat money laundering and terrorist financing. Another question is ‘to what extent should the private sector be involved in crime prevention’? How about the loopholes for money launderers in the unregulated sector, such as nail bars, tanning shops, fish 72 KPMG LLP Money Laundering: Review of the Reporting System (KPMG LLP UK 2003 July) 17. Also see PricewaterhouseCoopers Global Technology Centre Anti-Money Laundering: New Rules, New Challenges, New Solutions (PricewaterhouseCoopers LLP UK 2002 October); J Harvey ‘Compliance and Reporting Issues Arising for Financial Institutions from Money Laundering Regulations: A Preliminary Cost Benefit Study’ (2004) 7(4) Journal of Money Laundering Control 333. 73 I Bantekas ‘The International Law of Terrorist Financing’ (2003) 97(2) The American Journal of International Law 315, 330–331. 74 L Webb ‘A Survey of Money Laundering Reporting Officers and their Attitudes towards Money Laundering Regulations’ (2004) 7(4) Journal of Money Laundering Control 367, 373. 75 M Gill and G Taylor ‘Preventing Money Laundering or Obstructing Business?’ (2004) 44(4) British Journal of Criminology 582.

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and chips shops, pubs, night clubs and football clubs? This list can go on to include every business in the economy. However, it is essential to recognise that financial institutions could only cooperate in the fight against money laundering, but they should not do the work of the law enforcement agencies. The increasing burdens on the financial sector to assist in crime prevention is leaving a perception that crime prevention has been privatised and that the financial sector is paying the price for the failure of the criminal justice system to tackle the basic problems of drug trafficking and consumption…The banks are willing to play their part in preventing the United Kingdom financial system from being used to launder the proceeds of these activities. However, bank staff are not policemen and any extension of their role to policing domestic crimes such as tax evasion, or to policing environmental crimes, will be strongly resisted.76

Civil Liabilities Disclosure to the relevant authorities protects the reporting entity against criminal liability, but does not preclude it from civil liability. Financial institutions, which are involved in the transfer or handling of huge amount of funds that might represent the proceeds of crime, should be aware of their potential exposure to civil liability and claims may arise in constructive trusteeship,77 money had and received,78 tracing in equity and conspiracy.79 Claims have been made by victims in some of the high profile fraud cases, such as the Bank of Credit and Commerce International and Maxwell cases. Other issues that may arise in a civil context, including breach of Human Rights Act 1998, Data Protection Act 1998, duties of confidentiality and defamation, are discussed in Chapter 8. Conclusions Despite the enormous efforts and cooperation by the Government, law enforcement agencies and private financial institutions, organised criminals seem to be one step ahead and the financial system continues to be abused by money launderers. It is clear that the traditional criminal justice system has its limitations and does not seem to be adequate in addressing the global threat of organised crime. New restrictions are always followed by new ‘inventions’ or ‘innovations’ to escape from the original restriction. Besides, with increased availability of electronic methods of moving funds, much of the profit from major organised crime is moved across the borders to places where the financial regulations are more relaxed. There is also the 76 British Bankers’ Association in Home Affairs Committee on Organised Crime: Minutes of Evidence and Memoranda (HC Paper (1994–95) 18–II) 179, para 23. 77 The two heads of claim for constructive trust liability are ‘knowing receipt’ and ‘dishonest assistance’. See El Ajou v Dollar Land Holdings Plc [1994] 2 All ER 685; Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437, [2000] 4 All ER 221; Agip (Africa) Ltd v Jackson [1990] Ch 265, [1992] 4 All ER 385; Royal Brunei Airlines v Tan [1995] 2 AC 378. 78 Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548. 79 R v Siracusa (1989) 90 Cr App Rep 340, CA; Torquay Hotel Co. Ltd v Cousins [1969] 2 Ch 106.

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danger that anti-money laundering measures may only add burden on the financial industry and hinder the economic recovery without having much impact on the real problem. Therefore, a more joined-up approach among the different stakeholders and radical reforms in the legislation are necessary. It is crucial to get the right balance between preventing money laundering and not excluding people from the financial mainstream. Furthermore, international cooperation in tracing and recovering criminal assets and more effective mutual enforcement arrangements with other countries for confiscation orders (relating to drug trafficking and all serious crimes) are required. In response to the increasing complexity of money laundering and terrorist financing and the need for greater deterrence effect of the confiscation regime, the British Government has moved one step further to introduce the non-convictionbased system of confiscation under the Proceeds of Crime Act 2002, whereby the standard of proof is based on the balance of probabilities. The new era in interdicting organised crime and money laundering focuses on tracking down and recovering the proceeds of crime. The Proceeds of Crime Act 2002 consolidates the existing laws on confiscation and money laundering into a single piece of legislation and widens the investigative powers. It also contains provisions for civil forfeiture and taxation, which indicates that the recovery of the proceeds of crime does not necessary be part of the traditional criminal justice process, but is possible in the civil arena. The Assets Recovery Agency was created in 2003 with lead responsibility for disrupting organised criminal enterprises through the recovery of their criminal assets, promoting the use of financial investigation as an integral part of proactive criminal investigation and intelligence gathering techniques, providing training for financial investigators and setting higher standards in the attack on criminal assets. The new confiscation, money laundering, civil recovery and taxation regimes under the Proceeds of Crime Act 2002 are discussed in Chapter 7. In 2006, the UK-wide Serious Organised Crime Agency, incorporating various law enforcement agencies, was established with the core responsibility of reducing harm caused by organised crime to the British society. New investigatory powers are also introduced under the Organised Crime and Police Act 2005, which will be discussed in Chapter 9.

Chapter 7

Controlling Organised Crime: The New Perspectives Although organised crime is no new phenomenon, the meaning and nature of this concept has evolved and changed over time at a rate faster than the development and reform of the relevant legislation. Besides, the traditional criminal justice system has proven to be inadequate in tackling this problem. With globalisation and technology innovation, serious organised crime has accelerated to a more international level, which calls for new control and preventive mechanisms. This chapter focuses on the creation of legal mechanisms outside the traditional criminal justice system and the new asset recovery strategy under the civil arena in combating serious organised crime. The British Government has been emphasising the importance of an intelligenceled approach in policing since the 1990s. The role of intelligence in money laundering investigations and other measures (such as plea-bargaining, Queen’s evidence and witness protection programmes) used to facilitate the cooperation of witnesses in organised crime trials are discussed and compared with those in the United States. The issues on how to fully utilise intelligence under the new regime and to what extent intelligence should be drawn into the evidential structure are explored. The legality of undercover operations and the concerns over entrapment are also examined. Innovative Assets Recovery and Disruption Strategies In 2000, the Performance and Innovative Unit of the Cabinet Office published a report titled Recovering the Proceeds of Crime, which reviewed the anti-money laundering and confiscation regimes in the United Kingdom.1 The PIU Report identified the weaknesses in the whole assets recovery system and generated policy implications for the Proceeds of Crime Act 2002 (POCA 2002). The new era focuses on depriving the organised criminals, including terrorists, of their illicit gains and disrupting funding for future activities, thus, showing crime will not pay. Most crime is committed for profit – about 70 per cent of recorded crime is acquisitive. Asset deprivation attacks criminality through this profit motive. In the same way that starving a thriving small business of capital hampers its growth, removing assets from criminal enterprises can also disrupt their activities. Removing unlawful assets also: 1 Cabinet Office, Performance and Innovative Unit Recovering the Proceeds of Crime (Cabinet Office London 2000) Hereafter referred to as the ‘PIU Report’. The full report is available at , accessed 8 February 2007.

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• underpins confidence in a fair and effective criminal justice system and shows that nobody is above the law; • removes the influence of negative role models from communities; • deters people from crime by reducing the anticipated returns; • improves crime detection rates generally; and • assists in the fight against money laundering.2 Some of the main proposals suggested by the PIU Report and later implemented in the Proceeds of Crime Act 2002 are summarised as follows: (i) the creation of a new agency with lead responsibility for asset recovery and containing a ‘Centre of Excellence’ for financial investigation training; (ii) the consolidation of existing laws on confiscation and money laundering into a single piece of legislation; (iii) the introduction of new civil recovery proceedings without the need for a criminal conviction; (iv) the use of Inland Revenue functions by the new agency in relation to criminal gains; (v) the development of gateways for the exchange of information between the new agency and the other authorities; and (vi) the assurance of sufficient trained staff in all the agencies involved in asset recovery so that the system can function efficiently. The Proceeds of Crime Act 2002 received Royal Assent on 24 July 2002 and the Act contains twelve parts. Part I creates the Assets Recovery Agency (ARA). Part II makes provisions for confiscation in England and Wales. Parts III and IV make similar provisions for confiscation in Scotland and Northern Ireland respectively. Part V sets out new provisions for the civil recovery proceedings in the United Kingdom and provisions for the search, seizure and forfeiture of cash. Part VI empowers the Director of the Assets Recovery Agency to exercise functions of the Inland Revenue. Part VII consolidates, updates and reforms the criminal law in the United Kingdom with regard to money laundering. Part VIII sets out powers for use in criminal confiscation, civil recovery and money laundering investigations. Part IX deals with the relationship between confiscation and insolvency proceedings. Part X provides for the disclosure of information to and by the Director of the Assets Recovery Agency and the Scottish Ministers. Part XI provides for cooperation in investigation and enforcement between the jurisdictions of the United Kingdom and overseas authorities. Part XII deals with miscellaneous and general matters.3 When considering the Proceeds of Crime Act 2002, the Home Office has taken into account the human rights safeguards which give expression to the European Convention on Human Rights (ECHR) and the Human Rights Act 1998. These safeguards are necessary to reach an appropriate balance between the right of the individual to legal enjoyment of property and the rights of society to reclaim illegally derived assets. Such safeguards include ‘a £10,000 de minimis threshold; the burden of proof remaining with the State; the provision of civil legal aid; compensation provisions; and organisational management arrangements to ensure that the civil forfeiture route is not adopted as a “soft option” in place of criminal proceedings.’4 2 3 4

The PIU Report (n 1 above) para 1.10. Explanatory Notes to the Proceeds of Crime Act 2002. The PIU Report (n 1 above) para 5.24.

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The hierarchical structure in the legislature intended that confiscation should be the primary means of depriving criminals of the proceeds of their activities with civil recovery as the initial alternative and taxation being utilised as a ‘last resort’. The revised Guidance from the Secretary of State in February 2005, however, indicated that criminal investigations and civil recovery and/or taxation investigations and proceedings can be instituted at the same time into unrelated criminality.5 Assets Recovery Agency The Assets Recovery Agency (ARA), established on 13 January 2003, is a NonMinisterial Department headed by a new office-holder, the Director, who is appointed by the Secretary of State. The Director reports to the Home Secretary, in consultation with the Secretary of State for Northern Ireland and the Scottish Ministers as necessary. The office of the Director is a corporation sole, which has legal personality and can hold property, bring legal proceedings and employ staff.6 The Director may employ staff to assist her in carrying out her functions and enter into contractual arrangements. The Director may delegate the exercise of her functions to her staff and to others working on a contractual basis.7 The Assets Recovery Agency has three strategic aims8 which are consistent with the Government’s Asset Recovery Strategy9 published in November 2001: (i)

To disrupt organised criminal enterprises through the recovery of criminal assets, thereby alleviating the effects of crime on communities. (ii) To promote the use of financial investigation as an integral part of criminal investigation, within and outside the Agency, domestically and internationally, through training and continuing professional development. (iii) To operate the Agency in accordance with its vision and values. The Assets Recovery Agency is a non-prosecuting authority and has offices in London and Northern Ireland carrying out three distinct operational functions namely criminal confiscation, civil recovery and taxation. The civil recovery and taxation powers are unique to the Agency as designated under the Proceeds 5 A copy of the revised Guidance from the Secretary of State is available at , accessed on 20 February 2007. 6 Section 1(3), Proceeds of Crime Act 2002. 7 Section 1(4), Proceeds of Crime Act 2002. 8 Assets Recovery Agency Annual Report 2003/04 and Business Plan 2004–05 (Assets Recovery Agency London 2004) 4. 9 The aims of the Government’s Asset Recovery Strategy are (i) to make greater use of the investigation of criminal assets in the fight against crime; (ii) to recover money that has been made from crime or which is intended for use in crime; (iii) to prevent criminals and their associates from laundering the proceeds of criminal conduct, and detect and penalise such laundering where it occurs; and (iv) to use the proceeds recovered for the benefit of the community. See , accessed 21 February 2007.

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of Crime Act 2002. Cases are referred to the Agency by law enforcement agencies for assessment before adopted for civil recovery or taxation investigations. The Agency is intended to become a centre of expertise capable of handling high value and complex confiscation cases on referral from law enforcement and prosecution agencies. The Agency also takes the lead in developing the Joint Asset Recovery Database (JARD)10 funded by the Recovered Assets Incentives Fund. Besides, five Regional Asset Recovery Teams (RARTs) have been established to support the Asset Recovery Strategy. The Financial Investigation Centre of Excellence is an integral part of the Assets Recovery Agency, which delivers the Director’s statutory obligations in providing training and accreditation to financial investigators and promoting the use of financial investigation as part of criminal investigation. The Agency recognises the importance of working in partnership and has developed and maintained a series of Memoranda of Understanding (MOUs) with key stakeholders. Various Memoranda of Understanding have been signed with the Association of Chief Police Officers, Court Service, Crown Prosecution Service, Civil Recovery Unit in Scotland, Her Majesty’s Inland Revenue, the Police Service of Northern Ireland, Her Majesty’s Customs and Excise, the Local Authority Fraud Investigation Teams, the National Crime Squad, the National Criminal Intelligence Service and the National Identification Service. Further Memoranda of Understanding are under negotiation with wider government bodies including the Department for Work and Pensions, the Director of Public Prosecutions for Northern Ireland and the Department for Social Development (Northern Ireland).11 The total financial resource allocation was £13 million for 2003–04, £17,791 million for 2004–05 and £17,109 for 2005–06. The number of staff has increased from 131 in March 2004 to 162 in March 2005 and 201 in March 2006.12 Confiscation Regime under POCA 2002 Confiscation Proceedings Part II of the Proceeds of Crime Act 2002 makes a consolidated and updated set of provisions for confiscation in England and Wales. It introduces the concept of ‘criminal lifestyle’ and will eventually replace the separate drug trafficking and criminal justice legislation. As a result of the Human Rights Act 1998 and decisions in the European Court, confiscation for offences committed before 24 March 2003 has to be made under the Drug Trafficking Act 1994 and the Criminal Justice Act 1988 and the Assets Recovery Agency can only assist in these cases. For offences committed on or after 24 March 2003, the Assets Recovery Agency has the power to undertake and adopt a confiscation investigation with support from the referring law enforcement agency. In addition, wider investigative 10 The Joint Asset Recovery Database provides a central information management system for monitoring performance in asset recovery and a comprehensive record of all the assets under restraint nationally. 11 Assets Recovery Agency Annual Report 2004–05 and Business Plan 2005–06 (Assets Recovery Agency London 2005) 15. 12 Assets Recovery Agency Annual Report 2003–04 and Business Plan 2004–05 (Assets Recovery Agency London 2004); Assets Recovery Agency Annual Report 2004–05 and Business Plan 2005–06 (Assets Recovery Agency 2005); Assets Recovery Agency Annual Report 2005–06 and Business Plan 2006–07 (Assets Recovery Agency 2006).

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powers under Part VIII of the Proceeds of Crime Act 2002 will be available to all confiscation investigations, no matter which legislation the confiscation procedure is under. Therefore, confiscation proceedings are now an integral part of all acquisitive crime proceedings with the objective that the criminal justice process will not be regarded to be concluded until confiscation proceedings have been considered. The purpose of confiscation proceedings is to recover the financial benefit that an offender has obtained from his criminal conduct. A confiscation order is made by the Crown Court and requires the defendant (who has been convicted following a criminal trial) to pay a particular sum that the Court calculates to be the amount recoverable. Thus, a confiscation order is an in personam order, it does not apply to particular items of property and the defendant can satisfy the confiscation order with both legitimate and illicit income. The Court must proceed to make a confiscation order if (i) the defendant is convicted of an offence or offences in proceedings before the Crown Court, or he is committed to the Crown Court for sentencing or with a view to a confiscation order being considered; and (ii) the prosecutor, or the Director of the Assets Recovery Agency or the Court believes it is appropriate to do so.13 The Court then decides whether the defendant has a criminal lifestyle.14 If the defendant has a criminal lifestyle and has benefited from his general criminal conduct,15 then the four statutory assumptions16 are applied in determining the defendant’s benefit from crime, unless the Court decides that applying the assumptions would give rise to a serious risk of injustice or the defendant can prove these assumptions are

13 Sections 6(1) to (3), Proceeds of Crime Act 2002. 14 Section 75 of the Proceeds of Crime Act 2002 states that a person has a criminal lifestyle if the offence (or any of the offences) concerned is (i) an offence specified in Schedule 2 of the Act which include a drug trafficking offence, or a money laundering offence under section 327 or section 328, or an offence specified by the Secretary of State relating to people trafficking, arms trafficking, counterfeiting, intellectual property, pimps and brothels, blackmail, or an attempt, conspiracy, incitement or aiding, abetting, counselling or securing one of the above, or (ii) an offence committed over a period of at least six months and the offender’s total benefit is not less than £5,000 or (iii) the conduct forming part of a course of criminal activity. Conduct forms part of a course of criminal activity if the defendant has been convicted of three or more other offences on the same occasion and from which he has benefited, or the defendant has at least two previous convictions on separate occasions within 6 years of the most recent proceedings, and the total benefit is not less than £5,000. 15 General criminal conduct is defined in section 76(2) of the Proceeds of Crime Act 2002 as all the defendant’s criminal conduct and it is immaterial whether conduct occurred before or after the passing of the Act or whether property constituting a benefit from conduct was obtained before or after the passing of the Act. 16 The four assumptions contained in section 10 of the Proceeds of Crime Act 2002 are (i) any property transferred to the defendant after the relevant day was obtained as a result of his general criminal conduct; (ii) any property held by the defendant at the time after his conviction was obtained as a result of his general criminal conduct; (iii) any expenditure incurred by the defendant after the relevant day was met by property obtained as a result of his general criminal conduct; and (iv) any property obtained by the defendant was free of any other interests in it. The relevant day is defined in section 10(8) as the first day of the period of six years before the proceedings against the defendant were started.

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incorrect.17 If the Court decides that the defendant does not have a criminal lifestyle, then his benefit is the amount which he has obtained from the particular criminal conduct18 including the value of the property and any pecuniary advantage.19 In R v David Lee Jones,20 the Court states that where there are no business records to support the claimed legitimate business, the Court is entitled to take the view that the defendant has not produced sufficient evidence to rebut the assumptions in section 10 of the Proceeds of Crime Act 2002. Once the Court has determined the amount of the defendant’s benefit, the Court must decide the recoverable amount (that is, an amount equal to the defendant’s benefit from the conduct concerned)21 and then make a confiscation order requiring him to pay that amount. If the defendant shows that the available amount22 is less than that benefit, the recoverable amount is the available amount or a nominal amount if the available amount is nil.23 The standard of proof in relation to criminal lifestyle, benefit from general criminal conduct and recoverable amount is on a balance of probabilities. The Court may proceed with confiscation proceedings in the absence of a defendant who has been convicted24 or who has neither been convicted nor acquitted provided that two years has elapsed from the time of absconding.25 The Court may postpone the confiscation proceedings on one or more occasions for up to a total of two years from the date of conviction.26 The application for the postponement of the confiscation determination must be made before the defendant is sentenced. In enforcing the confiscation order, the Court may appoint an enforcement receiver, whose primary purpose is to realise assets in satisfaction of a confiscation order, but they will inevitably have to manage assets pending realisation. The enforcement receiver is a Court appointed officer with wide powers27 and independent of the prosecutor and the defendant. He has the right to have his fees paid from the proceeds of realisation of the defendant’s assets. Restraint Orders A restraint order28 can be obtained to freeze a defendant’s assets and prohibit the defendant from dealing with any realisable property29 held by him, 17 R v Bakewell (2006) EWCA Crim 2; R v Jones [2006] EWCA Crim 2061. 18 Particular criminal conduct is defined in section 76(3) of the Proceeds of Crime Act 2002 as conduct that constitutes offences of which the defendant was convicted and offences taken into consideration when deciding the defendant’s sentence. 19 Sections 76(4) to (7), Proceeds of Crime Act 2002. 20 R v David Lee Jones [2006] EWCA Crim 933; R v Gabriel [2006] EWCA Crim 229; R v Scragg [2006] EWCA Crim 2916. 21 Section 7(1), Proceeds of Crime Act 2002. 22 The available amount is the value of all the defendant’s free property, minus certain prior obligations of the defendant’s such as earlier fines, plus the value of all tainted gifts made by the defendant as described in section 77. 23 Section 7(2), Proceeds of Crime Act 2002. 24 Section 27, Proceeds of Crime Act 2002. 25 Section 28, Proceeds of Crime Act 2002. 26 Section 14, Proceeds of Crime Act 2002. 27 Section 51, Proceeds of Crime Act 2002. 28 Section 41, Proceeds of Crime Act 2002. 29 Section 83, Proceeds of Crime Act 2002.

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so that assets will be available to satisfy any confiscation order that might be made against him by the Crown Court upon his being convicted of a criminal offence. The general rule is that if a restraint order is made before a bankruptcy order, then the restraint order will have priority over any assets subject to both orders. Where the Court has made a restraint order, it may at any time appoint a receiver30 to take possession of any realisable property and to manage or otherwise deal with any property in respect of which he is appointed. The receiver has wide powers31 and is independent of the prosecutor and the defendant. The receiver’s costs will be paid from assets under his control, and if they are insufficient, it will rely on an indemnity from the prosecutor. For offences occurred before 24 March 2003, or where there are some offences occurred before 24 March 2003 and some occurred after that date, restraint powers under the Drug Trafficking Act 1994 and the Criminal Justice Act 1988 are used. The restraint powers under the Proceeds of Crime Act 2002 are only available for those offences committed on or after 24 March 2003. There are three main differences between the restraint regime under the Proceeds of Crime Act 2002 and those of the old legislation. The first difference is the venue of the application; applications for restraint orders under the Proceeds of Crime Act 2002 are made to the Crown Court, whereas such applications are made to the High Court under previous legislation. The second difference is the timing of the application; applications under the Proceeds of Crime Act 2002 can be made at an earlier stage because the power to make a restraint order is triggered by the start of a criminal investigation, and therefore, there are reasonable grounds to believe that the alleged offender has benefited from his criminal conduct. Under the old procedure, applications are made when a defendant has been, or is about to be, charged. The third difference is the legal costs; funds restrained under the new regime cannot be released to the defendant to pay for legal expenses incurred in relation to the offences in respect of which the restraint order is made, while such restraint is not available under the old regime. Civil Recovery and Forfeiture Proceedings under POCA 2002 The concept of civil recovery is similar to the civil forfeiture power under the Racketeer Influenced and Corrupt Organisations Act 1970, which does not rely on the individual being convicted but instead allows civil forfeiture on irrefutable presumptions without a prior criminal conviction. The idea of having civil forfeiture power in the United Kingdom was suggested by the Regional Crime Squads in 199532 and it was again recommended by the PIU Report in 2000. Following the PIU Report, ‘the Home Office proposes that, with appropriate safeguards, more extensive civil forfeiture powers should be introduced to England and Wales. The Home Office proposals envisage the powers being used where there is strong evidence that the property has criminal origins, but insufficient evidence for the criminal conviction 30 Section 48, Proceeds of Crime Act 2002. 31 Section 49, Proceeds of Crime Act 2002. 32 Regional Crime Squads in Home Affairs Committee Third Report on Organised Crime: Minutes of Evidence and Memoranda (HC Paper (1994–95) 18–II) 135.

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of the owner.’33 During the establishment of the civil recovery regime in the United Kingdom, experience has been drawn from the Racketeer Influenced and Corrupt Organisations Act 1970 in the United States, the Criminal Assets Recovery Act 1990 in New South Wales,34 the Proceeds of Crime Act 1996 and the Criminal Assets Bureau Act 1996 in the Republic of Ireland.35 Part V of the Proceeds of Crime Act 2002 contains two separate non-conviction based civil systems for removing the proceeds of crime. The first system deals with the civil recovery proceedings of property which has been obtained through unlawful conduct. This civil recovery procedure can only be initiated by the Assets Recovery Agency through High Court proceedings. The second system is a cash forfeiture system for amounts of cash discovered by Police or Customs officers during searches. Part V expands the provisions for the search and seizure of cash, which is reasonably suspected of having been obtained through unlawful conduct or of being intended for use in such conduct. The forfeiture of such cash involves Magistrates’ Court proceedings. Civil Recovery Proceedings The civil recovery procedure enables the Assets Recovery Agency to recover in civil proceedings before the High Court property which is, or represents, property obtained through unlawful conduct in England, Wales and Northern Ireland.36 The Agency receives cases referred by the law enforcement agencies where (i) criminal investigation has been carried out but insufficient evidence has been uncovered to pursue criminal charges; or (ii) a decision not to institute criminal proceedings is made due to public interest criteria; or (iii) confiscation proceedings have failed due to procedural faults; or (iv) where the defendant is beyond the reach of criminal proceedings because that person is dead, or abroad and there is no reasonable prospect of securing his extradition, or that the person has been convicted of an offence abroad but has recoverable property in the United Kingdom. A respondent who absconds would not usually result in any delay in the civil recovery proceedings as long as he is served with the relevant pleadings and judgment can be entered against the respondent in his absence. Certain criteria must be met before cases can be adopted by the Assets Recovery Agency for civil recovery investigations including (i) the case must normally be referred by a law enforcement agency or prosecution authority; (ii) recoverable property must have been identified and have an estimated value of at least £10,000;37 (iii) recoverable property must be acquired within twelve years; (iv) there must 33 The PIU Report (n 1 above) para 5.1. 34 ‘Confiscation that Counts’ Australia Law Reform Commission Report No.87 (Canberra 1999). The New South Wales scheme imposes a reverse onus on defendants to prove the lawful provenance of their restrained assets. Also see D Lusty ‘Civil Forfeiture of Proceeds of Crime in Australia’ (2002) 5(4) Journal of Money Laundering Control 345. 35 The Criminal Assets Bureau also exercises the Irish Revenue legislation to proceeds of criminal activity. 36 Section 240(1), Proceeds of Crime Act 2002. However, section 282(2) of the Proceeds of Crime Act 2002 prohibits civil recovery proceedings being taken in respect of cash only, the appropriate mechanism should be cash forfeiture. 37 The Proceeds of Crime Act 2002 (Financial Threshold for Civil Recovery) Order 2003 (No. 175).

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be significant local impact in the communities; and (v) there must be evidence of criminal conduct that is supported on the balance of probabilities.38 It was held in Assets Recovery Agency v Green that, ‘in civil recovery proceedings, ARA does not have to determine whether a specific criminal offence had been committed by a specific individual, but must set out the matters that are alleged to constitute the particular kind or kinds of unlawful conduct by or in return for which the property was obtained. A claim for civil recovery cannot be sustained solely upon the basis that a respondent has no identifiable lawful income to warrant his lifestyle.’39 The Assets Recovery Agency has the burden to prove on a balance of probabilities that any matters alleged to constitute unlawful conduct40 have occurred and that the property sought to be recovered is property, or represents property, that has been obtained through that unlawful conduct. The respondent has a reverse onus to prove the lawful provenance of his assets and to produce evidence that either refutes any allegation of unlawful conduct or an allegation that property is recoverable. Property is obtained through unlawful conduct if a person obtains it by or in return for the conduct.41 In deciding whether any property has been obtained through unlawful conduct, it is immaterial whether or not any money, goods or services were provided in order to put the person in question in a position to carry out the conduct and it is not necessary to show that the conduct was of a particular kind if it is shown that the property was obtained through conduct of one of a number of kinds, each of which would have been unlawful conduct.42 Thus, the property is still recoverable even if it is not possible to prove that particular property was derived from a particular type of crime. Recoverable property is property43 obtained through unlawful conduct.44 Recoverable property may be followed into the hands of a person obtaining it on a disposal.45 In addition, where property obtained through unlawful conduct (‘the original property’) is or has been recoverable, any property which represents the original property is also recoverable property.46 In other words, if the person tries to conceal the proceeds by mixing them with legitimate funds, the portion of the mixed property which is attributable to the recoverable property represents the property 38 Assets Recovery Agency Annual Report 2004/05 and Business Plan 2005–06 (Assets Recovery Agency London 2005) 10. 39 Assets Recovery Agency v Green [2005] EWHC 3168 (Admin). 40 Section 241(1) of the Proceeds of Crime Act 2002 states that conduct occurring in any part of the United Kingdom is unlawful conduct if it is unlawful under the criminal law of that part. Unlawful conduct, as stated in section 241(2), also includes conduct which occurs in a country outside the United Kingdom and is unlawful under the criminal law of that country, and if it occurred in a part of the United Kingdom, would be unlawful under the criminal law of that part. 41 Section 242(1), Proceeds of Crime Act 2002. 42 Section 242(2), Proceeds of Crime Act 2002. 43 Property includes all types of property whether in the United Kingdom or abroad, sections 316(4) to (7). 44 Section 304(1), Proceeds of Crime Act 2002. 45 Section 304(3), Proceeds of Crime Act 2002. 46 Section 305, Proceeds of Crime Act 2002.

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obtained through unlawful conduct and remains recoverable.47 The other portion of the mixed property which is not recoverable is described as ‘associated property’.48 Besides, where a person who has recoverable property obtains further property consisting of profits accruing in respect of the recoverable property, the further property is recoverable.49 However, property is not recoverable if the property was acquired twelve years ago from the date on which the Director’s cause of action accrued50 and the victims of theft obtain a declaration that they own the property.51 Other exemptions are found under section 282 of the Proceeds of Crime Act 2002. In Director of the Assets Recovery Agency v Singh,52 the respondent argued that the assets had previously been restrained and subject to the failed confiscation proceedings and therefore could not be considered under the Proceeds of Crime Act 2002 for civil recovery proceedings. This challenge was rejected by the Court of Appeal on 17 May 2005. The Agency may apply for freezing injunctions under Part 25.1(1)(f) of the Civil Procedure Rules to preserve assets for the purpose of meeting a recovery order if there is a real risk of imminent dissipation of such assets. Alternatively, the Agency may apply for a property freezing order whereby investigation can continue after such order is granted.53 If the case involves ongoing businesses and substantial amount of overseas property, the Agency may apply for an interim receiving order (whether before or after commencing civil recovery proceedings) for the detention, custody or preservation of property and the appointment of the interim receiver.54 The High Court may grant an interim receiving order if the Court is satisfied that there is a good arguable case that the property to which the application relates is or includes recoverable property and associated property whereby the identity of the person who holds the associated property cannot be established.55 An application for an interim receiving order may be made without notice to the person whose property it is going to affect, if the circumstances are such that notice would prejudice any right of the enforcement authority to obtain a recovery order.56 An interim receiving order is a type of worldwide freezing injunction prohibiting the person to whose property the order applies from dealing with the property and also requiring him to repatriate property or documents abroad to the United Kingdom. The interim receiver must take steps to establish whether or not the property to which an order applies is recoverable property or associated property and whether or not any other property is recoverable property in relation to the same unlawful conduct. 47 Section 306, Proceeds of Crime Act 2002. 48 Section 245(1), Proceeds of Crime Act 2002. 49 Section 307, Proceeds of Crime Act 2002. 50 Section 288(1), Proceeds of Crime Act 2002. 51 Section 281, Proceeds of Crime Act 2002. 52 Director of the Assets Recovery Agency v Singh [2005] EWCA Civ 580. 53 Section 98 of the Serious Organised Crime and Police Act 2005 inserts the provision for property freezing order into Section 245A of the Proceeds of Crime Act 2002. 54 Sections 246(1) and (2), Proceeds of Crime Act 2002. 55 Sections 246(5) and (6), Proceeds of Crime Act 2002; also see R (Director of the Assets Recovery Agency) v Keenan (2005) NIQB Ref No. COGC5362. 56 Section 246(3), Proceeds of Crime Act 2002.

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The interim receiver is responsible for establishing the owner of the property, the whereabouts of the property and the extent of the property.57 The interim receiver is a court appointed officer with wide powers and independent of the Assets Recovery Agency and the respondent. However, the Agency is responsible for the costs of the interim receivers. Recovery orders are orders against specified property and require that the property subject to the order to be sold and the proceeds realised.58 If the Court is satisfied that any property is recoverable, then the Court must make a recovery order which vests the property in the trustee for civil recovery.59 The functions of the trustee are (i) to secure the detention, custody or preservation of any property vested in him; (ii) to realise the value of the property to the benefit of the Assets Recovery Agency; and (iii) to perform any other functions conferred on him by Part V of the Proceeds of Crime Act 2002.60 It is the duty of the Agency to nominate a suitably qualified person for the appointment.61 The trustee, in performing his functions, acts on behalf of the Agency and must comply with directions given by the Assets Recovery Agency.62 Cash Forfeiture Proceedings The Proceeds of Crime Act 2002 replaces and extends the powers under the Drug Trafficking Act 1994 for the search, seizure and forfeiture of cash.63 It not only extends this power to include cash related to all unlawful conduct, but allows the forfeiture of cash which has an entirely legitimate origin as long as the Court is satisfied that the cash is intended for use in unlawful conduct.64 Cash forfeiture proceedings are civil proceedings and the civil standard of proof (balance of probabilities) applies, besides, no conviction is required for the forfeiture of the cash to be ordered. Unlike the previous legislation, the Proceeds of Crime Act 2002 provides for seizure of cash inland anywhere in the United Kingdom rather than only at the borders. In other words, cash held in any safety deposit box may be seized if there are reasonable grounds for suspicion. The Act also establishes a new power to search any person or any article in his possession65 if a Customs

57 Section 247 and Schedule 6, Proceeds of Crime Act 2002. 58 Section 266, Proceeds of Crime Act 2002. 59 Sections 266(1) and (2), Proceeds of Crime Act 2002. 60 Section 267(3), Proceeds of Crime Act 2002. 61 Section 267(2), Proceeds of Crime Act 2002. 62 Section 267(4), Proceeds of Crime Act 2002. 63 Part III of the Criminal Justice (International Cooperation) Act 1990 introduced the power for Police and Customs officers to seize cash discovered on import or export which is reasonably suspected of being derived from or intended for use in drug trafficking. An application for the forfeiture of the case may subsequently be made in a Magistrates’ Court. These provisions have been consolidated into Part II of the Drug Trafficking Act 1994. 64 In Commissioners of Customs and Excise v Duffy [2002] EWHC 425, it was held that the Court was entitled to aggregate to cover ‘smurfing’. In order to avoid the creation of any records or detection, the technique of ‘smurfing’ is used whereby large amount of cash transactions is broken into smaller ones, bundles or loads, so that each transaction is below the threshold-reporting requirements. 65 Section 289(2), Proceeds of Crime Act 2002.

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officer or Police has reasonable grounds for suspecting that person is carrying cash,66 which is recoverable property or is intended for use in unlawful conduct and the amount of which is not less than the minimum amount.67 The officers may detain the person for as long as necessary for the search,68 but the power does not include an intimate search or strip search.69 The officers may also search premises for cash if they are lawfully on the premises,70 but the Act has not provided a new power of entry. The officers may seize any cash if they have reasonable grounds for suspecting that it is recoverable property or intended for use in unlawful conduct and the amount of which is not less than the minimum amount.71 The powers of search and seizure will normally require the approval of a Magistrate or a Justice of the Peace, or if that is not practicable, the approval of a senior officer (police inspector or equivalent).72 The exercise of such powers is governed by the Code of Practice issued by the Home Secretary.73 Where a search takes place without prior approval, and either no cash is seized, or cash is seized but not detained for more than 48 hours, a written report justifying such search must be submitted (by the officer who exercised the power) to a person appointed by the Secretary of State.74 Cash, which has been seized, may be detained for an initial period of 48 hours.75 This period can be extended with an order made by a Magistrates’ Court or a Justice of the Peace, on application by the officers, for a period of no longer than three months in the case of the initial order. Further orders may be granted for up to a maximum of two years. In addition, cash detained for more than 48 hours should be paid into an interest bearing account,76 unless the cash is required as evidence of an offence or as evidence in the forfeiture proceedings.77 While cash is detained, an application for the forfeiture of the whole or any part of it may be made to a Magistrates’ Court by 66 Cash is defined in section 289(6) of the Proceeds of Crime Act 2002 as (a) notes and coins in any currency, (b) postal orders, (c) cheques of any kind, including travellers’ cheques, bankers’ drafts’ (d) bearer bonds and bearer shares, found at any place in the United Kingdom. Cash also includes any kind of monetary instrument which is found at any place in the United Kingdom, if the instrument is specified by the Secretary of State by an order made after consultation with the Scottish Ministers, as stated in section 289(8). 67 The minimum amount was originally £10,000 as specified in the Proceeds of Crime Act 2002 (Recovery of Cash in Summary Proceedings: Minimum Amount) Order 2002, but the threshold was decreased to £5,000 in 2004. The limit was further reduced to £1,000 with effect from 31 July 2006 as specified in the Proceeds of Crime Act 2002 (Recovery of Cash in Summary Proceedings: Minimum Amount) Order 2006 (No. 1699). Also see Chief Constable of Merseyside Police v Lee Hickman and Lynne Marie Preston (2006) EWHC 451 (Admin). 68 Section 289(4), Proceeds of Crime Act 2002. 69 Section 289(8), Proceeds of Crime Act 2002. 70 Section 289(1), Proceeds of Crime Act 2002. 71 Section 294, Proceeds of Crime Act 2002. 72 Section 290, Proceeds of Crime Act 2002. 73 Section 292 of the Proceeds of Crime Act 2002 and the Proceeds of Crime Act 2002 (Cash Searches: Code of Practice) Order 2002. 74 Sections 290(6) to (8), Proceeds of Crime Act 2002. 75 Section 295(1), Proceeds of Crime Act 2002. 76 Section 296(1), Proceeds of Crime Act 2002. 77 Section 296(3), Proceeds of Crime Act 2002.

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the Commissioners of Customs and Excise or a constable.78 Any person who claims ownership of the detained cash may apply for it to be released before a forfeiture order is made.79 An appeal against the forfeiture order can also be made to the Crown Court within the period of 30 days of the order by way of a rehearing.80 Taxation Powers under POCA 2002 As the Al Capone case illustrated, tax offences can be a key in dealing with organised crime. For years, Capone had evaded prosecution for his racketeering and other criminal activities, but was found guilty in 1931 of tax evasion and sentenced to 11 years imprisonment, US$80,000 in fines and court costs. Many criminal organisations generate substantial revenues, especially through drug trafficking, and most illicit proceeds have gone untaxed, which greatly destabilise the financial systems in the United Kingdom. A variety of jurisdictions try to ‘fiscalise resources from participants in drug markets, and integrate this drug revenue into their system of rule.’81 In view of the potential of using tax enforcement laws as a means of deterring and punishing criminals, the Proceeds of Crime Act 1996 and the Criminal Assets Bureau Act 1996 have established the framework for the exchange of information between the Revenue Authorities and the Department of Social Welfare Officials in the Republic of Ireland. Under section 5 of the Criminal Assets Bureau Act 1996, the Criminal Assets Bureau has the functions under the Revenue Acts to ensure that the proceeds of criminal activity or suspected criminal activity are subject to tax. Indeed, taxation powers have been a major source of recovered funds from suspected criminals in both Ireland and Australia. In the United Kingdom, criminal organisations were estimated to have generated between £6.5 billion and £11.1 billion in 1996 and substantial amounts of these revenues were untaxed.82 Although the Inland Revenue has the power to raise assessments and enforce removal of assets against those shown to have undeclared income and wealth, these powers are generally of little use against individuals suspected of benefiting from crime. Besides, tax cannot be collected where a source of the income, including criminal activity, cannot be identified. The PIU Report suggested that ‘there should be (i) increased proactive investigation and removal of criminal assets by the Inland Revenue and tax inspectors located in the new National Confiscation Agency;83 (ii) the facilitation of greater exchanges of information on criminality between Inland Revenue and law enforcement, including new statutory

78 Section 298(1), Proceeds of Crime Act 2002. 79 Section 301(1), Proceeds of Crime Act 2002. 80 Section 299, Proceeds of Crime Act 2002. 81 H Van Der Veen ‘Taxing the Drug Trade: Coercive Exploitation and the Financing of Rule’ (2003) 40 Crime, Law & Social Change 349, 349. 82 The PIU Report (n 1 above) para 10.1. 83 Proposed new agency which is responsible for achieving criminal confiscation and civil forfeiture results under the Proceeds of Crime Act 2002, now known as the Assets Recovery Agency.

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gateways; and (iii) the correction of tax law anomalies to enable the Inland Revenue to tax income, even where a source (such as crime) cannot be identified.’84 Part VI of the Proceeds of Crime Act 2002 empowers the Director of the Assets Recovery Agency to exercise functions of the Inland Revenue in relation to income, gains and profits arising or accruing as a result of criminal conduct85 without a conviction. Before the Director of the Agency can take over general Revenue functions86 and carry out taxation investigations, certain qualifying condition must be satisfied. The Director must have reasonable grounds to suspect that income, gains or profits accruing to a person or a company in respect of a chargeable period are chargeable87 to the relevant tax and arise or accrue as a result of the person’s or another’s criminal conduct.88 The relevant taxes include, but are not limited to, income tax, capital gains tax, corporation tax and inheritance tax. Once the qualifying condition is met, the Director is then required to serve a notice on the Board of Inland Revenue, which enables her to carry out the normal taxation functions of the Inland Revenue for the specified period.89 Section 318 of the Act gives more details in relation to the Revenue’s functions regarding employment. A major difference between the assessments raised by the Inland Revenue and those initiated by the Director of the Assets Recovery Agency is that the former is required to specify the source of income in question, while the Director can raise income tax assessments under section 29 of the Taxes Management Act 1970, where she discovers a loss of tax even though she cannot identify the source of income in question. This provides for a new ‘no-source’ assessing power.90 However, if the case is transferred back to the Inland Revenue from the Director, any ‘no-source’ assessment is invalid.91 All appeals against the actions arising from the exercise by the Director of her Revenue functions will be to the Special Commissioners, excluding access to the General Commissioners.92 There are similar provisions and conditions in relation to inheritance tax functions.93 In exercising the Revenue functions, the 84 The PIU Report (n 1 above) para 1.40. 85 Criminal conduct is defined in section 326 of the Proceeds of Crime Act 2002 as conduct which constitutes an offence in any part of the United Kingdom, or would constitute an offence in any part of the United Kingdom if it occurred there, but does not include conduct constituting an offence relating to a matter under the care and management of the Board of Inland Revenue. 86 General Revenue functions under section 323 of the Proceeds of Crime Act 2002 include (a) income tax; (b) capital gains tax; (c) corporation tax; (d) national insurance contributions; (e) statutory sick pay; (f) statutory maternity pay; (g) statutory paternity pay; (h) statutory adoption pay; and (i) student loan. 87 Income must be chargeable to tax under one or other of the legal headings or ‘schedules’ of tax. Schedule D provides for a charge to tax in respect of income from trade, profession and vocation. 88 Section 317(1), Proceeds of Crime Act 2002. 89 Section 317(2), Proceeds of Crime Act 2002. 90 Section 319, Proceeds of Crime Act 2002. 91 Section 319(3), Proceeds of Crime Act 2002. 92 Section 320, Proceeds of Crime Act 2002. 93 Sections 321 and 322, Proceeds of Crime Act 2002.

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Director must apply all interpretations of the law and concessions published by the Board of Inland Revenue.94 The authority of the Director is not just limited to the proceeds of unlawful conduct, but applies to the whole of the respondent’s property. Besides, the Agency’s settlement policy also applies to taxation cases. In general, taxation cases are expected to take 12 to 18 months to reach conclusion particularly where the subject chooses to exercise their rights of appeal.95 In addition, tax inspectors from the Special Compliance Office of the Inland Revenue are seconded to the Agency to enhance sharing of information and experience. Money Laundering Offences under POCA 2002 Under previous legislation, there were three types of money laundering offences depending on whether the underlying crime or ‘predicate crime’ was drug trafficking, terrorism or other serious crime. This has created unnecessary complexity for investigators and prosecutors as discussed in Chapter 6. In order to tighten the money laundering regime, the concept of ‘predicate offence’ should be abolished and a single money laundering legislation covering the proceeds of all crime should replace the existing offences, as recommended in the PIU Report. Part VII of the Proceeds of Crime Act 2002 consolidates, updates and reforms the criminal law in relation to money laundering, which includes not only three substantive offences but is extended to all inchoate offences. It came into force on 24 February 2003 and can be used for investigating and prosecuting a money laundering offence occurred on or after 24 February 2003. If the offence occurred before 24 February 2003, it must be prosecuted under previous legislation. The reason for this transitional arrangement is that the new money laundering offences are different from the old offences and the commencement order has not addressed the problem of retrospectively. However, as amended by the Serious Organised Crime and Police Act 2005, the investigation powers under Part VIII of the Proceeds of Crime Act 2002 can now be used to investigate money laundering offences committed under previous legislation.96 A precise definition of money laundering is given in section 340(11) of the Proceeds of Crime Act 2002 as ‘an act which constitutes an offence under sections 327, 328 or 329 of the Proceeds of Crime Act 2002; constitutes an attempt, conspiracy or incitement to commit one of those offences; constitutes aiding, abetting, counselling or procuring the commission of one of those offences; or would constitute any of the above offences if done in the United Kingdom.’ The mens rea element is imported by the definition of ‘criminal property’ which includes an objective element. Property is considered to be criminal property if two conditions are satisfied: (i) If the property constitutes a person’s benefit from criminal conduct (in whole or in part, directly

94 Section 324, Proceeds of Crime Act 2002. 95 Further guidance in respect of the Assets Recovery Agency’s policy on the application of Part VI taxation powers and the conduct of taxation cases is available at , accessed 20 February 2007. 96 Section 107, Serious Organised Crime and Police Act 2005.

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or indirectly);97 and (ii) the alleged offender knows or suspects that the property constitutes or represents such benefit.98 Section 102 of the Serious Organised Crime and Police Act 2005, as qualified by the Proceeds of Crime Act 2002 (Money Laundering: Exceptions to Overseas Conduct Defence), amends the definition of criminal conduct and introduces a limited defence relating to lawful conduct carried out overseas which would otherwise be criminal conduct under the definition in section 340(2) of the Proceeds of Crime Act 2002. If it is known, or believed on reasonable grounds, that the relevant conduct occurred in a particular country or territory outside the United Kingdom and if such relevant criminal conduct was not, at time it occurred, unlawful under the criminal law then applying in that country or territory, then an offence will not be committed subject to an important qualification. This qualification states that such activity will remain criminal conduct for the purposes of the Proceeds of Crime Act 2002 if it would attract a maximum sentence in excess of 12 months’ imprisonment were it to have been carried out in the United Kingdom. This provision introduces the concept of dual criminality test for less serious offences and provides a defence to money laundering offences under sections 327 to 329 and sections 330 to 332. In other words, for a money laundering offence to be committed the conduct generating the criminal property must be unlawful both under the law of the overseas country and in the United Kingdom. The prosecution must satisfy the mens rea requirement of the offence, thus, it needs to prove the ‘knowledge’ or ‘suspicion’ of the defendant from the circumstances in which they came into possession of the property and show that the property dealt with was ‘dirty money’. In pre-POCA environment, there must be proof of actual knowledge99 that the property was tainted. It was held in James & Son Ltd v Smee100 that wilfully shutting one’s eyes from the obvious truth may constitute knowledge. However, the objective notion of constructive knowledge101 is not enough and it cannot be asserted that the defendant ought to have known that the property was tainted. Thus, a person would not be liable for money laundering if he is negligent in not investigating the truth about the source of the property unless the statute expressly states otherwise. ‘Suspicion’ is not defined in the Proceeds of Crime Act 2002. The ordinary meaning of suspicion is ‘an act of suspecting: state of being suspected; the imagining of something without evidence or on slender evidence: inkling mistrust.’102 Other everyday interpretations of ‘suspicion’ include (i) have an impression of the existence or presence of; (ii) believe tentatively, without clear ground; (iii) be inclined 97 Criminal conduct is defined in section 340(2) of the Proceeds of Crime Act 2002 as conduct which constitutes an offence in any part of the United Kingdom, or would constitute an offence in any part of the United Kingdom if it occurred there. It continues in section 340(4) that it is immaterial who carried out the conduct; who benefited from it; or whether the conduct occurred before or after the passing of this Act. 98 Section 340(3), Proceeds of Crime Act 2002. 99 Westminster City Council v Croyalgrange Ltd [1986] 83 Cr App R 155. 100 James & Son Ltd v Smee [1955] 1 QB 78. 101 Constructive knowledge ‘has no place in the criminal law’ per Devlin J. Roper v Taylor Central Garages (Exeter) Ltd [1951] 2 TLR 284, 288. 102 Chambers English Dictionary, 7th edition.

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to think; (iv) be inclined to mentally accuse, doubt the innocence of and; (v) doubt the genuineness of truth.103 Per Devlin J in Hussien v Chong Fook Kam, ‘suspicion in its ordinary meaning is a state of conjecture or surmise where proof is lacking’104 and that ‘suspicion can take into account matters that could not be put in evidence at all.’105 However, some factual basis for the suspicion is required.106 In R v Da Silva, the Court of Appeal held that, ‘it seems to us that the essential element in the word “suspect” and its affiliates, in this context, is that the defendant must think that there is a possibility, which is more than fanciful, that the relevant facts exist. A vague feeling of unease would not suffice. But the statute does not require the suspicion to be “clear” or “firmly grounded and targeted on specific facts”, or based upon “reasonable grounds”.’107 In other words, a person who temporarily held a suspicion but honestly dismissed it from his mind upon further consideration should not be liable to be convicted. The Court in the civil case, K Ltd v National Westminster Bank Plc, adopted the same definition of ‘suspicion’ as that in the criminal case of R v Da Silva and held that ‘the existence of suspicion is a subjective fact. There is no legal requirement that there should be reasonable grounds for the suspicion. The relevant bank employee either suspects or he does not. If he does suspect, he must (with himself or through the Bank’s Nominated Officer) inform the authorities.’108 The three principal criminal offences of money laundering are contained in Part VII of the Act and they all carry a maximum of 14 years imprisonment, which is more than most predicate offences. The actus reus involves a person: (a) (b) (c) (d) (e) (f)

concealing or transferring criminal property (section 327); entering into or becoming concerned in money laundering arrangements (section 328); acquiring, possessing and using of criminal property (section 329 of the Act also creates further criminal offences related to money laundering); failure to disclose knowledge or suspicion of money laundering (section 330 to 332); tipping off (section 333); prejudicing an investigation (section 342).

Additional criminal offences in relation to terrorist financing, sometimes referred to as ‘terrorist money laundering’, are contained in the Terrorism Act 2000 and the Anti-Terrorism, Crime and Security Act 2001 as discussed in Chapter 3. Concealing Offence Section 327 of the Proceeds of Crime Act 2002 simplifies and replaces section 49 of the Drug Trafficking Act 1994 and section 93C of the Criminal Justice Act 1988. A person commits an offence if he conceals, disguises, converts, transfers criminal property or removes criminal property from England and 103 The Concise Oxford Dictionary. 104 Hussein v Chong Fook Kam [1970] AC 942, 948. 105 Hussein v Chong Fook Kam [1970] AC 942, 949. 106 Walsh v Loughman [1991] 2 VR 351. 107 R v Da Silva [2006] EWCA Crim 1654. 108 K Ltd v National Westminster Bank Plc [2006] EWCA Civ 1039.

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Wales, Scotland or Northern Ireland. ‘Concealing or disguising’ criminal property has a wide meaning, which includes concealing or disguising its nature, source, location, disposition, movement or ownership or any rights with respect to it.109 An offence is also committed by a person who, knowingly or having reasonable grounds to suspect any property is, or represents, another’s proceeds of criminal conduct, carries out one of the above. The penalty for this offence on summary conviction is imprisonment for six months, or a fine, or both, and on conviction on indictment is 14 years imprisonment, or a fine, or both.110 Three statutory defences are available under section 327(2) of the Proceeds of Crime Act 2002, which states that a person does not commit this offence if he makes an authorised disclosure under section 338 and has the appropriate consent; or he intended to make such a disclosure but had a reasonable excuse for not doing so;111 or the acts done in carrying out a function relating to enforcement of any provision of the Act, or of any other enactment relating to criminal conduct or benefit from criminal conduct. Arrangement Offence Section 328 of the Proceeds of Crime Act 2002 simplifies and replaces section 50 of the Drug Trafficking Act 1994 and section 93A of the Criminal Justice Act 1988. A person commits an offence if he enters into or is otherwise concerned in an arrangement to facilitate another person (by whatever means) to acquire, retain, use or control criminal property. It must be established that he has knowledge or suspicion that the property constitutes or represents benefit from criminal conduct. This section catches a wide range of money laundering activities especially at the layering and integration stages. The penalty for this offence is the same as that for the concealing offence with a maximum imprisonment of 14 years.112 Three statutory defences are available under section 328(2), which are the same as those for the concealing offence. In R v Hussain & Bhatti,113 the Court held that if a person making an arrangement to launder money has reasonable grounds to suspect that the provenance of the money is illicit, they must have had reasonable grounds to suspect that it is either drugs money or money derived from other criminal conduct or both. The prosecution has to establish the making of the agreement, but does not have to establish that the agreed offences have been committed. The prosecution would also have to establish that if the agreed conduct has been carried out, that conduct would constitute an offence known to law. The Court in R v Siracusa114 held that even if the plan to commit a money laundering offence is abandoned or fails to come to realisation, the offence would be completed as soon as the agreement is made.

109 Section 327(3) of the Proceeds of Crime Act 2002, also see R v Macmaster [1999] 1 CAR 402. 110 Section 334(1), Proceeds of Crime Act 2002. 111 R v Clarke (1969) 53 Cr App R 438. 112 Section 334(1), Proceeds of Crime Act 2002. 113 R v Hussain & Bhatti [2002] Crim LR 407. 114 R v Siracusa [1989] Crim LR 712.

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Acquisition, Use or Possession Offence Section 329 of the Proceeds of Crime Act 2002 simplifies and replaces section 51 of the Drug Trafficking Act 1994 and section 93B of the Criminal Justice Act 1988. A person commits an offence if he acquires, uses or possesses criminal property. It is necessary to prove that the defendant has the necessary knowledge or suspicion that the property represents a benefit from criminal conduct. In Warner v Metropolitan Police Commissioner,115 the Court held that a person does not possess things of whose existence he is unaware of, thus, a person could not be in possession of something planted on him without his knowledge. The penalty for this offence is the same as that for the concealing offence with a maximum imprisonment of 14 years.116 Four statutory defences are provided for this offence.117 The first three defences are the same as those available for the concealing offence and the arrangement offence. The last defence states that a person does not commit such an offence if he acquires or uses or has possession of the criminal property for adequate consideration. The purpose of the last defence is to protect ordinary traders who are paid for ordinary consumable goods and services with money that comes from crime and they are not under any obligation to question the source of the money. In R v Gibson,118 the defendant was charged for holding £28,000 of criminal proceeds for another person. At the trial, he believed that on returning the funds he attached an extra £500 and that additional £500 represented adequate consideration. However, the Court held that the defendant had not given any consideration for the use of the funds as there was no express or implied promise or obligation on his part to pay for its use. Failure to Disclose Offences The Proceeds of Crime Act 2002 provides three ‘failure to disclose’ offences including (i) an offence for employees in the regulated sector; (ii) an offence for nominated officers in the regulated sector; and (iii) an offence for other nominated officers. This represents a significant change to the offence whereby an offence can now be committed on a negligence basis. A person in the regulated sector commits an offence of failing to disclose if the following conditions are met.119 The first condition is that he knows or suspects, or has reasonable grounds for knowing or suspecting that another person is engaged in money laundering.120 The second condition is that the information or other matter on which his knowledge or suspicion is based or which gives him reasonable grounds for his knowledge or suspicion came to him in the course of business in the regulated sector.121 The third condition is that he fails to disclose to a constable, customs officer or nominated officer as soon as is practicable after the information comes to him.122 The Serious Organised Crime and Police Act 2005 adds an extra condition which

115 Warner v Metropolitan Police Commissioner [1969] 2 AC 256. 116 Section 334(1), Proceeds of Crime Act 2002. 117 Section 329(2), Proceeds of Crime Act 2002. 118 R v Gibson [2000] Crim LR 479. 119 Section 330(1), Proceeds of Crime Act 2002. 120 Section 330(2), Proceeds of Crime Act 2002. 121 Section 330(3), Proceeds of Crime Act 2002. 122 Section 330(4), Proceeds of Crime Act 2002.

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states that the regulated party must be able to identify the person who he knows, suspects or reasonably suspects is engaged in money laundering; or that he believes, or it is reasonable to expect him to believe, that the information or other matter in question will or may assist in identifying either the person or the whereabouts of any of the laundered property. The penalty for this offence on summary conviction is imprisonment for six months, or a fine, or both, and on conviction on indictment is five years imprisonment, or a fine, or both.123 Three statutory defences are available for employees in the regulated sector in respect of this offence. A person does not commit this offence if he has a reasonable excuse for not disclosing the information (the Court must consider whether the person has followed any relevant guidance issued by a supervisory authority or other appropriate body and approved by the Treasury); or he is a professional legal advisor and the information came to him in privileged circumstances; or he does not know or suspect another person is engaged in money laundering and has not been provided with proper training by his employer. A new defence is also provided under section 102 of the Serious Organised Crime and Police Act 2005 to the effect that there is no duty to disclose knowledge or suspicion of money laundering activity if (i) the person knows or reasonably believes that the activity concerned occurred outside the United Kingdom and (ii) if the activity concerned was not a criminal offence in the country in which and at the time it took place and is not of a description prescribed by an order of the Secretary of State. A nominated officer in the regulated sector can commit a similar offence if he receives a disclosure under the Act, and knows or suspects, or has reasonable grounds for knowing or suspecting that another person is engaged in money laundering and fails, without reasonable excuse, to notify the authority in the prescribed manner.124 Another similar offence can also be committed by other nominated officers who are not within the regulated sector.125 The only defence open to the nominated officers is that they would have a reasonable excuse for not disclosing the information or other matter. Tipping-Off Offence A person commits an offence if he knows or suspects that a protected126 or authorised127 disclosure has been made and he then makes a disclosure to the third party, which is likely to prejudice any subsequent investigation conducted following the disclosure.128 The penalty for this offence is the same as that for the ‘failure to disclose’ offences.129 Three statutory defences are available under section 333(2) of the Proceeds of Crime Act 2002, which states that a person does not commit an offence if he does not know or suspect the disclosure is likely to be prejudicial; or the disclosure is made in carrying out a function of enforcement of an enactment 123 Section 334(2), Proceeds of Crime Act 2002. 124 Section 331, Proceeds of Crime Act 2002. 125 Section 332, Proceeds of Crime Act 2002. 126 Section 337, Proceeds of Crime Act 2002. 127 Section 338, Proceeds of Crime Act 2002. 128 Section 333(1), Proceeds of Crime Act 2002. 129 Section 334(2), Proceeds of Crime Act 2002.

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relating to criminal conduct or benefit from criminal conduct; or he is a professional legal adviser and the disclosure is to a client in connection with legal proceedings, but this defence is not available if the disclosure is made with a view to furthering a criminal purpose. Prejudicing an Investigation Offence A person commits this offence if he makes a disclosure to a third person which is likely to prejudice an investigation; or he falsifies, conceals, destroys or otherwise disposes of or causes or permits the falsification, concealment, destruction or disposal of documents which are relevant to the investigation.130 The penalty for this offence on summary conviction is imprisonment for six months, or a fine, or both, and on conviction on indictment is five years imprisonment, or a fine, or both.131 The three statutory defences132 available for this offence are the same as those for the tipping-off offence. Two additional defences are available which state that a person does not commit an offence if he does not know or suspect that the documents are relevant to an investigation; or he does not intend to conceal any facts disclosed by the documents from any appropriate officer.133 Major Changes under the Proceeds of Crime Act 2002 The Proceeds of Crime Act 2002 is designated to simplify and widen the money laundering offences under previous legislation. Three main differences between the Proceeds of Crime Act 2002 and the previous legislation on money laundering offences are (i) previous legislation made the distinction between the proceeds of drug trafficking and other crimes leading to difficulties in trying to establish the underlying or predicate offence, while this distinction has been removed under the Proceeds of Crime Act 2002; (ii) all three substantive money laundering offences now apply to the laundering of an offender’s own proceeds of crime as well as those of others, while a distinction was made in the previous legislation; and (iii) previous legislation required that the money laundering offence had to be committed for the purpose of avoiding prosecution or avoiding the making, or enforcement, of a confiscation order, this is removed under the Proceeds of Crime Act 2002. Furthermore, sections 102 to 107 of the Serious Organised Crime and Police Act 2005 have provided a significant change to Part VII of the Proceeds of Crime Act 2002, in particular the application of dual criminality test on money laundering offences, as discussed above. Cases took place before the implementation of the money laundering offences under the Proceeds of Crime Act 2002 on 24 February 2003 need to be considered under the Drug Trafficking Act 1994 and the Criminal Justice Act 1988. The historical divide in the treatment of drug proceeds and those of other crimes has made it difficult for the prosecution to prove definitely that the proceeds originated from drug trafficking and not any other criminal conduct when there is no conclusive evidence as to the source of those funds, even though it is clear that the money is

130 Section 342(2), Proceeds of Crime Act 2002. 131 Section 342(7), Proceeds of Crime Act 2002. 132 Section 342(3), Proceeds of Crime Act 2002. 133 Section 342(6), Proceeds of Crime Act 2002.

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illicit. It was held in R v El-Kurd134 that the prosecution did not need to prove the predicate offence or the precise source of the funds, as long as the jury was satisfied that the money was derived from either drug trafficking or criminal conduct. Where there was evidence that the defendant was party to both a conspiracy to launder the proceeds of drug trafficking and party to a conspiracy to launder the proceeds of criminal conduct, the appropriate course for the prosecution was a single count of conspiracy to launder money illicitly obtained. This would avoid the necessity for any choice to be made as to whether the funds derived from drug trafficking or other criminal conduct. In R v Hussain & Bhatti,135 it was held that the statement of offence for the indictment which read ‘conspiracy to contravene section 49(2) of the Drug Trafficking Act 1994, alternatively section 93C(2) of the Criminal Justice Act 1988, contrary to section 1(1) of the Criminal Law Act 1977’ was not bad for duplicity. It was appropriate for the prosecution to choose a charge of conspiracy to contravene the drug trafficking money laundering provisions or alternatively the nondrug trafficking money laundering provisions. Although the concept of ‘predicate offence’ no longer exists under the new money laundering legislation in the United Kingdom, investigators and prosecutors must be aware of this concept when seeking mutual legal assistance from a jurisdiction where the term is still in use.136 The Court in R v Sakavickas137 and R v Saik138 held that knowledge was not necessary for the purposes of conspiracy provided that there was reasonable ground of suspicion. The Court in R v Ali and Others,139 however, held that R v Sakavickas had been overtaken by the decision in the House of Lords in R v Montila140 which ruled that a person could not be guilty of money laundering offence without proof that the defendant was in fact dealing with the proceeds of drug trafficking or other criminal conduct. In other words, a person could not be convicted for laundering ‘clean’ money, mistakenly believing or having grounds to suspect that they were ‘dirty’. The effect of R v Montila on the conspiracy mens rea was to require knowledge and not mere reasonable ground of suspicion. This means that the jury may only convict of conspiracy if the defendant knew that he was dealing with proceeds of drug trafficking or of other criminal conduct.141 As a consequence of the recent rulings, the prosecution has a heavier burden to discharge if it charges a suspect with conspiracy to launder money than it would have if it charged the suspect with a substantive money laundering offence. This results in a significant setback in the fight against money laundering and organised crime.

134 R v El-Kurd [2001] Crim LR 234 (CA). 135 R v Hussain & Bhatti [2002] Crim LR 407. 136 RE Bell ‘Abolishing the Concept of ‘Predicate Offence’’ (2002) 6(2) Journal of Money Laundering Control 137. 137 R v Sakavickas [2004] EWCA Crim 2868. 138 R v Saik [2002] EWCA Crim 2936. 139 R v Ali and Others [2005] EWCA Crim 87. 140 R v Montila [2004] UKHL 50. 141 R v Harmer [2005] EWCA Crim 104; R v Ramzan [2005] EWCA Crim 2331; R v Saik [2006] UKHL 18.

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Under previous legislation, there were provisions in the definitions of money laundering offences expressly placing the burden of proof on the defendant.142 However, the Human Rights Act 1998 and Article 6(2) of the European Convention of Human Rights (ECHR) guarantee the presumption of innocence. It was held in Lingens v Austria143 that certain reasonable presumptions are permissible and a defendant could bear an onus, but not the whole burden of proof. The House of Lords in R v Lambert144 held that the natural meaning of the words placing upon the defendant an affirmative duty is prima facie inconsistent with Article 6(2) of the European Convention on Human Rights and does not satisfy the test of proportionality. The statute would bear the ‘secondary interpretation’ in which an evidential burden and not a legal burden is imposed upon the defendant.145 Besides, three criteria must be satisfied before the burden could be shifted to the defence consistently with Article 6(2), (1) (2)

(3)

What does the prosecution have to prove in order to transfer the onus to the defence? What is the burden on the accused – does it relate to something which is likely to be difficult for him to prove or does it relate to something which is likely to be within his knowledge or to which he readily has access? What is the nature of the threat faced by society which the provision is designed to combat?146

The Court in Sheldrake v DPP147 ruled that the statutory defence contained in section 5(2) of the Road Traffic Act 1988 did prima facie interfere with the presumption of innocence contained in Article 6(2) of the European Convention on Human Rights. It was held that the burden of proving an essential feature of the offence was to be on the prosecution because otherwise the defendant could be convicted even though the prosecution had failed to make the justices sure that the essential feature was present. In this case, the prosecution had failed to show that it was necessary to impose a legal burden on the defendant. Nevertheless, if it was necessary and appropriate, only an evidential burden could be imposed on the defendant. The Proceeds of Crime Act 2002 has taken into consideration these matters and the legal and evidential burdens under the defences for money laundering offences will fall upon the prosecution.

142 R v Hunt [1987] AC 352; R v Colle (1992) 95 CAR 67; R v Butt [1999] CLR 414; R v Gibson [2000] CLR 479. 143 Lingens v Austria (No.1) (1982) 4 EHRR 373. 144 R v Lambert [2001] 3 All ER 577. 145 Also see Hoang v France (1993) 16 EHRR 53; Salabiaku v France (1988) 13 EHRR 379; R v Director of Public Prosecutions, ex parte Kebilene and Others [2000] 2 AC 326. 146 R v Director of Public Prosecutions, ex parte Kebilene and Others [2000] 2 AC 326, 386 per Lord Hope. 147 Sheldrake v DPP [2003] 2 All ER 497.

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Wider Investigative Powers under POCA 2002 Financial investigation, in addition to traditional investigation techniques, is an important tool for asset identification and recovery and a key element in ensuring an effective fight against organised crime and money laundering. Part VIII of the Proceeds of Crime Act 2002 provides a number of investigative orders to assist in confiscation, civil recovery and money laundering investigations. The exercise of these investigative powers is governed by the Code of Practice issued under section 377 of the Proceeds of Crime Act 2002. The types of powers which assist financial investigators in obtaining financial information for asset tracing are (i) production orders; (ii) search and seizure warrants; (iii) disclosure orders; (iv) customer information orders; and (v) account monitoring orders. However, these orders are not applicable for taxation investigation under Part VI of the Proceeds of Crime Act 2002 or when cash has been detained under Part V of the Act. These investigative powers have an impact on financial institutions and intermediaries and involve significant interference with individual privacy which might attract human rights challenges, thus, certain statutory requirements must be met to safeguard civil liberty and to justify any infringement.148 Production Orders A production order is an order either requiring the person who appears to be in possession or control of material to produce it to an appropriate officer149 for him to take away, or requiring that person to give an appropriate officer access to the material within the period stated in the order, usually 7 days.150 A production order also includes a provision granting entry for the appropriate officer to specified premises so as to obtain access to the material.151 A production order has effect in spite of any restriction on the disclosure of information (however imposed),152 thus infringing the principles of client confidentiality. The requirements for making production orders are set out in section 346 of the Proceeds of Crime Act 2002 which require that there must be reasonable grounds for suspecting that the subject has benefited from his criminal conduct in a confiscation investigation; or the subject has committed a money laundering offence in a money laundering investigation; or the property is recoverable property or associated property in a civil recovery investigation.153 There must also be reasonable grounds to believe that the 148 AVM Leong ‘Financial Investigation: A Key Element in the Fight against Organised Crime’ (2006) 27(7) The Company Lawyer 218. 149 In relation to confiscation investigation, section 378(1) of the Proceeds of Crime Act 2002 provides that (i) the Director of the Assets Recovery Agency; (ii) an accredited financial investigator; (iii) a constable; and (iv) a Customs officer are appropriate officers. As to civil recovery investigations, only the Director of the Assets Recovery Agency is an appropriate officer as stated in section 378(3). In relation to money laundering investigations, section 378(4) provides that accredited financial investigators, constables, and Customs officers are appropriate officers. 150 Section 345(4), Proceeds of Crime Act 2002. 151 Section 347, Proceeds of Crime Act 2002. 152 Section 348(4), Proceeds of Crime Act 2002. 153 Section 346(2), Proceeds of Crime Act 2002.

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subject is in possession or control of the property154 and that the material is likely to be of substantial value to the investigation,155 besides, it is in the public interest for the material to be obtained.156 However, a production order does not require a person to produce or give access to privileged material157 or excluded material.158 A person commits no criminal offence if he fails to comply with a production order, but he may be subject to proceedings for contempt of court.159 Production orders are also available under section 93H of the Criminal Justice Act 1988, section 55 of the Drug Trafficking Act 1994 and the Police and Criminal Evidence Act 1984 (PACE 1984) for the purpose of obtaining evidence regarding the commission of a criminal offence. Production orders are the most commonly used investigative tool for asset tracing and obtaining financial information such as bank statements, mortgage applications and conveyance files. Search and Seizure Warrants A search and seizure warrant is a warrant authorising an appropriate person to enter and search the premises specified in the application for the warrant, and to seize and retain any material found there which is likely to be of substantial value (whether or not by itself) to the investigation for the purposes of which the application is made.160 The requirements for making search and seizure warrants are set out in section 353 of the Proceeds of Crime Act 2002 and are similar to those for production orders. An additional requirement is that there must be reasonable grounds for believing that it would not be appropriate to make a production order either because of difficulties in communicating with those whom the order affects, or because the investigation might be seriously prejudiced unless immediate access to the material is secure,161 or entry to the premises where the material will not be granted unless a warrant is produced.162 Although a search and seizure warrant does not confer the right to seize privileged material or excluded material,163 Part II of the Criminal Justice and Police Act 2001 provides a power to seize anything that a person has reasonable grounds to believe that there is something which he is authorised to seize, but it is not reasonably practicable for the issue to be determined on the premises. Search and seizure warrants are also available under section 93I of the Criminal Justice Act 1988, section 56 of the Drug Trafficking Act 1994 and section 8 of the Police and Criminal Evidence Act 1984 for the purpose of obtaining 154 Section 346(3), Proceeds of Crime Act 2002. 155 Section 346(4), Proceeds of Crime Act 2002. 156 Section 346(5), Proceeds of Crime Act 2002. 157 Privilege material is defined in section 348(2) of the Proceeds of Crime Act 2002 as any material which the person would be entitled to refuse to produce on grounds of legal professional privilege in proceedings in the High Court. 158 Excluded material, as defined in the Police and Criminal Evidence Act 1984, consists of (i) personal records relating to his physical or mental health, counselling or spiritual counselling; (ii) human tissue and (iii) journalistic material. 159 Section 351(7), Proceeds of Crime Act 2002. 160 Section 352(4), Proceeds of Crime Act 2002. 161 Section 353(4), Proceeds of Crime Act 2002. 162 Section 353(9), Proceeds of Crime Act 2002. 163 Section 354, Proceeds of Crime Act 2002.

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evidence regarding the commission of a criminal offence. In practice, the execution of search and seizure warrants usually incurs additional cost and manpower, thus, careful planning is paramount for searches to be carried out successfully. Disclosure Orders A disclosure order is an order authorising the Director of the Assets Recovery Agency to give to any person, whom the Director considers has relevant information with respect to any matter relevant to the investigation for the purposes of which the order is sought, notice in writing requiring him to (i) answer questions, either at a time specified in the notice or at once, at a place so specified; and/or (ii) provide information specified in the notice by a time and in a manner so specified; and/or (iii) produce documents, or documents of a description specified in the notice, either at or by a time so specified or at once, and in a manner so specified.164 Disclosure orders are only available for confiscation and civil recovery investigations carried out by the Director of the Assets Recovery Agency.165 A disclosure order has effect in spite of any restriction on the disclosure of information (however imposed),166 thus infringing the principles of client confidentiality, but does not confer the right to seize privileged material or excluded material.167 A disclosure order is also considered to be the most intrusive among the investigative orders under the Proceeds of Crime Act 2002. The requirements for making disclosure orders are set out in section 358 of the Proceeds of Crime Act 2002, which are similar to those for production orders. A person commits an offence if (i) he fails to comply with a requirement imposed on him under a disclosure order without reasonable excuse; or (ii) he makes a statement which he knows to be false or misleading in a material particular in purported compliance with a disclosure order; or (iii) he recklessly makes a statement which is false or misleading in a material particular in purported compliance with a disclosure order.168 A person guilty of this offence is liable on summary conviction to imprisonment for a term not exceeding six months, or to a fine not exceeding the statutory maximum, or both; or on conviction on indictment for a term not exceeding two years, or to a fine, or both.169 However, a statement made by a person in response to a disclosure order may not be used in evidence against him in criminal proceedings170 so as to avoid the issue of self-incrimination171 and breaching the European Convention on Human Rights. Customer Information Orders A customer information order is an order that a financial institution covered by the application for the order must, on being required to do so by notice in writing given by an appropriate officer, provide any such

164 Section 357(4), Proceeds of Crime Act 2002. 165 Section 357(2), Proceeds of Crime Act 2002. 166 Section 361(6), Proceeds of Crime Act 2002. 167 Section 361(5), Proceeds of Crime Act 2002. 168 Section 359, Proceeds of Crime Act 2002. 169 Section 359(4), Proceeds of Crime Act 2002. 170 Section 360(1), Proceeds of Crime Act 2002. 171 Saunders v United Kingdom (1996) 23 EHRR 313.

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customer information172 as it has relating to the person specified in the application.173 The required information must be provided to an appropriate officer in such manner, and at or by such time, as an appropriate officer requires.174 In practice, a customer information order is used to find out about accounts or other financial arrangements which an individual has with a specified financial institution and to identify any financial associates of that individual. A customer information order has effect in spite of any restriction on the disclosure of information (however imposed),175 thus infringing the principles of client confidentiality. The requirements for making customer information orders are set out in section 365 of the Proceeds of Crime Act 2002, which are similar to those for production orders. A financial institution commits an offence if (i) it fails to comply with a requirement imposed on it under a customer information order without reasonable excuse; or (ii) it makes a statement which it knows to be false or misleading in a material particular in purported compliance with a customer information order; or (iii) it recklessly makes a statement which is false or misleading in a material particular in purported compliance with a customer information order.176 A financial institution guilty of this offence is liable on summary conviction to a fine not exceeding the statutory maximum, or on conviction on indictment to a fine.177 However, a statement made by a financial institution in response to a customer information order may not be used in evidence against that institution in criminal proceedings178 so as to avoid the issue of self-incrimination179 and breaching the European Convention on Human Rights. Customer information orders are also available for terrorist finance investigations under section 38 and schedule 6 of the Terrorism Act 2000 and article 49 and schedule 2 of the Proceeds of Crime (Northern Ireland) Order 1996.

172 Customer information is defined in section 364 of the Proceeds of Crime Act 2002 as any information relating to whether the person holds, or has held, an account or accounts at the specified financial institution whether solely or jointly with another. If such accounts are or have been held by an individual, customer information includes the account number or numbers, the person’s full name, date of birth, most recent and any previous address, date or dates of account opening and/or closing, evidence of identity obtained by the financial institution for the purpose of money laundering regulations, personal details of joint account holders and account numbers of any other accounts to which the individual is signatory and details of the account holders. If the specified person is a company, limited liability partnership or similar body incorporated or otherwise established outside the United Kingdom, customer information includes the account number or numbers, the entity’s full name, description of any business carried on, the country or territory in which it is incorporated, any VAT number assigned to it, its registered office and previous registered office, date or dates of account opening and/or closing, evidence of identity obtained by the financial institution for the purpose of money laundering regulations and personal details of the account signatories. 173 Section 363(5), Proceeds of Crime Act 2002. 174 Section 363(6), Proceeds of Crime Act 2002. 175 Section 368, Proceeds of Crime Act 2002. 176 Section 366, Proceeds of Crime Act 2002. 177 Section 366(4), Proceeds of Crime Act 2002. 178 Section 367, Proceeds of Crime Act 2002. 179 Saunders v United Kingdom (1996) 23 EHRR 313.

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Account Monitoring Orders An account monitoring order is an order that the financial institution specified in the application for the order must, for the period stated in the order, provide account information180 of the description specified in the order to an appropriate officer in the manner, and at or by the time or times, stated in the order.181 The period stated in an account monitoring order must not exceed the period of 90 days beginning with the day on which the order is made.182 An account monitoring order has effect in spite of any restriction on the disclosure of information (however imposed),183 thus infringing the principles of client confidentiality. The requirements for making account monitoring orders are set out in section 371 of the Proceeds of Crime Act 2002, which are similar to those for production orders. A financial institution commits no criminal offence if it fails to comply with an account monitoring order, but it may be subject to proceedings for contempt of court.184 However, a statement made by a financial institution in response to an account monitoring order may not be used in evidence against that institution in criminal proceedings185 so as to avoid the issue of self-incrimination186 and breaching the European Convention on Human Rights. Account monitoring orders are considered to be more intrusive than production orders or customer information orders. There is the scope for applications to reflect company names, false names and aliases, and is originally applied in a terrorist context under section 3 and schedule 2 of the AntiTerrorism, Crime and Security Act 2001. Proactive Approach to Combating Organised Crime As mentioned earlier in this chapter, disrupting the source of funding is the key to interdict serious organised crime. The focus is on combating money laundering and terrorist financing. However, the number of money laundering convictions in the United Kingdom is comparably lower than in the United States. The reasons being, the information gathered by law enforcement agencies from sting operations, accomplices through plea-bargaining187 and wiretaps, are much more commonly used as evidence in the United States, which ‘allows a jury to view money laundering transactions from the perspective of an insider. Without such evidential sources, prosecutors must persuade juries to draw inferences from the external circumstances of the transactions themselves, a much more difficult task.’188 In addition, a different 180 Account information is defined in section 370(4) of the Proceeds of Crime Act 2002 as information relating to an account or accounts held at the financial institution specified in the application by the person so specified whether solely or jointly with another. 181 Section 370(6), Proceeds of Crime Act 2002. 182 Section 370(7), Proceeds of Crime Act 2002. 183 Section 374, Proceeds of Crime Act 2002. 184 Section 375(6), Proceeds of Crime Act 2002. 185 Section 372(1), Proceeds of Crime Act 2002. 186 Saunders v United Kingdom (1996) 23 EHRR 313. 187 R v. Flahiff (1998) 123 CCC (3d) 79 (Que. C.A.). 188 RE Bell ‘The Prosecution of Lawyers for Money Laundering Offences’ (2002) 6(1) Journal of Money Laundering Control 17, 19; also see RE Bell ‘Proving the Criminal Origin

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exercise of prosecutorial discretion in the United States allows more frequent use of money laundering charges.189 Therefore, more proactive and innovative measures are necessary to secure more money laundering convictions in the United Kingdom. The Role of Intelligence: Comparison between the United Kingdom and the United States Intelligence-Led Policing Good quality intelligence is ‘the life blood of the cutting edge of modern, intelligence led and proactive police service’.190 After information is obtained, it needs to be researched, evaluated, analysed and developed into valuable intelligence packages and strategic threat assessments, then disseminated to the law enforcement community. With the support of technology improvements (such as DNA database, Comparative Case Analysis, Automatic Fingerprint Recognition System, Police National Computer – ‘flags’ system, QUEST and the Holmes software systems), intelligence will result in an increasingly accurate crime pattern analysis underpinning crime prevention and reduction strategies. An effective intelligence strategy that is clearly defined, published and effectively communicated will result in resources being more efficiently targeted against current challenges and emerging trends. It is also recognised that a more proactive national approach and inter-agency cooperation are crucial in combating organised crime since these professional criminals are intelligent, resourceful, well-funded and well-equipped with the latest technology. Intelligence-led policing is the cornerstone of the United Kingdom National Intelligence Model (NIM), which was introduced in the Police Reform Agenda in 2003.191 The National Intelligence Model is ‘A Model for Policing’ which ensures that information is fully researched, developed and analysed to provide intelligence for senior managers ‘to provide strategic direction, make tactical resourcing decisions about operational policing and manage risk.’192 The National Intelligence Model produced by the National Criminal Intelligence Service, on behalf of the Association of Chief Police Officers (ACPO) Crime Committee, aims to professionalise the intelligence discipline within law enforcement on a national basis, including the of Property in Money Laundering Prosecutions’ (2000) 4(1) Journal of Money Laundering Control 12. 189 United States v O’Hagan (1997) 117 S Ct 2199; also see RE Bell ‘Decision Making and Discretion in Money Laundering Prosecutions’ (2001) 5(1) Journal of Money Laundering Control 42. 190 Her Majesty’s Inspector of Constabulary Policing With Intelligence: Criminal Intelligence – A Thematic Inspection on Good Practice (HMIC United Kingdom 1997) 1. 191 Home Office, Police Reform Performance Delivery Unit Police Briefing on the National Intelligence Model (Home Office London 20 November 2003); M Maguire and T John Intelligence, Surveillance and Informants: Integrated Approaches Police Research Series Paper 139 (Home Office London 1995); M Maguire ‘Policing by Risks and Targets: Some Implications of Intelligence-Led Crime Control’ (2000) 9 Policing and Society 315; JH Ratcliffe ‘Intelligence-Led Policing and the Problems of Turning Rhetoric into Practice (2002) 12(1) Policing and Society 53. 192 More information is available at , accessed 20 February 2007.

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codification of best practice, professional knowledge and the identification of selection and training requirements of staff. The National Intelligence Model is currently being implemented across all police forces in the United Kingdom providing a standard way of deciding how to deploy their resources, a common language and a standard template for the collection and dissemination of intelligence among the 43 police forces. It also provides an efficient clearing house for the exchange of information on top tier criminality, on a local or divisional level (Level 1), cross border or regional level (Level 2); national and international (Level 3) scale via the International Division at the National Criminal Intelligence Service. The model comprises four components namely (i) analytical products; (ii) intelligence products; (iii) knowledge products; and (iv) system products. The analytical products (such as results analysis, crime patterns analysis, demographic analysis, network analysis, risk analysis, target profile analysis, market profile and criminal business profile) represent a key element in converting information into useful intelligence which assist law enforcement managers by allowing them to have a good view of the real problems and interpret the criminal environment. As a result, priorities and resources required can be identified in the most effective way. There are four key intelligence products namely the strategic assessment, the tactical assessment, the target profile and the problem profile, which are used to inform decisions on the prioritisation of problems and targets, to allocate ownership of the problems and to form the basis for planning operational responses. Knowledge products define the rules for the conduct of the business or the best practice at both local and national level covering access to data, Data Protection Act guidelines, intelligence training and European Convention on Human Rights compliant codes. These products also maintain the quality of the Model and inform future development. System products relate to the systems and facilities necessary for the secure collection, recording, reception, storage, linkage, analysis and use of the information. In fact, many countries have adopted a similar approach to intelligence-led policing.193 There are certain challenges in implementing the National Intelligence Model, including a poor understanding of analysis among police officers, a lack of trust of crime analysts embedded in the police culture and a lack of understanding of policing among crime analysts. Such misunderstanding and mistrust influence the usefulness of analytical products for operational policing and highlight the fundamental need for training and development for both police officers and crime analysts in order to develop a mutual supportive and productive working relationship.194 It is essential 193 JH Ratcliffe ‘Policing Urban Burglary’ (2001) 213 Trends and Issues in Crime and Criminal Justice Australian Institute of Criminology Canberra; JH Ratcliffe ‘IntellligenceLed Policing’ (2003) 248 Trends and Issues in Crime and Criminal Justice Australian Institute of Criminology Canberra. 194 N Cope ‘Intelligence Led Policing or Policing Led Intelligence? Integrating Volume Crime Analysis into Policing’ (2004) 44(2) British Journal of Criminology 188; T John and M Maguire ‘Rolling out the National Intelligence Model: Key Challenges’ in K Bullock and N Tilley (eds) Crime Reduction and Problem-Oriented Policing (Willan Devon 2003); John T and M Maguire The National Intelligence Model: Early Implementation Experience in Three Police Force Areas (Cardiff University Cardiff 2004), available at , accessed 20 February 2007; T John and M Maguire The National Intelligence Model: Key Lessons from Early Research (Home Office Online Report 30/04), available at , accessed 20 February 2007. 195 Home Office One Step Ahead: A 21st Century Strategy to Defeat Organised Crime Cm 6167 (HMSO London 2004 March) para 4.1. 196 H Ping ‘The Suspicious Transactions Reporting System’ (2005) 8(3) Journal of Money Laundering Control 252. 197 FATF 40 Recommendations is available at , accessed 8 February 2007. 198 FATF Eight Special Recommendations on Terrorist Financing is available at , accessed 8 February 2007.

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Special Recommendation IX,199 which calls on countries to stop cross-border cash movements by terrorists and criminals, has been added in October 2004 as a key element to the world’s counter-terrorist financing defences. All countries worldwide and members of many international organisations200 are expected to implement the FATF 40 + 9 Recommendations as discussed in Chapter 3. Recommendation 26 states that ‘countries should establish a Financial Intelligence Unit (FIU)201 that serves as a national centre for the receiving (and, as permitted, requesting), analysis and dissemination of Suspicious Transaction Reports (STRs) and other information regarding potential money laundering or terrorist financing.’ Recommendations 13 to 16 deal with the obligations in reporting of suspicious transactions and compliance. Special Recommendation V emphasises the importance of international cooperation and sharing of information between jurisdictions and states that ‘each country should afford another country, on the basis of a treaty, arrangement or other mechanism for mutual legal assistance or information exchange, the greatest possible measure of assistance in connection with criminal, civil enforcement and administrative investigations, inquiries and proceedings relating to the financing of terrorism, terrorist acts and terrorist organisations.’ The Egmont Group was established in 1995 to foster the development of Financial Intelligence Units and enhance information exchange as discussed in Chapter 3. According to the Egmont Group, there are four different models of Financial Intelligence Units depending on its type and functions.202 As of May 2007, the Financial Intelligence Units from 106 countries 199 FATF Special Recommendation IX is available at , accessed 8 February 2007. 200 International organisations such as Asia Pacific Economic Cooperation, Basel Committee of Banking Supervisors, International Monetary Fund, United Nations, Wolfsberg Group and World Bank. 201 The Egmont definition of Financial Intelligence Unit is ‘A central, national agency responsible for receiving (and, as permitted, requesting), analysing and disseminating to the competent authorities, disclosures of financial information: (i) concerning suspected proceeds of crime and potential financing of terrorism, or (ii) required by national legislation or regulation, in order to combat money laundering and terrorism financing.’ See , accessed 20 February 2007. 202 The four models of Financial Intelligence Unit are: (i) The Judicial Model is established within the judicial branch of government wherein ‘disclosures’ of suspicious financial activity are received by the investigative agencies of a country from its financial sector such that the judiciary powers can be brought into play, eg seizing funds, freezing accounts, conducting interrogations, detaining people and conducting searches, etc.; (ii) The Law Enforcement Model implements anti-money laundering measures alongside already existing law enforcement systems, supporting the efforts of multiple law enforcement or judicial authorities with concurrent or sometimes competing jurisdictional authority to investigative money laundering; (iii) The Administrative Model is a centralised, independent, administrative authority, which receives and processes information from the financial sector and transmits disclosures to judicial or law enforcement authorities for prosecutions. It functions as a ‘buffer’ between the financial and law enforcement communities; and (v) The Hybrid Model serves as a disclosure intermediary and a link to both judicial and law enforcement authorities. It combines elements of at least two of the Financial Intelligence Unit models. See ‘Information Paper on Financial Intelligence Units and the Egmont Group’

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are members of the Egmont Group.203 The National Criminal Intelligence Service was the former representative of the United Kingdom and is now represented by the Serious Organised Crime Agency. The timing of the collection of intelligence and the technology for analysing such intelligence will certainly affect the quality of the intelligence. The value of technology to real-time intelligence-led policing is recognised in many jurisdictions.204 Information, such as suspicious activity reports (SARs), need to be analysed, developed and transformed into value-added intelligence in a timely manner. Indeed, financial intelligence could be used as basis for an inductive policing approach which enables information to be generated for proactive investigations. One of the new innovative approach to combating money laundering is ‘data mining’, which ‘refers to the collection of automated tools and Artificial Intelligence (AI) techniques that facilitate searching of large data sets to discover “hidden” or “buried” relationships among the data, not easily identified by inspection.’205 For example, the Financial Crimes Enforcement Network Artificial Intelligence Systems in the United States evaluates reports of large cash transactions, both cash transaction reports (CTRs) and SARs, to identify potential money laundering activities and patterns. ‘Data mining’ also enables Australia’s Financial Intelligence Unit, the Australian Transaction Reports and Analysis Centre (AUSTRAC) to deal with the high volume of data of over 10 million financial transaction reports per year206 and generate meaningful and proactive intelligence. In Europe, Europol has created the AWF Sustrans207 in 2002 at , accessed 22 February 2007. 203 The list of Financial Intelligence Units of the world can be found at , accessed 21 June 2007. 204 NJ Jensen ‘Technology and Intelligence’ (2005) 8(3) Journal of Money Laundering Control 227. The Financial Intelligence Unit of the National Criminal Intelligence Service has established the ‘MoneyWeb’ for financial institutions to submit SARs by direct electronic transfer. The Egmont Secure Web (ESW) by the Egmont Group and the FIU.NET by the European Union enable international network of Financial Intelligence Units to work together and share intelligence in a quick and secure manner by using technology. The Financial Transaction Reports Analysis Centre of Canada (FINTRAC) is another Financial Intelligence Unit that has a comprehensive financial transaction-reporting regime that is not limited to SARs thus increasing its data holdings for intelligence analysis. Another example is the ‘data-mining’ technology used by the Australian Transactions Reports and Analysis Centre (AUSTRAC). 205 RC Watkins, KM Reynolds, R Demara, M Georgiopoulos, A Gonzalez and R Eaglin ‘Tracking Dirty Proceeds: Exploring Data Mining Technologies as Tools to Investigate Money Laundering’ (2003) 4(2) Police Practice and Research 163, 169. 206 The Financial Transaction Reports Act 1988 requires the mandatory reporting of all customer-based international wire-transfers in addition to suspicious transaction activities, including cash transaction reports and cross-border reports. See NJ Jensen ‘Technology and Intelligence’ (2005) 8(3) Journal of Money Laundering Control 227, 236–240. 207 AWF Sustrans stands for Analytical Work File Sustrans formed under Article 10 of the Europol Convention which states that AWF ‘shall be opened for the purpose of analysis defined as the assembly, processing or utilisation of data with the aim of helping a criminal investigation.’

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with the aim to collect and analyse SARs and currency activity reports filtered by law enforcement agencies in the European Union. Europol has also implemented data mining tools to produce analysis reports which can be used to initiate proactive criminal investigations. The Crimes Against Property and Financial Crime Unit of Europol (SC4) is also closely involved in the creation of the European Suspicious Transaction Reporting Network. The advantages of data mining technology over traditional approach208 to combating money laundering includes (i) more apparent, timely and proactive case leads, trends and patterns can be generated; (ii) large volume of complex data can be analysed in a timely manner; and (iii) more efficient use of manpower and technological resources. However, there are certain limitations associated with the ‘data mining’ technologies, such as the integrity of data, the lack of training of intelligence analysts in using such technologies and the reactive organisational culture of law enforcement.209 Despite these limitations, both intelligence and technology are undoubtedly very important to law enforcement agencies in identifying potential criminals or criminal behaviour, which might not otherwise be known to the law enforcement agencies. Besides, SARs and CTRs make it more difficult for criminals to avoid creating a paper trail by using large amounts of cash210 and make money laundering activities more prone to detection. In fact, proactive intelligence is the only way to detect money which goes through alternative money remittance systems or Hawala systems since no SARs will be reported from these informal money value systems. However, the mere sharing of information among law enforcement agencies is not enough, financial transaction information (such as SARs) needs to be researched, evaluated, analysed and developed into meaningful intelligence, and more importantly, disseminated to the relevant law enforcement agencies which can then be used for strategic decision making and resource allocation. Evidential Use of Intercept Material Most successful prevention and prosecution of organised criminal activity depends on intelligence gathered from informants and through electronic surveillance, which is essential to prove a connection between the defendant and the set of people performing the predicate crime. The United States is the jurisdiction which makes the most use of electronic surveillance evidence.

208 Traditional investigative approach used to uncover money laundering patterns can be broken down into one of the three categories in an overall cumulative process: (i) identification of money laundering incidences; (ii) detection avoidance; and (iii) surveillance of money laundering activities. These traditional approaches are time-consuming, labour intensive and reactive. See RC Watkins, KM Reynolds, R Demara, M Georgiopoulos, A Gonzalez and R Eaglin ‘Tracking Dirty Proceeds: Exploring Data Mining Technologies as Tools to Investigate Money Laundering’ (2003) 4(2) Police Practice and Research 163, 166–169. 209 RC Watkins, KM Reynolds, R Demara, M Georgiopoulos, A Gonzalez and R Eaglin ‘Tracking Dirty Proceeds: Exploring Data Mining Technologies as Tools to Investigate Money Laundering’ (2003) 4(2) Police Practice and Research 163, 174–177. 210 E Brayshaw ‘SARs: How They Benefit Law Enforcement Agencies’ (26 September 2003), see , accessed 20 February 2007.

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In United States v Navarro and Nunez-Vasquez,211 the defendants were convicted of a US$12 million money laundering conspiracy where evidence of telephone conversations concerned the proceeds of drug trafficking was introduced. In the United Kingdom, the situation is different and the content of telephone taps or products of other intrusive devices carried out in the United Kingdom are not admissible in court as evidence under the current evidential rule in the Regulation of Investigatory Powers Act 2000 (RIPA 2000). However, where a telephone conversation abroad is lawfully intercepted, evidence from that intercept may be adduced in the United Kingdom. One concern is that the evidential use of intercept would reveal intercepting capabilities and techniques, which could undermine the effectiveness of intercept and damage the cooperation between different law enforcement and intelligence agencies. Another issue is the compatibility with the European Convention on Human Rights. The Prime Minister commissioned a Home Office led review on the benefits and risks of using intercept material as evidence in criminal proceedings in July 2003. The review report is a classified document but the issue was discussed at the House of Commons which concluded that, evidential use of intercept would be likely to help secure a modest increase in convictions of some serious criminals but not terrorists. The preferred legal model for evidential use of intercept would comprise three types of interception warrant – intelligence only, nonevidential and evidential, the latter requiring authorisation by a judge. Intelligence only and non-evidential warrants would continue to be authorised by the Secretary of State and would provide criteria-based protection against disclosure in Court of the most sensitive interception capabilities and techniques. Set against the benefits that this approach might deliver, the review identified a number of serious risks that evidential use of intercept would entail for the intercepting agencies and their present capabilities in fighting serious crime and terrorism.212

The report itself has not made recommendations for or against lifting the prohibition on evidential use of intercept. The Government stated that unless the benefits clearly outweigh the costs and adequate safeguards are in place to prevent the disclosure of sensitive capabilities, it would not be right to legislate to remove the existing prohibition and allow the evidential use of intercept material. Indeed, it is important to maintain the balance between the investigator’s right to investigate and the citizen’s individual freedom and personal privacy. Sting/Undercover Operations More proactive and aggressive operations, such as sting and undercover operations, might add value to particular money laundering investigations, especially in identifying the patterns of laundering activities through the underground banking systems. Sting operation means a police undercover

211 United States v Navarro and Nunez-Vasquez 145 F 3d 580 (1998); R v Clymore 515 F Supp 1361 (1981). 212 House of Commons Hansard Written Ministerial Statements for 26 January 2005 (pt 2), ‘Interception of Communications’, details can be found at , accessed 20 February 2007.

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operation designed to catch criminals by means of deception or ‘set a trap to catch a crook’. The use of money laundering sting operations not only allows sufficient evidence to be obtained to convict the money launderers, but it also deters criminals from engaging in money laundering activity, thus, forcing them to transport large amounts of cash which is more prone to detection. The law enforcement agencies in the United States frequently gather evidence of money laundering through sting or undercover operations.213 There are two types of money laundering stings namely ‘stinging the launderer’ and ‘stinging the criminal entrepreneur’. Some particular features of sting operations in the United States include (i) sting operations are often used to target any entry point (such as car dealership, restaurants, bookmakers, cheque-cashing service, pawn shops, lawyers and even churches) which is used to introduce proceeds of crime into the financial system; (ii) the use of informants in sting operations is often followed by an undercover agent later substituting for the informant;214 (iii) sting operations will not necessarily conclude when the original target of the operation has been stung and will continue with laundering referrals; (iv) cross-border sting operations are used to lure money launderers who are resident in foreign jurisdictions to enter the United States; (v) intrusive surveillance methods are used to recording of conversations and meetings; and (vi) the duration of sting operations is usually long term in nature.215 However, sting operation is seldom used in the United Kingdom even though the current legislation allows to some degree for sting operations in money laundering investigations. There are a number of difficulties in mounting sting operations in money laundering investigations. The first major hurdle is the requirement for the prosecution to prove that the funds or property concerned is the proceeds of crime in money laundering offences under sections 327, 328 and 329 of the Proceeds of Crime Act 2002, since the money used in the sting operations might not necessarily be the proceeds of crime.216 Although a sting operation might be mounted with a view to prosecuting defendants for an offence of ‘failing to disclose’ knowledge or suspicion of money laundering under sections 330 to 332 of the Proceeds of Crime Act 2002, the impact against major organised crime is minimal. Besides, a sting operation could not be mounted with a view to prosecuting defendants for the offence of tipping off under section 333 of the Proceeds of Crime Act 2002 because there would not be the element of prejudicing the investigation. The second obstacle is the prohibition of evidential use of intercept material under the Interception of Communications Act 1985 and the Regulation of Investigatory Powers Act 2000. The third problem is the admissibility of evidence obtained in a sting operation. Section 78 of the Police and Criminal Evidence Act 1984 allows a Court to exclude evidence if its admission would have such an effect on the fairness of the proceedings. Therefore, amendments 213 United States v Foster 868 F Supp 213 (1994). 214 United States v Steinhorn 739 F Supp 268 (1990). 215 RE Bell ‘Undercover Sting Operations in Money Laundering Cases’ (2001) 4(4) Journal of Money Laundering Control 333. 216 The United States Congress has included Section (a)(3) to the Money Laundering Statute in 1988 which provides that the actus reus of money laundering does not require transactions involving the actual proceeds of crime.

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to the legislation are required for the law enforcement to effectively mount sting operations in money laundering cases in the United Kingdom.217 Another concern is the accountability of informers and agents.218 There is also the issue of entrapment in sting and undercover operations. The use of undercover officers is governed by Part II of the Regulation of Investigatory Powers Act 2000 and the Code of Practice on the Use of Covert Human Intelligence Sources (CHIS),219 which comply with the European Convention on Human Rights. So, when does an undercover operation become entrapment? In R v Smurthwaite and Gill,220 the Court laid down some guidelines on whether the undercover operation became entrapment. The main consideration was whether the police office had enticed a defendant to commit an offence and whether the officer played an active or a passive role. Further guidance was laid down in the House of Lords cases of Attorney-General’s Reference No. 3 of 2000 and R v Looseley,221 which stated that when deciding whether an operation amounted to entrapment, a judge should consider the following factors in each case, (i) whether the defendant would not otherwise have committed the offence; (ii) the nature of the offence; (iii) the nature of the entrapment; (iv) whether the police had ground for suspicion; (v) whether the operation was supervised properly; (vi) how active or passive a role the police officer(s) played relative to the circumstances; (vii) whether the defendant was presented with an ‘unexceptional opportunity’ to commit the offence; (viii) whether the police had behaved in a way the public would condone in the circumstances; and (xi) whether the conduct of the police was so seriously improper that it brought the administration of justice into disrepute so that prosecution would be an affront to the public conscience. In R v Mason and Others,222 the Court has made it clear that evidence obtained as a result of entrapment will not be excluded automatically; neither will proceedings be stayed automatically. Subject to the judge’s discretion under section 78 of the Police and Criminal Evidence Act 1984 to exclude the evidence as ‘unfair’, the evidence obtained in an operation which breaches Article 8 of the European Convention on Human Rights may still be admissible at trial. However, on 28 July 2003, the Southwark Crown Court ruled that the police in Operation Cotton223 ‘had overstepped the line between legitimate crime detection and unacceptable crime creation’ and that some officers had committed a ‘state-created crime’ during this sting operation, as a result, 217 Re Bell ‘Undercover Sting Operations in Money Laundering Cases’ (2001) 4(4) Journal of Money Laundering Control 333. 218 M Boer Undercover Policing and Accountability from an International Perspective (European Institute of Public Administration Maastricht 1997); N South ‘Informers, Agents and Accountability’ in R Billingsley, T Nemit and P Bean (eds) Informers, Policing, Policy and Practice (Willan Publishing Devon 2001). 219 Section 26(8), Regulation of Investigatory Powers Act 2000. 220 R v Smurthwaite and Gill (1994) 98 Cr App R 437; DPP v Williams and O’Hare (1994) 98 Crim App R 206. 221 R v Looseley [2001] UKHL 53; [2002] 1 Cr App R 29. 222 R v Mason and Others [2002] EWCA Crim 385. 223 In Operation Cotton, a sting operation was mounted by the Metropolitan Police, detectives had set up a false company, laundered £15 million and then returned to the alleged drug dealers over a three-year period.

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the defendants were allowed to walk free. Following this ruling, the Scotland Yard claimed that the future of covert police work was under threat. Reforming Criminal Trials: ‘Plea Bargaining’ and Queen’s Evidence The person who obtains the criminal proceeds through illegal activities has the best knowledge of the criminal origin of such proceeds. Occasionally it may serve the individual’s interest, usually through plea-bargaining for reduced sentence or early release from prison, to cooperate with the prosecuting authority and give accomplice evidence against those who have laundered his proceeds. The practice of pleabargaining and the use of accomplice evidence in money laundering prosecutions are used more often by the law enforcement agencies in the United States224 and Canada225 than in the United Kingdom. Similar well-established system for using crown witnesses or ‘legislazione premiale’ (rewards regulations) is found in Italy, while there is no system of plea bargaining or witness immunity in Japan and France. The variations between countries in the types of measures used to facilitate witness cooperation in organised crime investigations reflect the differences in the scale and nature of organised crime as well as the distinction in their legal systems.226 Besides, specific concerns in the context of the European Convention on Human Rights (guarantee of a fair trial in Article 6) exist in Europe about the legitimacy of measures to assist witnesses.227 In R v Turner,228 the Court of Appeal ruled that an indication by the judge of the likely sentence in the event of a guilty plea would place undue pressure on the defendant and should not take place because it presents too great a risk of perjury and thus of wrongful convictions. The Royal Commission on Criminal Justice in 1993 questioned the judgement in R v Turner and recommended removing such prohibition. Lord Justice Auld recommended that there should be ‘a system of advance indication of sentence for a defendant considering pleading guilty.’229 The idea of sentence reductions also encourages defendants to cooperate with the prosecution. Per Lord Lane CJ and Cantley J in R v King,230 224 United States v Singleton 144 F 3d 1343 (10th Cir 1998); United States v Rooks, Cook and Patterson 1999 US App LEXIS 11045. 225 R v. Flahiff (1998), 123 CCC (3d) 79 (Que. C.A.). 226 N Fyfe and J Sheptycki Facilitating Witness Co-operation in Organised Crime Cases: An International Review (Home Office Online Report 27/05), available at , accessed 20 February 2007. 227 PJP Tak ‘Deals with Criminals: Supergrasses, Crown Witnesses and Pentiti’ (1997) 5(1) European Journal of Crime, Criminal Law and Criminal Justice 2; LCH Hoyano ‘Striking a Balance between the Rights of Defendants and Vulnerable Witnesses: Will Special Measures Directions Contravene Guarantees of a Fair Trail?’ (2001) Criminal Law Review 948. 228 R v Turner (1970) 2 WLR 1093; R v Peverett [2001] 1 Cr App R 27. 229 A Review of the Criminal Courts of England and Wales by the Right Honourable Lord Justice Auld, September 2001, available at , accessed 20 February 2007. 230 R v King (1985) 7 Cr App R (S) 227; R v Sinfield (1981) 3 Cr App R (S) 258; R v Saggar [1997] 1 Cr App R (S) 167; R v A and B (1999) 1 Cr App R (S) 52.

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One of the most effective weapons in the hands of the detective is the informer. Once the identity of a suspect can be established, even if he does not confess, it will often be possible to obtain scientific or other evidence to connect the suspect with the crime so to corroborate the informer. It is to the advantage of law-abiding citizens that criminals should be encouraged to inform upon their criminal colleagues. They know that if they do so they are likely to be the subject of unwelcome attention, to say the least, for the rest of their lives. They know that their days of living by crime are probably at an end. Consequently, an expectation of some substantial mitigation of what would otherwise be the proper sentence is required in order to produce the desired result, namely the information. The amount of that mitigation, it seems to us, will vary…from about one half to two thirds reduction.

However, in the United Kingdom, Queen’s Evidence is underused in serious and organised crime cases. The reasons why cooperation is now rarely used are (i) the reluctance of defendants to submit to the process when the incentives are not seen to be clear or substantial enough; and (ii) juries’ suspicion of the character, credibility and motivations of cooperating defendants. The former Her Majesty’s Customs and Excise had only 1% of all defendants in 2003 who used Queen’s Evidence and received sentence reductions as a result of substantial cooperation with the investigation, compared to 26% of defendants in drug trafficking cases in the United States and 10–15% of defendants in serious drug trafficking cases in Australia.231 In addition to sentence reductions, there is also the consideration for full immunity. The Director of Public Prosecutions in Australia has a power to offer complete immunity under section 9 of the Director of Public Prosecutions Act. Recently, in the United Kingdom, the Serious Organised Crime and Police Act 2005 has placed the common law practice by which a defendant can plead guilty and offer Queen’s Evidence in return for a discounted sentence on a statutory footing.232 Furthermore, if a specified prosecutor thinks that for the purposes of the investigation or prosecution of any offence it is appropriate to offer any person immunity from prosecution he may give the person an immunity notice.233 Cooperation of Witnesses: National Witness Protection Programme Witnesses must be confident that both their families and themselves are safe before any cooperation can be established. The longest established witness protection programme is the United States Federal Witness Security Programme (WITSEC) formed by the Organised Crime Control Act 1970. The main protection involves secret and permanent relocation of witnesses and their families to safe places and a change of their identities if required.234 Some countries, like Belgium and Germany, have 231 Home Office One Step Ahead: A 21st Century Strategy to Defeat Organised Crime Cm6167 (HMSO London 2004 March) para 6.3.2. 232 Sections 71 to 74, Serious Organised Crime and Police Act 2005. 233 Section 71(1), Serious Organised Crime and Police Act 2005. 234 F Montanino ‘Protecting Organised Crime Witnesses in the United States’ (1990) 14(1) International Journal of Comparative and Applied Criminal Justice 123; P Earley and G Schur WITSEC: Inside the Federal Witness Protection Program (Bantam Books New York 2002).

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specific legislation governing the operation of their witness protection programmes, whereas the Netherlands and the United Kingdom have no such legislation before the Serious Organised Crime and Police Act 2005. While some countries (such as the United Kingdom, Australia and Canada) view witness protection as largely a police function, others (such as Jamaica and South Africa) view it as part of the judiciary and government ministries’ role. In some countries, like Belgium and Italy, there is a national or federal witness protection programme. The United Kingdom and Germany have various local and regional programmes.235 No matter what the witness protection arrangements are, it is definitely the government’s obligation to protect the life of someone the authorities know to be in danger.236 It is a criminal offence if a person knowingly performs an act intended to intimidate another person who is or may be a witness in civil or criminal proceedings and the penalty is up to five years in prison.237 In fact, witness and jury protection schemes have been set up since the Diplock type trials in Northern Ireland to ensure that the best evidence is given in Court, thus, increasing the number of successful prosecutions.238 The Multi-Agency Witness Mobility Scheme239 is a systematic, streamlined approach and is established to give the Social Landlords, Local Authorities and Police Services access to fast track relocation and support services for vulnerable or intimidated witnesses. Though various witness protection schemes exist in different law enforcement agencies designed to reduce fear and distress experienced by the vulnerable witnesses, their arrangements and standards are different and the witnesses lack the confidence in the protection provided.240 As a result, law enforcement agencies in the United Kingdom often find it difficult to get witnesses to cooperate in organised crime trials because organised criminals 235 NR Fyfe and J Sheptycki Facilitating Witness Co-operation in Organised Crime Cases: An International Review (Home Office Online Report 27/05); E McCusker Protecting the Truth: Comparative Analysis of Witness Protection Services (United Nations International Criminal Tribunal for the Former Yugoslavia Hague 2002). 236 Osman v United Kingdom [1999] 29 EHRR 245. 237 Sections 39 to 41, Criminal Justice and Police Act 2001. 238 T Gifford Supergrasses: The Use of Accomplice Evidence in Northern Ireland (Cobden Trust London 1984); SC Greer Supergrasses: A Study of Anti-Terrorist Law Enforcement in Northern Ireland (Oxford University Press Oxford 1994); SC Greer ‘Where the Grass is Greener? Supergrasses in Comparative Perspective’ in R Billingsley, T Nemit and P Bean (eds) Informers, Policing, Policy and Practice (Willan Publishing Devon 2001). 239 Home Office The Multi-Agency Witness Mobility Scheme (Home Office London 2003 October). Summary document and protocol can be found at , accessed 20 February 2007. 240 Home Office Speaking Up for Justice: Report of the Interdepartmental Working Group on the Treatment of Vulnerable and Intimidated Witnesses in the Criminal Justice System (Home Office London 1998); NR Fyfe and H McKay ‘Witness Intimidation, Forced Migration and Resettlement: A British Case Study’ (2000) 25 Transactions of the Institute of British Geographers 77; NR Fyfe and H McKay ‘Desperately Seeking Safety: Witnesses’ Experiences of Intimidation, Protection and Relocation’ (2000) 40(4) British Journal of Criminology 671; NR Fyfe Protecting Intimidated Witnesses (Aldershot Ashgate 2001); P Bean ‘Informers and Witness Protection Schemes’ in R Billingsley, T Nemit and P Bean (eds) Informers, Policing, Policy and Practice (Willan Publishing Devon 2001).

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are ready to use threat or violence to intimidate the witnesses or jurors so as to prevent prosecutions. A more effective national witness protection programme with common standards and national guidelines is necessary to improve the support and protection of witnesses. Since January 2004 the Home Office had been working with the Association of Chief Police Officers and the Witness Support Network on reviewing the costs, benefits and risks associated with moving to a national witness protection scheme.241 That review ended in September 2004 and concluded that ‘the case had not been made out for a national witness protection agency, but instead recommended rationalising witness protection arrangements by consolidating force units on a regional basis and having a central unit to provide assistance nationally to the regional units.’242 Chapter 4 of the Serious Organised Crime and Police Act 2005 has placed the arrangement for providing witnesses protection on a statutory footing. Provisions for joint arrangements by two or more protection providers are found under section 83 of the Act. Section 83(2) provides that the powers conferred are exercisable jointly or by one of the providers with the agreement of the others. It places a duty on public authorities to assist protection providers under section 85. It also introduces offences in connection with the unauthorised disclosure of information about protection arrangements243 or protected persons.244 Private Security Private security is not a new phenomenon. Self-help and the sale of protection as a commodity have a long history. Since the early 1960s there has been an enormous growth in ‘contract security’, which provides police services on a fee-for-service basis to anyone willing to pay. What is new about modern private security is its pervasiveness and the extent to which its activities have expanded into public, rather than purely private, places. An innovative approach in the fight against money laundering and terrorist financing would be the use of private consultants or quasi-government security. As mentioned earlier, the law enforcement agencies are overloaded with SARs and they have limited resources, technology and capability to analyse and develop SARs into useful and meaningful intelligence. A possible approach is to out-source part of the SAR regime to private security consultants, which specialise in intelligence databases (such as data mining, forensic technology, asset tracing and financial crime), at an early stage so as to reduce the time in developing useful intelligence.245 However, the 241 Home Office One Step Ahead: A 21st Century Strategy to Defeat Organised Crime Cm6167 (HMSO London 2004 March) para 6.4. 242 House of Lords – Explanatory Note ‘Serious Organised Crime and Police Bill’ Session 2004–05, details can be found at , accessed 20 February 2007. 243 Section 86, Serious Organised Crime and Police Act 2005. 244 Section 88, Serious Organised Crime and Police Act 2005. 245 S Schneider ‘Privatising Economic Crime Enforcement: Exploring the Role of Private Sector Investigative Agencies in Combating Money Laundering’ (2006) 16(3) Police and Society 285.

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issues of legality, accountability, confidentiality and the security of out-sourcing the SAR regime require further consideration. Conclusions Organised crime has evolved so rapidly that the traditional criminal justice system has proven to be inadequate in tackling this problem. In addition to engaging in sophisticated financial schemes and technology in laundering their proceeds, organised crime has accelerated to a more international level which calls for radical reforms of the relevant legislation. Indeed, criminal law is only one weapon in the war on organised crime and that much can be achieved under the civil law and taxation law provided that they are properly implemented and enforced. Civil recovery and taxation powers have long been recognised as alternative measures in the United States and Australia. Although a little behind other major economies, the United Kingdom finally incorporates civil recovery and taxation powers in the Proceeds of Crime Act 2002 giving law enforcement agencies wider investigative powers. In addition, financial investigation is beginning to be seen as an integral part of criminal investigation. Furthermore, a more joined-up and multi-agency approach is emphasised in the new asset recovery strategy. The effectiveness of these new regimes under the Proceeds of Crime Act 2002 will be examined in Chapter 8. The importance of intelligence-led approach in inductive policing cannot be emphasised enough, especially in organised crime and money laundering investigations. Both intelligence and innovative technology, like data-mining and forensic technology, are very useful for identifying potential criminals or criminal behaviour which might not otherwise be known to the law enforcement agencies. In fact, proactive intelligence is the only way to detect money which goes through alternative money remittance systems or Hawala systems as no SARs will be reported from these informal money value systems. Moreover, a more joined-up national approach with closer cooperation and more information sharing among police forces, national enforcement agencies, prosecutors and intelligence services are crucial. However, the mere sharing of information among law enforcement agencies is not enough, financial transaction information (such as SARs) needs to be researched, evaluated, analysed and developed into meaningful intelligence, which is then disseminated to the relevant law enforcement agencies. Therefore, ‘intelligence work is expected to become more broad based in the future and experts from the private sector will work more closely with personnel from the public sector. Long-term workable partnership arrangements will be formed based on trustworthy behaviour.’246 Furthermore, the cooperation of witnesses also plays a significant role in organised crime and money laundering prosecutions. Powers being too intrusive and disruptive will raise concerns of breach in human rights and civil liberties. Even though the evidential use of intercept materials would be likely to help secure more convictions of some serious criminals (as in the case

246 PRJ Tim ‘Disaster Management and the Role of the Intelligence and Security Services’ (2003) 12(1) Disaster Prevention and Management 6, 6.

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of the United States), the British Government still believes that the benefits do not clearly outweigh the costs in using intercept materials and decides that it would not be right to legislate to remove the existing prohibition on the evidential use of intercept material. The legality of undercover operations and the concern of entrapment are other issues relating to civil liberties. It is important to maintain the balance between the investigator’s right to investigate and the citizen’s individual freedom and personal privacy. The legal implications of the ‘disruption strategies’, the potential danger of infringing human rights and the safeguards in place in the criminal justice system are considered in Chapter 8.

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Chapter 8

Legal Implications and Efficacy of ‘Disruption Strategies’ The United Kingdom gives further effect to rights and freedoms guaranteed under the European Convention for the Protection of Human Rights and Fundamental Freedoms by enacting the Human Rights Act in 1998 and the Regulation of Investigatory Powers Act in 2000. However, the intrusive and disruptive nature of the new powers introduced under the Proceeds of Crime Act 2002 (POCA 2002) raises concerns of breaches in human rights and civil liberties and is considered to be highly controversial. The obligation of confidentiality and the duty of disclosure under the new financial services regulatory regime also attract concerns among professionals, banks and other financial institutions. Besides, certain provisions in the Money Laundering Regulations are in confrontation with the principles of the Data Protection Act 1998. The implications and consequences of ‘disruption strategies’ in law and the apprehension of the compatibility of these new provisions with the requirements of domestic and international human rights law are considered in this chapter. Civil recovery and taxation powers are introduced under the Proceeds of Crime Act 2002 as alternative measures in the war on organised crime and financial investigation begins to be seen as an integral part of criminal investigation. Furthermore, a more joined-up approach and the importance of proactive intelligence gathering and sharing are emphasised in the latest asset recovery strategy. The effectiveness of these new regimes in combating organised crime is examined. The adequacies of the anti-money laundering strategy and the risk-based approach in identifying and interdicting money laundering are also discussed. Legal Implications of ‘Disruption Strategies’ European Convention for the Protection of Human Rights and Fundamental Freedoms The European Convention for the Protection of Human Rights and Fundamental Freedoms, also known as the European Convention on Human Rights (ECHR), was adopted in 1950 by a number of European nations recognising the importance of human rights to the development of the free market economies and democracy. Section 1 of the Convention defines the basic rights and freedoms that all individuals

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should be able to enjoy in a democratic society.1 In 1951, this international treaty was ratified by the United Kingdom and individual British citizens were given the right to petition the European Court of Human Rights in Strasbourg in 1966. The Human Rights Act 1998 gives further effect to rights and freedoms guaranteed under the Convention. The Act states that primary legislation and subordinate legislation must be read and given effect in a way which is compatible with the Convention rights.2 However, if the Court is satisfied that the provision is incompatible with a Convention right, it may make a declaration of that incompatibility.3 This gives the Parliament an opportunity to remedy any problem if it so wishes, however, the Parliament retains its sovereign position and is not obliged to change the legislation. The Act also states that it is unlawful for a public authority to act in a way which is incompatible with a Convention right.4 In fact, a lot of the work carried out by law enforcement and financial investigators involves some degree of infringement on an individual’s rights, especially the right to respect for private and family life under Article 8 of the Convention. Such intrusion would not be unlawful if it is proportional to the nature of the investigation and is in accordance with the law. Besides, the law enforcement agencies must show that such intrusion is necessary in a democratic society in the interests of national security, public safety or the economic well-being of the country for the prevention of disorder or crime, the protection of health or morals or the protection of the rights and freedoms of others. Victims of unlawful acts by public authorities have a right to challenge those public authorities in Tribunals or in the Courts. In order to comply with Article 8 of the Convention, it is necessary to have in place legislation that sets out both the conditions under which Article 8 may be breached and the necessary safeguards. This leads to the implementation of the Regulation of Investigatory Powers Act 2000, which received Royal Assent in July 2000. The Regulation of Investigatory Powers Act 2000 intersects with the Data Protection Act 1998 and the Human Rights Act 1998 to ensure that the relevant investigatory powers are used in accordance with human rights legislation. Thus, law enforcement officers and financial investigators will have to satisfy a Judge that any infringement of a person’s rights under the European Convention on Human Rights is proportional to the benefit to be gained from granting the order or warrant.

1 The rights and freedoms include the right to life (Article 2); prohibition of torture (Article 3); prohibition of slavery and forced labour (Article 4); right to liberty and security (Article 5); right to a fair trial (Article 6); no punishment without law (Article 7); right to respect for private and family life (Article 8); freedom of thought, conscience and religion (Article 9); freedom of expression (Article 10); freedom assembly and association (Article 11); right to marry (Article 12); right to an effective remedy (Article 13); prohibition of discrimination (Article 14); derogation in time of emergency (Article 15); restrictions on political activity of aliens (Article 16); prohibition of abuse of rights (Article 17) and limitation on use of restrictions of rights (Article 18). 2 Section 3, Human Rights Act 1998. 3 Section 4(2), Human Rights Act 1998. 4 Section 6(1), Human Rights Act 1998.

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Human Rights and Financial Services Regulation The powers of the Serious Fraud Office under section 2 of the Criminal Justice Act 1987 to demand the attendance of suspects for interview and to demand that information be supplied, irrespective of whether the suspect has been charged with a criminal offence, are considered to be draconian and have led to numerous human rights challenges. In Saunders v United Kingdom,5 it was held that the use of evidence gained from a previous civil inquiry by the Department for Business, Enterprise and Regulatory Reform under section 432 of the Companies Act 1985 in the Serious Fraud Office interviews restricted the privilege against self-incrimination and was in breach of Article 6 of the European Convention on Human Rights, however, its limits and rationale remain unclear.6 The Government has widened the discrepancy between the Serious Fraud Office interpretations of human rights and the rulings of the European Court of Human Rights by vesting powers on the Financial Services Authority to impose unlimited fines (in addition to civil sanctions) on white-collar offenders without the safeguards and the standard of proof required in the criminal law. The Financial Services Authority has powers similar to the Serious Fraud Office even though it is a civil regulator. The Financial Services Authority can demand information and the production of documents without delay, require suspects to attend interview and answer question on oath. A failure to comply with a request or obstruction of the exercise is a criminal offence and punishable with a fine and/or imprisonment. The Financial Services Authority also has the potential to use the market abuse offence to deprive market abusers of their gains. This civil regime complements the criminal offence of insider trading under Part V of the Criminal Justice Act 1993. The civil sanctions include unlimited fines and public censure. In addition, the Financial Services Authority has the power to bring criminal prosecution for breaches of the Money Laundering Regulations. Furthermore, section 146 of the Financial Services and Markets Act 2000 gives the Financial Services Authority the authority to ‘make rules in relation to the prevention and detection of money laundering in connection with the carrying on of regulated activities by authorised persons.’ However, the Financial Services Authority legislation will not be set out in statutory instruments or subject to direct parliamentary control, which is potentially in conflict with Article 7 of the European Convention on Human Rights. In fact, there is a growing homogeneity between civil and criminal proceedings. A number of measures of the Financial Services Authority are clearly criminal in nature, but civil in law, which are in direct confrontation with Articles 6 and 7 of the European Convention on Human Rights. Although the Government has issued a statement under section 19 of the Human Rights Act 1998 to state that Financial Services and Markets Act 2000 fully meets the requirements 5 Saunders v United Kingdom (1996) 23 EHRR 313; Brown v Scott [2001] 2 WLR 817; R v Allen [2001] UKHL 45. 6 I Dennis ‘Instrumental Protection, Human Right or Functional Necessity? Reassessing the Privilege against Self-Incrimination’ (1995) 54(2) Cambridge Law Journal 342; also see P Alldridge and B Swart ‘The Privilege against Self-Incrimination in Proactive Policing’ in SA Field and C Pelser (eds) Invading the Private (Dartmouth Aldershot 1998) 253.

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of the European Convention on Human Rights, it fails to address all the concerns on human rights and a number of sources still perceived to be incompatible to the Convention. Therefore, the powers vested on the Financial Services Authority are considered to be draconian.7 Civil Recovery Powers and Human Rights Challenges Most legal systems distinguish between civil and criminal proceedings by engaging separate courts and different procedures and evidential rules. However, the distinction between civil and criminal proceedings has become less clear in recent years. Criminal cases often involve civil or quasi-civil procedures, while some civil litigation might involve quasi-criminal procedures, thus, it has become more difficult to determine whether proceedings are civil or criminal.8 Several jurisdictions, such as Italy, Ireland, South Africa, Australia, Canada and the United Kingdom, have introduced civil forfeiture legislation. In the United Kingdom, some common issues are explored when deciding whether the forfeiture regime is of civil nature. These factors include (i) the investigative powers that exist in the regime; (ii) the procedural rules; (iii) the availability of remedies; (iv) the organisational features; and (v) the legislative intent. Civil recovery proceedings under Part V of the Proceeds of Crime Act 2002 point towards a civil classification because (i) no police investigative powers are available to the Director of the Assets Recovery Agency (ARA); (ii) civil procedural rules are applied and proceedings are initiated in the format of a claim form in the High Court; (iii) liability for an individual is limited to the recoverable property based on the balance of probabilities; (iv) the Assets Recovery Agency does not have prosecuting authority and civil recovery proceedings are not brought by the Crown Prosecution Service; and (v) the Parliament’s intention is to adopt the civil model of forfeiture to tackle the proceeds of crime.9 Although civil recovery proceedings in the United Kingdom are classified as civil in nature in domestic law, it must also be examined within the framework of the European Convention on Human Rights. Three principle criteria are identified in Engel v The Netherlands,10 namely (i) the manner in which the domestic state classifies the law in question; (ii) the nature of the unlawful conduct classified in the domestic state; and (iii) the severity of any sanction imposed. Imprisonment as a penalty is generally recognised as criminal in nature.11 In fact, a number of decisions in the High Court have established forfeiture proceedings as civil proceedings, thus, 7 P Johnstone and J Haines ‘Human Rights and the Restructuring of Financial Services Regulation in the UK’ (2001) 9(2) Journal of Financial Crime 179. 8 R (McCann and others) v Crown Court at Manchester [2001] 4 All ER 264. 9 A Kennedy ‘Justifying the Civil Recovery of Criminal Proceeds’ (2004) 12(1) Journal of Financial Crime 8, 10–11. 10 Engel v The Netherlands (1976) 1 EHRR 647. The approach in the Engel case was followed by Lord Saville of Newdigate v Harnden [2003] NI 239 and R v H [2003] 1 All ER 497. 11 Engel v The Netherlands (1976) 1 EHRR 647; Campbell and Fell v United Kingdom (1984) 7 EHRR 165; B v Avon and Somerset Constabulary [2001] 1 WLR 340; S v Millar [2001] SC 977; R v H [2003] 1 All ER 497.

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such proceedings are not covered by Article 6(2) of the European Convention on Human Rights.12 In Walsh v The Director of the Assets Recovery Agency13 and R (The Director of the Assets Recovery Agency) v He & Cheng,14 the respondents challenged that civil recovery proceedings should be categorised as criminal rather than civil and should attract all the safeguards guaranteed by Article 6 of the European Convention on Human Rights. It was held that civil recovery procedure is to recover property obtained through unlawful conduct, but not to penalise or punish any person who is proved to have engaged in such conduct. Therefore, civil recovery proceedings under Part V of the Proceeds of Crime Act 2002 should be classified as civil rather than criminal15 and do not contravene Articles 6 and 7. Moreover, in R (Director of the Assets Recovery Agency) v Belton,16 the High Court in Northern Ireland ruled that civil recovery proceedings are not proceedings for a penalty in the context of the European Convention on Human Rights. Since civil forfeiture is a significant extension of the domestic state’s powers to deal with the proceeds of crime without a conviction to the criminal standard, other fundamental concerns in relation to the civil recovery proceedings include the lack of proportionality,17 the breaching of the presumption of innocence and double jeopardy rule.18 The Government argued that the civil recovery proceedings are 12 Goldsmith v Customs and Excise Commissioners [2001] 1 WLR 1673; Butt v HM Customs and Excise [2001] EWHC Admin 1066; R (Mudie and Another) v Dover Magistrates’ Court [2003] QB 1238; Gora and Others v Customs and Excise Commissioners [2003] All ER (D) 208. 13 Walsh v The Director of the Assets Recovery Agency [2005] NICA 6; R (The Director of the Assets Recovery Agency) v Charrington [2005] EWCA Civ 334; Director of the Assets Recovery Agency v Singh [2005] EWCA Civ 580. 14 R (The Director of the Assets Recovery Agency) v He & Cheng [2004] EWHC 3021 (Admin). 15 The European Court of Human Rights has ruled in a number of cases that civil forfeiture is classified as civil proceedings, see Agosi v United Kingdom (1987) 9 EHRR; Air Canada v United Kingdom (1995) 20 EHRR 150; Butler v United Kingdom (2002) Application No. 41661/98; Webb v United Kingdom (2004) Application No. 56054/00. Other Italian cases include M v Italy 70 DR 59 (1991); Raimondo v Italy (1994) 18 EHRR 237; Arcuri v Italy (2001) Application No. 54024/99. 16 R (Director of the Assets Recovery Agency) v Belton (2005) NIQB Ref No. COGF5334. 17 McIntosh v Lord Advocate [2001] 2 All ER 638; R (The Director of the Assets Recovery Agency) v He & Cheng [2004] EWHC 3021 (Admin). The issue of proportionality has to be considered on an individual case basis. However, both the High Court and the Court of Appeal in England and Wales and Northern Ireland ruled that civil recovery proceedings are generally regarded as a proportional response and breaches to Article 8 and Article 1 of Protocol 1 of the European Convention on Human Rights are justified and proportionate to the harmful activities against which the proceedings are aimed and are in the public interest. 18 This rule states that a person should not be prosecuted twice for the same offence and that conviction shall be a bar to all further criminal proceedings. However, if that can be circumvented, there is no independent rule in English Law against double punishment. In fact, the United Kingdom has not signed or ratified the double jeopardy protocol to the European Convention on Human Rights. See Connelly v Director of Public Prosecutions [1964] AC

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classified as civil proceedings and it may be brought against any person (whether or not he is the person who committed the unlawful conduct) who holds or controls the recoverable property. Thus, the civil recovery proceedings do not contravene the spirit of the presumption of innocence nor the double jeopardy rule.19 Confidentiality and Duty of Disclosure An obligation of confidentiality can arise under the express terms of a contract,20 or implied terms of a contract of different kinds21 or by virtue of the rules of equity.22 The idea of financial institutions reporting the activities of their clients is completely contrary to their traditional emphasis on customer confidentiality.23 As mentioned in Chapter 6, the suspicious activity reporting regime (SAR regime) and the duty to disclose under the Terrorism Act 200024 are also contrary to the idea of independent legal advice, which is based on the freedom of confidential communication.25 However, it is argued that in order to detect the proceeds of crime effectively, there must be some conflict with the confidentiality of relationships. As long as the suspicious reports fall within the gateway for disclosure under the legislation, their validity in relation to the confidentiality laws cannot be disputed. Therefore, privacy interests should not be allowed to override the higher public interest in the prevention and detection of crime.26 Indeed, for professions such as bankers and lawyers, it is no longer simply about carrying out client instructions and acting in the best interests of each client, they are given the role of ‘policeman, detectives and

1254; Wymyss v Hopkins (1875) LR 10 QB 378; R v W [1998] STC 550 (CA (Crim Div)); R v Smith [2001] UKHL 68. Also see P Alldridge ‘Smuggling, Confiscation and Forfeiture’ (2002) 65 Modern Law Review 781. 19 A Kennedy ‘Justifying the Civil Recovery of Criminal Proceeds’ (2004) 12(1) Journal of Financial Crime 8, 18. 20 Attorney-General v Observer Ltd [1990] 1 AC 109; Attorney-General v Blake [2001] 1 AC 268. 21 Weld-Blundell v Stephens [1919] 1 KB 520; Liverpool CC v Irwin [1977] AC 239; Ali Shipping Corporation v Shipyard Trogir [1999] 1 WLR 314. 22 Seager v Copydex Ltd [1967] 1 WLR 923 per Lord Denning MR at 931, ‘The law on this subject does not depend on any implied contract. It depends on the broad principle of equity that he who has received information in confidence shall not take unfair advantage of it. He must not make use of it to the prejudice of him who give it without obtaining his consent.’ 23 Commonwealth Secretariat Money Laundering: Key Issues and Possible Action (1997). 24 Sections 19 and 20, Terrorism Act 2000. 25 J Wadsley ‘Professionals as Policemen’ (1994) Conveyancer & Property Lawyer 275. 26 J Breslin ‘Privacy – the Civil Liberties Issue’ paper presented at the 13th International Symposium on Economic Crime, Cambridge, September 10–16, 1995; Annesley v Earl of Anglesea (1743) LR 5 QB 317; Initial Services Ltd v Putterill [1968] 1 QB 396.

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even soothsayer’27 or sometimes described as ‘an unpaid, involuntary High Street watch of pressed informants.’28 Another concern relates to whether the SAR reporting regime violates the privilege against self-incrimination under Article 6 of the European Convention on Human Rights, which is essential to ensure a fair trial and avoid miscarriages of justice. Since suspicious activity reports (SARs) are supplied by the third party (that is, the financial institution), the reports exist independently of the will of the defendant, therefore, it does not violate the defendant’s own right not to incriminate himself.29 Lawyer and Client Confidentiality The rule of confidentiality of communications between lawyers and their clients can be traced back to as early as 1500s in Berd v Lovelace.30 In R v Derby Magistrates’ Court, ex parte B, Lord Taylor confirmed the rule of legal professional privilege in respect of legal advice or proceedings as fundamental to the criminal justice system. However, items held with the intention of furthering a criminal purpose are not considered in the subject of legal privilege.31 The principle which runs through all these cases, and the many other cases which were cited, is that a man must be able to consult his lawyer in confidence, since otherwise he might hold back half the truth. The client must be sure that what he tells his lawyer in confidence will never be revealed without his consent. Legal professional privilege is thus much more than an ordinary rule of evidence, limited in its application to the facts of a particular case. It is a fundamental condition on which the administration of justice as a whole rests.32

The tipping off offences under sections 333 and 342 of the Proceeds of Crime Act 2002 create specific concerns among financial institutions and professionals due to the fact that a criminal offence can be committed without the requirement of mens rea, intent or recklessness. In addition, there is no clear indication of the restriction on what is prohibited from disclosure or to whom a disclosure is made under section 333 and it does not explain the meaning of ‘likely to prejudice’ which imports an objective standard.33 There are specific exemptions from the offence of ‘tippingoff’ which provide that it is not an offence for the lawyer to advise the client of 27 D Kirk ‘Serious Fraud – A Banker’s Perspective’ in J Norton (ed.) Banks: Fraud and Crime (Lloyd’s of London Press London 1994). 28 M Levi ‘Cleaning up the Bankers’ Act: the United Kingdom Experience’ in B Fisse et al The Money Trail: Confiscation of Proceeds of Crime, Money Laundering and Cash Transaction Reporting (Law Book Company Sydney 1992). 29 Saunders v United Kingdom (1996) 23 EHRR 313; Brown v Stott [2001] 2 LRC 612. 30 Berd v Lovelace (1577) 21 ER 33; also see P Alldridge Money Laundering Law: Forfeiture, Confiscation, Civil Recovery, Criminal Laundering and Taxation of the Proceeds of Crime (Hart Publishing Oxford United Kingdom 2003) 265–269. 31 Section 333(4) of the Proceeds of Crime Act 2002, also see R v Central Criminal Court, ex parte Francis & Francis [1989] 1 AC 346; Finers v Miro [1991] 1 WLR 35. 32 R v Derby Magistrates Court, ex parte B [1995] 4 All ER 526 at 540–541. 33 Rex Tedd QC ‘Tipping Off’ paper presented at the Financial and Regulatory Crime Club (5 April 2005).

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a disclosure if the disclosure is in connection with the giving by the adviser of legal advice to the client or to any person in connection with legal proceedings or contemplated legal proceedings.34 In Finers v Miro,35 it was held that because the solicitor was potentially liable as a constructive trustee to the beneficiaries of the misappropriated funds, the Court would direct that the solicitor notify the interested persons of the possible fraud. However, this may not always be practical, such as where the beneficiaries are unknown to the intermediary. The Court of Appeal in Bowman v Fels36 has clarified the solicitor’s duty to report money laundering and overruled P v P.37 It makes it clear that while proceedings are being undertaken, including preparations for litigation, negotiations and settlement, solicitors are protected by the fact that material passed to them falls within the definition of legal privilege. However, once those proceedings have concluded, the solicitor must re-examine the circumstances to decide whether a disclosure should be made to the relevant authority. Another implication from this case is that no offence is committed if the tipping off occurs before disclosure within sections 337 and 338 has taken place. Another difficulty relates to the fees of lawyers, the lawyer will be engaged in money laundering if the fees paid to the lawyer are from the proceeds of crime which is liable for confiscation. The Proceeds of Crime Act 2002 provides a specific exception to such offence if the sum paid is in exchange for adequate consideration.38 Besides, the Act expressly excludes the property or the subject matter of the restraint proceedings from being available to pay for litigation.39 Despite the legal profession’s opposition against the extension of legal privilege to other profession, the same protection, albeit limited, when reporting suspicious transactions to the authority is now available to external accountants, auditors and tax advisers following the amendments of the Proceeds of Crime Act 2002 and Money Laundering Regulations 2003 approved by the Privy Council in February 2006.40 Banker and Client Confidentiality The first banking secrecy statute was created in Switzerland and was originally intended to protect people from arbitrary or unlawful interference. Banking secrecy is closely related to individual privacy, while some people consider it contractual in nature.41 However, banking secrecy is often exploited to protect illegal interests. It provides a safe harbour for money laundering activities 34 Sections 333(2) and (3), Proceeds of Crime Act 2002. 35 Finers v Miro [1991] 1 WLR 35. 36 Bowman v Fels (2005) EWCA Civ 226. Also see S Schneider ‘Testing the Limits of Solicitor-Client Privilege: Lawyers, Money Laundering, and Suspicious Transaction Reporting’ (2006) 9(1) Journal of Money Laundering Control 27. 37 P v P [2003] EWHC 2260. 38 Section 329(2)(c), Proceeds of Crime Act 2002. 39 Section 41(4), Proceeds of Crime Act 2002. 40 ‘Accountants Get “Clarity” on Anti-Money Laundering Duties’ AccountancyAge. Com (20 February 2006), available at , accessed 22 February 2007. 41 PM Bahamas ‘Civil Liberties and Privacy – The Question of Balance’ (1997) 1(2) Journal of Money Laundering Control 177.

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through which the criminals are able to separate their identities from the funds. Thus, it is argued that banking secrecy should not be absolute and should be lifted in the fight against money laundering.42 The Court of Appeal in Tournier v National Provincial and Union Bank of England 43 held that there is a duty of confidence owed by a bank to its customer, however, the constitutional right to privacy is not absolute, but qualified by certain specified exceptions including (i) where disclosure is under compulsion by law; (ii) where there is a duty to the public to disclose; (iii) where the interests of the bank require disclosure; and (iv) where disclosure is made by express or implied consent of the customer.44 Therefore, disclosure of suspicious transactions reports, production orders, customer information orders and account monitoring orders, which are made without a customer’s knowledge or consent, can be justified for the purpose of preventing or detecting crime that falls within the ambit of the exceptions for public interest. The banks and their officials are often put in a very difficult position when dealing with the dilemma between the criminal liability of tipping off and their actual contractual and fiduciary obligations with their customers,45 or the possibility of being held liable as a constructive trustee under the heads of knowing assistance of a trustee and knowing receipt of and dealing with a trust fund if the misappropriated funds are traced into a customer’s account.46 It was held in K Ltd v National Westminster Bank Plc 47 that where a bank had a suspicion that the money in its customer’s account was criminal property and made an authorised disclosure, there could be no breach of contract for the bank to refuse to honour its mandate as the contract would be suspended until the illegality was removed and the court could not and should not compel the bank by interim injunction to act illegally by complying with its customer’s payment instructions. The Act has not made clear what constitutes a disclosure, for instance, the delay of financial transactions or the termination of an existing relationship may itself constitute ‘tipping off’. Though disclosure to the relevant authority might protect the bank against criminal liability under section 331, it does not guarantee against tipping off offences nor does it preclude the bank from civil liabilities.48 In Bank of Scotland v A Ltd,49 the bank was concerned about large sums paid into the customer’s 42 H Ping ‘Banking Secrecy and Money Laundering’ (2004) 7(4) Journal of Money Laundering Control 376; also see P Alldridge Money Laundering Law: Forfeiture, Confiscation, Civil Recovery, Criminal Laundering and Taxation of the Proceeds of Crime (Hart Publishing Oxford United Kingdom 2003) 270. 43 Tournier v National Provincial and Union Bank of England [1924] 1 KB 461 44 Tournier v National Provincial and Union Bank of England [1924] 1 KB 461 per Lord Justice Bankes at 473; applied in Barclays Bank Plc v Taylor [1989] 3 All ER 563; Turner v Royal Bank of Scotland Plc [1999] 2 All ER (Comm) 664. 45 Tayab v HSBC Bank Plc [2004] EWHC 1529. 46 Bank of Scotland v A Ltd [2001] WCA Civ 52. Also see C Nakajima Conflicts of Interest and Duty (Kluwer Dordrecht 1999). 47 K Ltd v National Westminster Bank Plc [2006] EWCA Civ 1039. 48 C v S [1999] 2 All ER 343. 49 Bank of Scotland v A Ltd [2001] WCA Civ 52; Tayeb v HSBC Bank Plc [2004] 4 All ER 1024.

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account and was informed by the relevant authorities that the customer was under investigation. The bank faced a dilemma between the liability as a constructive trustee if it paid out money that was the proceeds of fraud and criminal liability for ‘tipping off’ if it refused to make payment. The Court of Appeal drew attention to the power of the Court to grant interim advisory declarations. Such a declaration almost certainly protects the bank from criminal proceedings. However, the Court emphasised the ‘commercial responsibility’ of financial institutions to make their own decisions unless there is a ‘real dilemma’ requiring the intervention of the Court. Anti-money laundering and counter-terrorism legislation may function well as a criminal law statute; however, it creates a dilemma between commercial responsibility and criminal liability of tipping off. In addition, the impact on the civil liabilities of breach of confidentiality and damage to customer relationships are unclear. Indeed, it poses enormous challenges to banks in implementing the robust anti-money laundering and counter-terrorist financing measures.50 There is also an increasing tension between preserving privacy rights and enforcing a strong and effective anti-money laundering regime. Besides, there is the lack of cost-benefit analysis on the effectiveness of the anti-terrorism and anti-banking secrecy laws.51 Therefore, rushing into adopting anti-banking secrecy laws and copying failed policies might not be the best strategies to stop organised crime and terrorism;52 instead it might even encourage discrimination.53 Defamation and Third Party Liability Since an erroneous allegation of involvement in money laundering can be damaging to a person’s reputation and career, there is the possibility of a defamation action as mentioned in Chapter 6. A concern which anyone caught up in suspected money laundering may have is: ‘Will statements made to the authorities be actionable as defamatory?’ It may be argued that since the report is made pursuant to a statutory obligation, it would be covered by the doctrine of qualified privilege. In such circumstances, a defamation suit is likely to fail unless the person filing the report acted with malice. In Taylor v Director of the Serious Fraud Office,54 it was held that where an investigator is seeking evidence in support of a criminal charge under the money laundering regime, any out of court statement, which forms part of the process of such an investigation, should be immune from a libel action. This principle is extended beyond statements made to the police or Serious Fraud Office in Mahon

50 RB Johnston and I Carrington ‘Protecting the Financial System from Abuse: Challenge to Banks in Implementing AML/CFT Standards’ (2006) 9(1) Journal of Money Laundering Control 48. 51 P Latimer ‘Bank Secrecy in Australia: Terrorism Legislation as the New Exception to the Tournier Rule’ (2004) 8(1) Journal of Money Laundering Control 56. 52 Editorial (2002) 23(12) The Company Lawyer 358. 53 P Binning ‘In Safe Hands? Striking the Balance between Privacy and Security – AntiTerrorist Finance Measures’ (2002) 6 European Human Rights Law Review 737. 54 Taylor v Director of the Serious Fraud Office [1999] 2 AC 177.

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v Rahn55 to cover officers of a bank who were carrying out an investigation as to whether individual stockbrokers were fit and proper persons to carry on investment business. The Court held that no claim on the statements made in the letter to the Securities Association could be brought for defamation. Another concern is the potential of third party liability. For example, if the bank suspects that its client, who is in a contract with a third party, is engaged in money laundering and makes a disclosure to the authority which results in the client’s account being frozen causing a breach of the contract between the client and the third party. Then the question is ‘would the bank be liable for inducement for breach of contract or be sued by the third party for negligence if the funds of the client prove to be genuine?’ Indeed, many issues in relation to civil liability have not been resolved. The Money Laundering Directive has offered a broad-brush solution by proposing that those who provide disclosure in good faith should be relieved from ‘liability of any kind’. Article 9 of the European Union Money Laundering Directive on Prevention of Use of Financial System for the Purpose of Money Laundering indicates that potential conflicts may be prevented by prescribing that disclosure to the reporting authority ‘shall not give rise to any civil liability’. Nevertheless, a more comprehensive approach to the issue of immunities should be taken to protect those obliged to making disclosure from, not just criminal liability, but also civil liability. Money Laundering Regulations and Data Protection Act The Data Protection Act 1998 supersedes the Data Protection Act 1984 and gives full effect to the European Directives on Data Protection. Under the Data Protection Act 1998, data may only be processed in accordance with the Data Protection Principles:56 (i) (ii)

(iii) (iv) (v) (vi) (vii)

(viii)

55 56

Personal data shall be processed fairly and lawfully. Personal data shall be obtained only for one or more specified and lawful purposes, and shall not be further processed in any manner incompatible with that purpose or those purposes. Personal data shall be adequate, relevant and not excessive in relation to the purpose or purposes for which they are processed. Personal data shall be accurate and, where necessary, kept up to date. Personal data processed for any purpose or purposes shall not be kept for longer than is necessary for that purpose or those purposes. Personal data shall be processed in accordance with the rights of data subjects under this Act. Appropriate technical and organisational measures shall be taken against unauthorised or unlawful processing of personal data and against accidental loss or destruction of, or damage to, personal data; and Personal data shall not be transferred to a country or territory outside the European Economic Area unless that country or territory ensures an adequate level of protection for the rights and freedoms of data subjects in relation to the processing of personal data.

Mahon v Rahn (No. 2) [2000] 4 All ER 41. Schedule 1, Part I of the Data Protection Act 1998.

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Under the money laundering legislation, business in the regulated sector has the obligation to report reasonable suspicions of money laundering and terrorist financing, failure to disclose might result in an offence.57 Besides, tipping off a person that a disclosure has been made also constitutes an offence.58 Both offences can be committed on a negligence basis. The conflict between anti-money laundering and data protection legislation arises between the duty of the regulated sector to report suspicions of money laundering as well as the need to avoid committing tipping off offences and the obligation on each data controller59 to allow individuals access to their personal data held by the controller in accordance with the data subject60 access right under section 7 of the Data Protection Act 1998. As a result, the data controller is constantly performing a balancing act as to whether he should or should not disclose. If the data controller makes the disclosure to the police or the Money Laundering Reporting Officer (MLRO), he can avoid the offence of failure to disclose and use it as a defence to potential money laundering offences; however, he might risk damaging the relationship with an innocent customer. If the data controller complies with the data subject access rights to the data, he might be committing the offence of tipping off. If the data controller discloses to a third party, other than the police, he might incur criminal liabilities of tipping off as well as other civil liabilities of breach of confidence, defamation and malicious prosecution. Although there are exemptions61 to the rights of data access under the Data Protection Act 1998 for data processed for the prevention or detection of crime or the apprehension or prosecution of offenders to the extent to which the application of those provisions to the data would be likely to prejudice those matters, the Act does not explain the meaning of ‘likely to prejudice’. Thus, the data controller needs to make a judgement as to whether or not prejudice is likely in relation to the circumstances of each particular case as these exemptions are not regarded as a blanket exemption.62 The Treasury has issued Guidance Notes63 on the interaction between the antimoney laundering legislation and the Data Protection Act which emphasises that each request for information must be considered on its merits. However, the Guidance Notes has not covered issues of civil liability and potential damage to customer relationships when the disclosure turns out to be unnecessary and the customer subsequently obtains 57 Section 21A of the Terrorism Act 2000; sections 330 to 332 of the Proceeds of Crime Act 2002. 58 Sections 333 and 342, Proceeds of Crime Act 2002. 59 Section 1 of the Data Protection Act 1998 defines data controller as the person who determines the purposes for which and the manner in which any personal data are, or are to be, processed. 60 Section 1 of the Data Protection Act 1998 defines data subject as an individual who is the subject of personal data. 61 Section 29, Data Protection Act 1998. 62 Equifax Europe Ltd v the Data Protection Registrar (unreported 28 June 1991). 63 Her Majesty’s Treasury The UK’s Anti-Money Laundering Legislation and the Data Protection Act 1998 – Guidance Notes for the Financial Sector (2002 April), available at , accessed 22 February 2007.

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a copy of the disclosure. The Guidance Notes suggests the data controller to obtain direction from the authority (the former National Criminal Intelligence Service) on whether an investigation would be prejudiced by making the disclosure to the data subject under section 7 of the Data Protection Act 1998. However, the Guidance Notes has not taken into account the practical issues and the workload of the authority since the implementation of the Proceeds of Crime Act 2002.64 Since the Freedom of Information Act 2000 came into force on 1 January 2005, any individual has a general right of access to information held by or on behalf of public authorities. An applicant has a right to be told whether the information requested is held by that authority and, if it is held, to have it communicated to him. The Act recognises that there are grounds for withholding information and provides a number of exemptions from the right to know. Part II sets out the circumstances in which information is ‘exempt information’ for the purposes of the Act. Some of the exemptions confer to a class of information known as an ‘absolute exemption’ which includes information in relation to investigations and proceedings conducted by public authorities; others rely on the application of a prejudice test or a public interest test in disclosure. Civil Recovery and Taxation Powers: Are They Working? Evaluation of the Civil Recovery Regime In 2003–2004, the Key Performance Indicators for the Assets Recovery Agency included the disruption65 of 35 criminal enterprises at all levels of criminality, obtaining orders and issuing tax assessments to the value of at least £10 million and realisation of confiscation receipts to the value of at least £5 million. During this period, the Agency managed to disrupt 24 criminal enterprises, freeze £14.1 million worth of property by the High Court and restrain £4.4 million. The reason for the shortfall was mainly the result of the length of time taken to progress civil recovery cases through court which was longer than initially expected.66 In 2004–2005, the Key Performance Indicators included the disruption of 35 criminal enterprises at all levels of criminality, adoption of a further 35 cases, early restraint of assets to the value of £15 million, obtaining recovery orders and issuing tax assessments to the value of at least £15 million and realisation of receipts in civil recovery and taxes cases to the value of £10 million. The Agency achieved three out 64 C Rees, K Brimsted & H Smith ‘Charybdis or Scylla? – Navigating a Course between Money Laundering Law and Data Protection’ (2003) 19(1) Computer Law & Security Report 25. 65 According to the Assets Recovery Agency, disruption is defined as (a) the freezing of assets through a restraint or freezing order, Mareva injunction or interim receiving order; or (b) where freezing has not taken place either (i) making a confiscation or recovery order; or (ii) obtaining voluntary settlement/payment, where no order has been made; or (iii) undertakings given not to deal with assets; or (c) the issue of a tax assessment. 66 Assets Recovery Agency Annual Report 2003/04 and Business Plan 2004/05 (Assets Recovery Agency London 2004) Annex A.

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of the five main targets, including the disruption of 36 criminal enterprises, adoption of 51 cases and early restraint of £17 million of assets. However, the impact of legal challenges67 delayed the progress of the civil recovery cases in the High Court resulting in only £5.6 million in civil recovery orders and tax assessments granted and £4.7 million in receipts collected.68 Other reasons for the lengthy litigation process included the issue of legal aid and the fact that section 252(4) of the Proceeds of Crime Act 2002 expressly prevented the use of frozen property to pay legal expenses. The Court was reluctant to hear the case unless the respondent had legal representation, thus, a new provision to modify its effect was introduced in the Serious Organised Crime and Police Act 2005.69 Moreover, the rules for disclosure were unclear since no civil recovery case had yet reached the stage of full trial in 2005. In 2005–2006, the Key Performance Indicators included the disruption of 70 criminal enterprises at all levels of criminality, adoption of a further 100 cases, early restraint of assets to the value of £25 million, obtaining recovery orders and issuing tax assessments to the value of at least £16 million and realisation of receipts in civil recovery and taxes cases to the value between £6 to £12 million. Once again, the Agency achieved, indeed over performed, in three of the five main targets, including the disruption of 100 criminal enterprises, adoption of 108 cases and early restraint of £85.7 million of assets. However, only £4.6 million in civil recovery orders and tax assessments were granted and only £4.1 million in receipts were collected.70 To summarise the performance of the Agency since its establishment in 2003, as at 31 March 2006, it had disrupted a total of 160 criminal enterprises, obtained 23 confiscation orders of a value of £13.5 million in the criminal confiscation cases and obtained £9.6 million worth of recovery orders, voluntary settlement and tax agreements in 24 cases. However, only £9.2 million of receipts were actually realised and collected in the tin-box.71 The Agency has been criticised for not meeting its targets and failing to raise enough money to cover its budget.72 The National Audit Office 67 Assets Recovery Agency Annual Report 2004/05 and Business Plan 2005/06 (Assets Recovery Agency London 2004) 15–17. 68 Assets Recovery Agency Annual Report 2004/05 and Business Plan 2005/06 (Assets Recovery Agency London 2004) Annex A. 69 The Proceeds of Crime Act 2002 (Legal Expenses in Civil Recovery Proceedings) Regulations 2005 (No. 3382). 70 Assets Recovery Agency Annual Report 2005–06 and Business Plan 2006–07 (Assets Recovery Agency 2006, Annex A, 59. 71 This information is calculated by the author using the figures in the Annual Reports of the Assets Recovery Agency since 2003. Also see AVM Leong ‘Civil Recovery and Taxation Regime: Are These New Powers under the Proceeds of Crime Act 2002 Working?’ (2006) 27(12) Company Lawyer 362; A Kennedy ‘Putting Robin Hood Out of Business: A Proceeds of Crime Case Study’ (2006) 9(1) Journal of Money Laundering Control 19; A Kennedy ‘Civil Recovery Proceedings under the Proceeds of Crime Act 2002: The Experience So Far’ (2006) 9(3) Journal of Money Laundering Control 245; A Kennedy ‘An Evaluation of the Recovery of Criminal Proceeds in the United Kingdom’ (2007) 10(1) Journal of Money Laundering Control 33. 72 ‘Assets Recovery Agency “Failing”’ BBC News (14 June 2006), available at , accessed 22 February 2007; ‘Agency Aims

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also found that no feasibility study was carried out before the Agency’s creation to assess its likely performance or appropriate targets. There are still four police forces which have not yet referred a single case to the Agency. Besides, case management information is considered poor. There is no central database of cases and staff refer to different systems which hold ‘contradictory and incomplete’ information.73 In order to improve its performance and meet the challenging targets in 2006– 2007, the Assets Recovery Agency should take a more active role in communicating and educating law enforcement agencies and other stakeholders on the application of civil recovery and taxation proceedings. The Agency also needs to implement new policy on receiverships and settlements so as to decrease the costs of casework and increase the amount of receipts realised. Indeed, it is more important to increase the quality of referrals rather than the quantity, besides, taxation powers should be used more often. On 30 June 2006, Her Majesty’s Revenue and Customs announced the creation of a new Criminal Taxes Unit that will use taxation ‘as a way of disrupting crime’. Sir David Varney, Chairman of Her Majesty’s Revenue and Customs, said: ‘It will use every method of taxing and penalising suspected criminals, taking away their profits made from crime. The new Criminal Taxes Unit will aim to ensure that suspected criminals who have gained from their criminal activity are made to pay their fair share of tax.’74 Furthermore, the Assets Recovery Agency needs to implement its international powers efficiently and develop good working relationship with overseas counterparts since civil recovery cases increasingly involve crossborder elements. Reasons for Variances There are several factors which explain the shortfall of the civil recovery regime. Since civil forfeiture is a significant extension of the government’s powers to deal with the proceeds of crime without a conviction to the criminal standard, there have been several legal challenges. Some fundamental concerns in relation to the civil recovery proceedings include the lack of proportionality, the breaching of the presumption of innocence and double jeopardy rule. The impact of such legal challenges has delayed the progress of civil recovery cases as discussed above. The lack of understanding and experience of civil recovery proceedings among law enforcement agencies and interim receivers also hinder the progress of the civil recovery cases. The law enforcement agencies are confused with the criteria for civil recovery and confiscation proceedings which often result in overlaps of resources. Until 31 March 2006, the Agency has received in total 397 referrals from different

to Take Crime Gains’, BBC News (14 June 2006), available at , accessed 22 February 2007. 73 ‘Assets Recovery Agency “A Mess”’ The Guardian (21 February 2007), available at , accessed 22 February 2007. 74 P Inman ‘Criminal taxes hit squad aims to give fraudsters the Al Capone treatment’, The Guardian (30 June 2006) , accessed 22 February 2007.

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law enforcement agencies and authorities. Only about 50% of all referrals have been adopted by the Agency which reflects the low quality of the referrals received by the Agency.75 Besides, the interim receivers have not yet fully utilised their new powers under the Proceeds of Crime Act 2002. In addition, staff turnover is high and a third of financial investigators trained by the Assets Recovery Agency either retired or left shortly after qualifying. Furthermore, civil recovery investigation is obstructed by the lack of international powers. Part XI of the Proceeds of Crime Act 2002, which empowers the Agency to seek and provide overseas cooperation in asset freezing and recovery, only came into effect in January 2006. However, even after Part XI has been enacted, the mutual recognition of asset freezing and confiscation orders among overseas authorities will involve a lengthy process and the standard of proof required might be higher than the balance of probabilities since not all the countries have civil recovery proceedings. Evaluation of the Taxation Regime The Assets Recovery Agency adopted seven cases for taxation during 2003–2004 and estimated assessments were issued during 2004–2005 in six cases with total amount in excess of £1 million and the tax, National Insurance contributions and penalties totalled over £500,000.76 The Agency had successfully obtained taxation production orders under section 23 of the Taxes Management Act 1970 and had developed a good working relationship with the Special Commissioners. As at 31 March 2006, the Agency’s tax team were working on 24 cases, in which seven freezing orders had been granted in five cases and estimated assessments had been issued in 12 cases with a total of £3.2 million.77 However, compared to the Irish system, the taxation powers under the Proceeds of Crime Act 2002 have not been fully utilised. Taxation proceedings have certain advantages over civil recovery and confiscation proceedings which include (i) taxation deals with ‘income’ rather than ‘property’ which means that assets acquired prior to, or after, the period of criminality can be seized in settlement of the debt; (ii) tax assessment is not constrained by the prerequisites for civil recovery proceedings which requires the proceeds to be tangible, accessible, linked to criminality and acquired within the last 12 years; (iii) criminal proceeds do not have to be specifically identified or quantified; (iv) assessments can cover up to 20 years instead of 12 years in civil recovery proceedings; (v) future earnings can be used to settle the debt; (vi) the costs of tax cases will generally be lower as there are no searches and no receivers involved during the investigation;

75 AVM Leong ‘Civil Recovery and Taxation Regime: Are These New Powers under the Proceeds of Crime Act 2002 Working?’ (2006) 27(12) Company Lawyer 362, 366. 76 Assets Recovery Agency Annual Report 2004/05 and Business Plan 2005/06 (Assets Recovery Agency London 2004) 20. 77 Assets Recovery Agency Annual Report 2005/06 (Assets Recovery Agency London 2006) 29.

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and (vii) it can be easier to deal with smokescreens, such as ‘front’ companies, in certain instances.78 However, there are certain shortcomings of taxation proceedings. The investigation, assessment, determination and enforcement of a tax debt involve a cumbersome and lengthy process which is expected to take at least 12 to 18 months to reach conclusion. Assets cannot be frozen or restraint for repaying tax debts and no Part VIII investigatory powers under the Proceeds of Crime Act 2002 are available for taxation investigations. The complexity of tax cases also makes forecasting the outcome of the cases almost impossible; in fact, the taxation process is less certain compared with the procedures for confiscation and civil recovery proceedings. In addition, the potential yield from confiscation and civil recovery proceedings will almost invariably be higher than that from taxation. The highest yield from taxation, including penalty and interest, would be at a maximum of only 80% of the criminal proceeds. The reason being criminals are entitled to the same personal allowances, thus, consideration must be given to the expenses or costs under tax assessments. In other words, criminals are, in effect, allowed to benefit from a percentage of their proceeds. Furthermore, revenue confidentiality rules limit the amount of publicity on taxation cases, therefore, reducing the deterrent value.79 Taxation powers under Part VI of the Proceeds of Crime Act 2002 have raised a number of legal issues in taxing the proceeds of crime which has been commonly seen as untaxable. First of all, the qualifying condition requires the Director of the Assets Recovery Agency to have reasonable grounds to suspect that there has been income which arises to a person and from criminal conduct and that income is chargeable to income tax or is a chargeable gain. In other words, the income derives from the criminal conduct must somehow fit into one of the Schedules of income tax. The most relevant in this case would be a charge of tax in respect of income from trade, profession and vocation under Schedule D. This means that those activities, which are capable of being a trade but merely tainted with illegal activities, would satisfy this qualifying condition.80 However, the real problem lies with those activities which can never be done legally and are not capable of being a trade as there is no supply of goods and services. Crimes, such as burglary, theft, robbery, excise duty evasion, advance fee-fraud, fall into this category. Nevertheless, the situation could be reconciled by defining burglary, theft and robbery as a vocation and income from excise duty evasion is chargeable to tax as it could be accompanied with the buying and selling of smuggled goods which underlay the evasion. Whether such tax cases would be successful depends on how far the Agency pushes the boundaries of the case law. Secondly, the ‘no-source’ provision under section 319 of the Act contradicts with the qualifying condition that the Director must have reasonable grounds to suspect that there has been income which is chargeable to 78 AVM Leong ‘Civil Recovery and Taxation Regime: Are These New Powers under the Proceeds of Crime Act 2002 Working?’ (2006) 27(12) Company Lawyer 362, 367. 79 AVM Leong ‘Civil Recovery and Taxation Regime: Are These New Powers under the Proceeds of Crime Act 2002 Working?’ (2006) 27(12) Company Lawyer 362, 367. 80 Minister v Smith [1927] AC 193; PC and Lindsay Woodward and Hiscox v Commissioners of Inland Revenue 16 TC 43; Mann v Nash 16 TC 523; Southern v AB 18 TC 59.

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income tax or is a chargeable gain and this income has a causative link to criminality, when the Director does not even know the source of the income.81 Thirdly, similar concerns as to whether Articles 6 and 7 of the European Convention on Human Rights apply to the taxation jurisdiction will depend on whether the raising of an assessment to income tax constitutes a ‘criminal charge’.82 In fact, there are many more issues under Part VI that need to be clarified and perhaps more political and public support in the taxation regime is required to move this new taxation regime forward, implement the necessary amendments and widen the investigative powers for taxation investigations.83 Is the Risk-Based Anti-Money Laundering Strategy Sufficient? Anti-Money Laundering Strategy Cracking down on money laundering is a way to weaken the organisation of the criminal enterprises without confronting them physically when traditional methods of fighting them directly and imprisonment have shown their limitations. It is also a way to suppress the ultimate purpose for economic gain and the means for doing further harm. Anti-money laundering strategy is implemented through a series of legislative measures taken by the Government involving (i) the prevention of the use of financial system for purpose of money laundering; (ii) the detection of money laundering through the implementation of specialised investigative measures; and (iii) the suppression of money laundering activities and associated crimes through confiscation, enforcement and preventive measures, such as freezing and seizing assets. The latest Anti-Money Laundering Strategy 84 published by Her Majesty’s Treasury contains three main principles namely effectiveness, proportionality and engagement. First of all, an effective money laundering strategy should have a clear structure of controls and systems against money laundering, which is based on a robust, coherent framework and in line with existing international standards, primary and secondary legislation, industry and professional standards and regulations. Secondly, the British authorities should adopt a risk-based approach in

81 T Solecki ‘Taxing the Untaxable?’ Taxation (27 November 2003) 216; also see P Hunt ‘Criminal Assets Bureau and Taxation Matters’ paper presented at the Taxation Conference of the Bar Council of Ireland (21 July 2001). 82 Georgiou v United Kingdom [2001] STC 80; Customs and Excise Commissioners v Han and another and other appeals [2001] STC 1188; King v Walden [2001] STC 822; Ferrazzini v Itlay [2001] STC 1314; King v United Kingdom (No.2) [2004] STC 911; also see P Baker ‘Taxation and the ECHR’ (2000) British Tax Review 211; P Alldridge Money Laundering Law: Forfeiture, Confiscation, Civil Recovery, Criminal Laundering and Taxation of the Proceeds of Crime (Hart Publishing Oxford United Kingdom 2003) 250–253. 83 AVM Leong ‘Civil Recovery and Taxation Regime: Are These New Powers under the Proceeds of Crime Act 2002 Working?’ (2006) 27(12) Company Lawyer 362, 367. 84 HM Treasury Anti-Money Laundering Strategy (HMSO London 2004 October), available at , accessed 22 February 2007.

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money laundering controls which should only intervene when necessary. Resources should be allocated on a proportionate and cost-effective basis in relation to concrete risks and impact faced by the regulated sector. Through improving the evidence base, flexible and workable high-level objectives should be imposed rather than prescriptive and detailed requirements. The United Kingdom takes a lead role in the work of the Financial Action Task Force to improve the evidence base underpinning international standards. Within the United Kingdom, the former National Criminal Intelligence Service, in conjunction with the Assets Recovery Agency, has provided in-depth analysis and assessments of new and emerging money laundering typologies to law enforcement agencies. The Financial Services Authority has set up an ID Working Group to address the issues around customer identification. The Home Office continues to research on the level of money laundering in the United Kingdom and the value of the stock of criminal assets available for confiscation. Thirdly, a joined-up partnership approach between government, law enforcement agencies and regulatory bodies is essential to maintain and strengthen the element of self-regulation, flexibility and discretion in providing specific guidance on how objectives and framework set by the Government should be interpreted and implemented by the industry. Risk-Based Approach: Role of the Financial Services Authority A risk-based approach in money laundering and terrorist financing controls is adopted by the British authorities. This means that resources should be allocated on a proportionate and cost-effective basis in relation to the level of real risks and impact faced by the regulated sector. The risk-based approach recognises that the threat posed to the regulated firm by money laundering and terrorist financing varies across customers, jurisdictions, products and delivery channels. It allows the firm to differentiate between its customers in a way that matches the risk in its particular business so that senior management can apply its own approach to the firm’s compliance procedures, arrangements, systems and control in particular circumstances. As a result, the firm should be able to focus its resources on the minority of customers who represent a higher risk, simplify the document requirements and reduce unnecessary duplication of identity checks. Indeed, not all firms will require complex or highly sophisticated anti-money laundering and counter-terrorist financing procedures to meet the requirements established by the Financial Services Authority. Each regulated firm should identify the money laundering and terrorist financing risks that are relevant to the firm. It should assess the risks presented by the firm’s particular customers, products, delivery channels and geographical area of operation in order to design and implement controls to manage and mitigate these assessed risks. The firm should also monitor and improve the effective operation of these controls as well as recording in an appropriate manner. Since the advent of N2 on 30 November 2001 under the Financial Services and Markets Act 2000, the Financial Services Authority has taken over the responsibilities of nine regulators. It is now one of the most powerful financial regulators in the world with clearly defined objectives and a single set of coherent functions and powers. There is no doubt that the Financial Services Authority has encountered certain

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external and internal challenges during the transformation from rule-based regulation into its new risk assessment framework85 and in applying the risk-based approach consistently across the industry sector.86 The Financial Services Authority supports a risk-based anti-money laundering approach through supervision and enforcement actions. When devising specific Money Laundering Rules, the Financial Services Authority has undertaken cost-benefit analysis and Regulatory Impact Assessment.87 It works with the financial services industry and other stakeholders to achieve an effective but proportionate approach to ‘Know Your Customer’ requirements.88 It has set up an ID Working Group to address the issues around customer identification and launched a new regime on ‘Defusing the ID Issue’89 in April 2004 which aims to promote a more risk-based and targeted approach, enhance the culture and practice of compliance, facilitate and reduce the cost of the audit and to capture the information about a customer’s identity that is of most use to law enforcement. The Financial Services Authority is committed to tackle the ‘fear factor’, which refers to the situation when some firms adopt unduly conservative ID practices and are reluctant in pursuing a risk-based approach for fear of regulatory sanctions. The Home Office, the Passport Service and the Driver and Vehicle Licensing Agency work actively on improving the integrity of government documents and data. The Companies House has also been working on measures to guard against thieves hijacking companies’ identity or falsely representing themselves as new directors of firms. There is also the need to promote adequate awareness and understanding on the ID regime for consumers and other stakeholders. Despite the enormous efforts by the Financial Services Authority in implementing the risk-based anti-money laundering approach, the report on Anti-Money Laundering 85 Risk assessment framework comprises of risk identification, impact assessment and assessment of probability of risks materialising. 86 D Capps and S Linsley ‘The Financial Services Authority’s New Approach to Regulation’ (2001) 9(3) Journal of Financial Regulation and Compliance 245; C Sergeant ‘Risk-Based Regulation in the Financial Services Authority’ (2002) 10(4) Journal of Financial Regulation and Compliance 329; H Flight ‘Financial Regulations – Positives and Negatives’ (2003) 11(1) Journal of Financial Regulation and Compliance 6; P Parish ‘N2 + 1: A Review of FSA Enforcement and Discipline since N2’ (2003) 11(2) Journal of Financial Regulation and Compliance 146; M Foot ‘The FSA: The First Six Years’ (2004) 12(3) Journal of Financial Regulation and Compliance 201. 87 A Proctor ‘Supporting a Risk-Based Anti-Money Laundering Approach through Enforcement Action’ (2005) 13(1) Journal of Financial Regulation and Compliance 10; S Stewart ‘Coping with the FSA’s Risk-Based Approach’ (2005) 13(1) Journal of Financial Regulation and Compliance 43. 88 Financial Services Authority Reducing Money Laundering Risk: Know Your Customer and Anti-Money Laundering Monitoring Discussion Paper 22 (2003 August), available at < http://www.fsa.gov.uk/Pages/Library/Policy/DP/2003/discussion_22.shtml>, accessed 22 February 2007. 89 Financial Services Authority ID – Defusing the Issue: A Progress Report (2004 October); FSA ‘Defusing’ the ID Issue: Progress Report 2 (2005 June), available at , accessed 22 February 2007; Financial Services Authority Consumers’ Views of Proof of Identity Checks Consumer Research 36 (2005 June), available at , accessed 22 February 2007.

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Requirements: Costs, Benefits and Perceptions90 published by the Corporation of London stated that the financial services industry in the United Kingdom is more heavily regulated compared with other major financial centres. There is a lack of any comprehensive cost data and the best estimated total cost spent on anti-money laundering requirements, according to the Corporation of London report, is about £253 million. However, the United Kingdom is not perceived as being more effective in detecting and deterring money laundering than other countries such as the United States, Germany, France and Italy. The report warned that the costs of anti-money laundering regime are significantly higher as a proportion of national gross domestic product than in other major jurisdictions91 and this could drive business away from the United Kingdom. Although the extra costs of compliance have not yet hampered competitiveness, ‘the UK has approached a “tipping point” where past, current and future costs of such legislation are perceived to be greater than the benefits.’ Indeed, the costs involved in establishing, maintaining and demonstrating compliance are considerable. However, there is always the fear that even dedicated attention to compliance will only serve as mitigation should an offence actually occur. Mr Philip Robinson, financial crime sector leader at the Financial Services Authority, has acknowledged that the United Kingdom authorities do ‘not yet’ have an effective framework in the fight against money laundering even though much progress has been done since the new regime on ‘Defusing the ID Issue’ was announced in April 2004.92 Nevertheless, the concept of risk-based approach is based on sound principles; the real challenge is to generate a flexible, workable, high-level and effective framework.93 In July 2005, the Financial Services Authority published the consultation paper 05/10 ‘Reviewing the Handbook’ (CP05/10)94 on Money Laundering, Approved Persons and Training and Competence. In January 2006, the Financial Services Authority published the Policy Statement95 that dealt with the responses from the consultation paper and its final policy to the money laundering regime. There was 90 Z/Yen Limited Anti-Money Laundering Requirements: Costs, Benefits and Perceptions (Corporation of London 2005 June). Also see J Harvey ‘Compliance and Reporting Issues Arising for Financial Institutions from Money Laundering Regulations: A Preliminary Cost Benefit Study’ (2004) 7(4) Journal of Money Laundering Control 333; PricewaterhouseCoopers Global Technology Centre Anti-Money Laundering: New Rules, New Challenges, New Solutions (PricewaterhouseCoopers LLP UK 2002 October). 91 In the United Kingdom, the costs of anti-money laundering regime is 0.026% of national gross domestic product compared to 0.021% in the United States, 0.012% in Germany, 0.009% in France and 0.009% in Italy. 92 P Robinson ‘The Fight Against Money Laundering: Promoting Effectiveness’ speech presented at City & Financial Money Laundering and Financial Crime Fifth Annual Conference (22 June 2005). 93 M Gill and G Taylor ‘Preventing Money Laundering or Obstructing Business’ (2004) 44(4) British Journal of Criminology 582. 94 See , accessed 22 February 2007. 95 Financial Services Authority Reviewing our Money Laundering Regime – Feedback on Chapter 2 of CP05/10 and made text Policy Statement 06/1(2006 January), available at , accessed 22 February 2007.

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a strong support to abolish the Money Laundering Sourcebook and replace it with high-level provisions in the Senior Management Arrangement, Systems and Controls Sourcebook (SYSC). As a result, the Money Laundering Sourcebook was withdrawn in its entirety and replaced with the Senior Management Arrangement, Systems and Controls Sourcebook intended to drive a more effective, risk-based approach. The radically revised Joint Money Laundering Steering Group Guidance, which promotes a more risk-based approach, also came fully into effect at the same time. In September 2006, Langtons (IFA) Limited was fined £63,000 by the Financial Services Authority in respect of breaches of the Financial Services Authority Principles for Businesses and the Rules in the Senior Management Arrangement, Systems and Controls Sourcebook. Langtons (IFA) Limited failed to properly apportion roles and responsibilities to its senior management and failed to have systems in place to ensure that its advisers were trained and competent. As a result, its customers were unnecessarily exposed to potential risk.96 This new Financial Services Authority regime on anti-money laundering and counter-terrorist financing has important implications. Firstly, it is important to emphasise that the withdrawal of the Money Laundering Sourcebook does not imply that the Financial Services Authority is going to take a softer approach against money laundering. In fact, the priority that the Financial Services Authority accord to the fight against money laundering and terrorist financing is unchanged. Secondly, a more risk-based approach under the new regime means more flexibility over how firms manage their risks in ways that are proportionate for them so that resources can be allocated on a more cost-effective basis. Thirdly, the new regime is more about significant changes of emphasis rather than radical changes to the anti-money laundering techniques used by firms. It highlights the importance of strong senior management involvement and better flows of management information as well as appropriate monitoring procedures whereby more attention is placed on highrisk consumers/products combination than the low-risk ones. A more flexible risk management approach, systems and controls should be adopted depending on the circumstances of the firms. Fourthly, as long as firms are managing their higher risks effectively and use the right tools for the job, firms can choose whether to refocus their anti-money laundering and counter-terrorist financing activity. Besides, the difference in approach taken by individual firms will not give cause for concern, and hopefully, the so-called ‘fear factor’ can be reduced. In other words, there will be a growing diversity of anti-money laundering and counter-terrorist financing practice in different firms. It is important that the new revised Joint Money Laundering Steering Group Guidance is taken into account by the firms or the same standards of risks mitigation as suggested by the Guidance are in place. Last but not least, identity verification of customers under the new ID regime should be carried out sensibly and effectively so as to simplify the document requirements by which most individuals have to prove their identity, reduce unnecessary duplication of identity checks and encourage wider use of electronic means of identity verification. Indeed, identity verification requirements should not become a significant barrier to financial 96 Final Notice on Langtons (IFA) Limited can be found at , accessed 22 February 2007.

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inclusion. Firms should regard anti-money laundering and counter-terrorist financing tools as a means to an end and keep their focus throughout on outcomes rather than inputs.97 Furthermore, in order to meet the increased challenges of financial crime, the Financial Services Authority has created the Financial Crime and Intelligence Division in January 2007 which brings together all the financial crime expertise that was previously spread throughout the Financial Services Authority. This new division will work closely with law enforcement and other regulators to identify, assess and manage criminal threats in the financial sector in the United Kingdom. Conclusions The latest money laundering laws and regulations represent a stringent anti-money laundering strategy which results in considerable increases in compliance costs within the financial services industry as well as the non-financial sector. The risk-based approach adopted by the Financial Services Authority against money laundering is generally correct in principle. This less prescriptive approach will invariably change the way many firms operate and how money laundering and terrorist financing risk is managed in the United Kingdom. It will put a clearer focus on senior management responsibility for anti-money laundering systems and controls against real money laundering and terrorist financing risks as well as allowing more flexibility in implementing such systems and controls in the most appropriate way for the firms. Nevertheless, the anti-money laundering regime is generally perceived as a burden and cost ineffective, thus, the practice needs further development. Besides, the way that risk is conceptualised remains vague and the requirements on firms imposed by the risk-based approach involve a significant element of uncertainty. It is suggested that explicit quantifiable models of risk and related forms of risk assessments are necessary if risk-based decision making is to work effectively.98 It is extremely important to maintain the right balance between preventing money laundering and terrorist financing and not excluding people from the financial system.99 Resources should be allocated more efficiently and effectively against real money laundering and terrorist financing risks. Those affected by the system of anti-money laundering controls should be engaged through effective consultation on new proposals, communication on an ongoing basis and improved feedback. The general public should be made aware of the damage to society caused by money laundering and terrorist financing. Besides, anti-money laundering strategies must be implemented as uniform and as widespread as possible among different sectors

97 AVM Leong ‘Anti-Money Laundering Measures in the UK: A Review of Recent Legislation and FSA’s Risk-Based Approach’ (2007) 28(2) The Company Lawyer 35. 98 S Ross and M Hannan M ‘Money Laundering Regulation and Risk-Based DecisionMaking’ (2007) 10(1) Journal of Money Laundering Control 106. 99 L de Koker ‘Money Laundering Control and Suppression of Financing of Terrorism: Some Thoughts on the Impact of Customer Due Diligence Measures on Financial Exclusion’ (2006) 13(1) Journal of Money Financial Crime 26.

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and countries. Otherwise, the problem of money laundering will only be displaced to other less regulated sectors or countries. New powers under the current anti-organised crime and counter-terrorist financing legislation have attracted, and will continue, to attract human rights and civil liberty challenges. In addition, the impact of anti-money laundering laws on other areas of legal responsibility, such as obligation of confidentiality, duty of care, suitability of advice, defamation or collateral and transactional liability to third parties, has not yet been fully grasped. Thus, clarification in the legislation and perhaps evolution of the anti-money laundering regime is necessary to avoid compromising the growth and competitiveness of the economy. Indeed, the Proceeds of Crime Act 2002 and the Serious Organised Crime and Police Act 2005 are relatively new pieces of legislation which require further improvements and clarification.

Chapter 9

Conclusions and Policy Implications: The Way Forward Certain deficiencies in the implementation of the Proceeds of Crime Act 2002 (POCA 2002) are identified in this chapter leading to the requirement for further improvements to fully utilise this relatively new piece of legislation. This chapter also provides an understanding of the rationale behind the Serious Organised Crime Agency (SOCA) and its objectives, which are necessary to appreciate how this new approach will impact on the law enforcement arena. In addition, the latest developments on organised crime control in the United Kingdom are also highlighted. Finally, conclusions and policy implications on the war against organised crime are drawn. Proceeds of Crime Act 2002: A Wake-Up Call The Proceeds of Crime Act 2002 represents a powerful opportunity to disrupt and deter serious organised crime to a substantial extent provided that it is used as a routine investigative process against a wide range of criminality. According to the Joint Review published by Her Majesty’s Inspector of Constabulary (HMIC),1 there have been some positive feedbacks regarding the new assets recovery regime. There is a universal acceptance of the Proceeds of Crime Act 2002 which has worked its way up for managerial and political attention. There is also a growing body of expertise in financial investigation and asset recovery which leads to the success of several significant cases. However, since the Proceeds of Crime Act 2002 is a fairly new piece of legislation, there are some areas of deficiencies which need to be changed and improved. In general, asset recovery, confiscation and money laundering are still widely regarded as highly complex and specialised activities divorced from the mainstream business and ‘full integration into force-level priorities and objectives is the exception rather than the rule.’ In fact, implementation and adoption of the new powers has been patchy and inconsistent across the criminal justice system, thus, improvements in the strategic framework of objectives and targets, awareness levels, partnership approaches, the use of intelligence and enforcement, are required to move the whole asset recovery strategy forward.

1 Her Majesty’s Chief Inspector of Constabulary Payback Time – Joint Review of Asset Recovery Since the Proceeds of Crime Act 2002 (HMIC United Kingdom 2004). Hereafter referred to as the ‘Joint Review’.

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Lessons Learnt for Further Improvements The uncertainty about the way how the Proceeds of Crime Act 2002 could be used reflects some incoherence in the national framework for setting objectives and targets and for monitoring performance on asset recovery. It was suggested in the Joint Review that one body, perhaps the National Criminal Justice Board or Concerted InterAgency Criminal Finances Action Group (CICFA),2 should take the responsibility in securing clarity, consistency and coherence in the strategic framework of targets and objectives. Asset recovery should feature mainstream objectives rather than only marginally in the overall performance framework for criminal justice. In order to boost the capacity and incentive to assets recovery, the Recovered Assets Incentive Fund (RAIF) was set up by the Home Office in 2003–04 to resource crime reduction and asset recovery activity. In February 2004, a new incentive scheme was finally established to give the police a direct financial incentive to recover assets. ‘They will receive a third of all assets above £40 million recovered next year, increasing to 50% in 2005–06. The maximum benefit available to the police will be £43 million in 2004–05, rising to £65 million in 2005–06.’3 In February 2005, the Home Office announced that the incentive scheme would be extended to asset recovery agencies including Her Majesty’s Revenue and Customs (HMRC), the Assets Recovery Agency (ARA), the Serious Organised Crime Agency (SOCA) and the Department of Constitutional Affairs (DCA) from 2006. On one hand, it is important to clarify and communicate proactively how the incentivisation scheme works, on the other hand, it is necessary to emphasise that asset recovery must be regarded as a crime fighting tactic rather than an income generating tool. Due to the disparate nature of data collection and the confusion that arises from the mixed use of pre-POCA legislation and POCA provisions, it is difficult to assemble meaningful and validated statistics for analysing the current level of POCA successes and monitoring the performance of the overall asset recovery strategy. The difficulties in measuring the performance and targets of the Assets Recovery Agency have also been identified by the National Audit Office in February 2007. Indeed, it is naïve to evaluate the efficacy of the Proceeds of Crime Act 2002 and the anti-money laundering strategy simply by adding up the amounts of money that have in fact been successfully seized and recovered or by adding up the number of prosecutions and convictions of money laundering offences. It is not just how 2 The Concerted Inter-Agency Criminal Finances Action Group (CICFA) is a nonstatutory multi-agency group set up in 2002 to coordinate, monitor, manage and drive achievement of asset recovery targets. It is chaired by the former Her Majesty’s Customs and Excise with members from Assets Recovery Agency, Her Majesty’s Customs and Excise, Association of Chief Police Officers of England, Wales and Northern Ireland, Crown Prosecution Service, Inland Revenue, National Crime Squad, National Criminal Intelligence Service, Financial Services Authority, Home Office, Department of Constitutional Affairs, Northern Ireland Office and Department of Public Prosecutions (Northern Ireland). 3 House of Commons Hansard Written Ministerial Statements for 25 March 2004 (pt 3) ‘Money Laundering Report System’, details can be found at , accessed 22 February 2007.

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much it removes that matters but from whom it is removed. Successful disruption of criminal role models will have a deterrent effect and send the message to the local communities that ‘crime does not pay’. Hopefully, this will eventually deter criminal intent and improve public confidence in the criminal justice system. However, ‘disruption’ should not be confused with the meaning of ‘intervention’ which is a means to an end. Nor should ‘disruption’ be confused with the effect of ‘displacement’ which only relocates criminal activities to areas or jurisdictions with weaker law enforcement and regulations rather than reducing further criminal activities. The effect of ‘displacement’ is usually quite noticeable in relation to the problems of money laundering and terrorist financing. ‘Money laundering is intrinsically global. If one country or jurisdiction tightens its regulation on money laundering and the financing of terrorism, these activities will quickly shift to a less regulated environment.’4 Most countries in the United States and Europe have comprehensive anti-money laundering laws, but places like China, Southeast Asia and Africa continue to provide wide opportunities for money laundering and terrorist financing.5 Therefore, it is essential to establish meaningful and representative indicators for measuring the effect of disruption and consistency in data collection are also required to monitor the performance of the Proceeds of Crime Act 2002 so that the necessary resources can be deployed accordingly. The Joint Review has also identified a common problem of low levels of awareness of asset recovery issues among operational officers and that the mystique around financial investigation still remains. It is only recently that law enforcement agencies have been able and willing to commit the necessary resources to asset recovery. Besides, the courts and prosecutors have yet to become entirely comfortable with this body of law. There are also problems in case management and communications between the Crown Prosecution Services lawyers and police financial investigators. In addition, courts are ill-equipped to enforce confiscation orders against hidden assets especially those hidden abroad. Thus, the Crown Prosecution Services and the courts need to be geared up to manage the greater volume of POCA cases as well as improving their enforcement activity. The awareness level also needs to be raised so that police officers and financial investigators feel confident to use the new powers under the Proceeds of Crime Act 2002. Improvement is also required in the partnership approach, which is both a strength and a weakness in itself. When different law enforcement agencies work together effectively, the results can be spectacular. However, it also means that officers are operating on a crowded playing field with lots of potential for disjointed effort. Indeed, continuous effort is required to make criminal asset recovery an inclusive and seamless process. In addition to sharing intelligence, it needs to be effectively managed and coordinated. There is also ‘the need for asset recovery and financial

4 Aninat, Hardy & Johnston ‘Combating Money Laundering and the Financing of Terrorism’ (2002) 39 Finance and Development 3, 44. 5 JM Winer and TJ Roule ‘Fighting Terrorist Finance’ (2002) 44(3) Survival 87, 98–99.

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investigation to be embedded within the National Intelligence Model and possibly made the subject of a Code of Practice within the scope of the Police Reform Act.’6 Serious Organised Crime Agency: A 21st Century Strategy The Home Office published the consultation paper titled One Step Ahead: A 21st Century Strategy to Defeat Organised Crime in March 2004 to introduce a new strategy against organised crime and the establishment of the Serious Organised Crime Agency (SOCA). Home Secretary David Blunkett indicated that ‘organised crime is big business, it costs around £40 billion a year. Its effects are corrosive.’7 The challenges posed by organised crime require a wholly new strategy and a wider harm reduction approach. The basic principles of a nation-wide strategy focus on (i) reducing profit opportunities by criminal enterprises and the vulnerability of both public and private sectors to organised crime infiltration; (ii) disrupting the businesses and markets of the criminal enterprises by using the civil recovery powers, tax powers, probation powers and immigration powers more effectively; and (iii) increasing the risks for the criminals through reforming the criminal justice system.8 A number of new powers, as discussed in previous chapters, were proposed in this consultation paper including (i) the extension of Serious Fraud Office powers to compel witnesses to produce documents and answer questions; (ii) putting Queen’s evidence on a statutory footing; (iii) a national witness protection programme; (iv) a review of the laws of conspiracy; (v) a review of the existing sentencing regime; and (vi) the creation of enhanced licensing powers. The Serious Organised Crime and Police Act 2005 received Royal Assent on 7 April 2005. Part I of the Act establishes the Serious Organised Crime Agency, a single powerful agency to lead the fight against organised crime. The Serious Organised Crime Agency is a non-departmental public body reporting to the Home Office and incorporates the National Crime Squad, the National Criminal Intelligence Service, the investigative and intelligence work of Her Majesty’s Revenue and Customs9 on serious drug trafficking and the Immigration Service’s responsibilities for organised immigration crime. The core objective of the Agency is to reduce the harm to the United Kingdom caused by serious organised crime at all levels. Unlike the traditional law enforcement, the new Agency will be more proactive in the prevention and detection of crime through understanding and evaluating the problem rather than being concerned only in investigating and prosecuting specific 6 Her Majesty’s Chief Inspector of Constabulary Payback Time – Joint Review of Asset Recovery Since the Proceeds of Crime Act 2002 (HMIC United Kingdom 2004) 11. 7 See ‘Blunkett Unveils FBI-Style Police’ BBC News (29 March 2004) at , accessed 22 February 2007. 8 Home Office One Step Ahead: A 21st Century Strategy to Defeat Organised Crime Cm 6167 (HMSO London 2004 March) para 2.1. 9 Her Majesty’s Revenue and Customs is a new department set up on 18 April 2005 which merges Her Majesty’s Customs and Excise and Inland Revenue. It has 36 business units arranged in four business areas namely Operations, Process and Product Groups, Customer Units and Corporate Functions.

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offences. In other words, the Agency is an intelligence-led organisation focusing on harm reduction and information sharing through working in partnership with other law enforcement and government agencies. The Agency aims to improve the performance of intelligence and coordinates the collection, collation, analysis and dissemination of intelligence. Joint intelligence cells with officers and analysts from different law enforcement agencies are formed. The Agency analyses organised crime as a business, focuses on the crime sectors and aims to make the criminal market higher risk and less profitable. In addition to measuring the number of arrests, prosecutions and convictions, the Agency is going to put values on the economic and social costs, the size of the criminal market, the costs on the criminal justice system and the level of public concern. The Home Office has launched a new programme of research on the scale of organised crime and its harm to the society which will seek to estimate the value of the organised crime market and the economic and social costs of organised crime.10 ‘For most serious organised criminals the ability to legitimise their criminal proceeds quickly is of paramount importance. Tackling money laundering effectively is therefore fundamental to combating serious organised crime, so that criminals do not benefit materially from their crimes, and do not have the means to invest in further criminal activity.’11 Thus, one of the milestones of the Serious Organised Crime Agency is to operationalise the suspicious activity report (SAR) system by adopting a risk-based approach, updating the technology so as to allow full access to all SARs by all law enforcement agencies, clearing the backlog of SARs and addressing the issue of confidentiality.12 The review of the SAR regime was commissioned in July 2005 and was led by Sir Stephen Lander.13 The objective of the review is to determine the strengths, weaknesses, costs and benefits of the existing SAR regime and to make recommendations for the future operation of the regime under the Serious Organised Crime Agency. The 24 recommendations generated from this review can be grouped into four categories namely (i) those concerned with the Agency’s responsibility as the Financial Intelligence Unit; (ii) those concerned with the responsibility of the reporting sectors; (iii) those concerned with the obligation of confidentiality in the handling of SARs by the end users; and (iv) those concerned with the implementation of the recommendations. Part V of the review addresses the role of those who are required by law to report SARs. The review indicates that ‘the reporting machinery, and such guidance as has issued in relation to it has, however, tended to operate on a one size fits all basis, which means that it has not always been as helpful as it 10 Presentation by Paul Evans, Director of Intervention of the Serious Organised Crime Agency, at the British Bankers’ Association 4th Annual Fraud Conference held in London on 27 June 2005. Also see N Miller and A Richman Research, Evaluation and Shaping Organised Crime Policy (Home Office and Matrix Research and Consultancy 2005), available at , accessed 22 February 2007. 11 Serious Organised Crime Agency, The United Kingdom Threat Assessment of Serious Organised Crime 2006/7 (SOCA London 2006 July) 19. 12 Serious Organised Crime Agency, Annual Plan 2006/7 (SOCA London 2006). 13 Sir Stephen Lander Review of the Suspicious Activity Reports Regime (SOCA London 2006 March), available at , accessed 8 February 2007.

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could have been.’14 Even though the number of SARs has increased significantly from under 20,000 in 2000 to nearly 200,000 in 2005, the review suggested that it would not be appropriate to seek to suppress the overall number of SARs. Instead, the Agency should assist the reporting sectors in addressing the issue of uneven and poor quality SARs by reporting regularly on the functioning of the SAR regime, improving communications with reporting institutions and providing guidance and training programme. In particular, the risk-based approach in reporting SARs was suggested so as to improve the quality of the information provided in SARs and to reduce the amount of defensive reporting which is of little value. Such risk-based approach to supporting the weaker performers within the reporting sector should be devised with the relevant regulators and industry. As a result, a new regime on money laundering and terrorist financing controls has been recently adopted by the Financial Services Authority, as discussed in Chapter 8. In addition to the establishment of the new Agency, the Serious Organised Crime and Police Act 2005 also provides wider powers to enhance the ability of law enforcement agencies and prosecutors in preventing and investigating serious crimes. Disclosure notices enable prosecutors to require subjects to produce documents and answer questions on them.15 Chapter 2 of Part II of the Act enables a court to make a financial reporting order which requires the convicted person to make regular reports of specified financial information so that authorities could be alerted of indications that the person has commenced to reoffend. However, in practice, the effectiveness of such order is unclear. Conclusions and Policy Implications With globalisation and technology innovation, organised crime has evolved so rapidly that law enforcement, security services, politicians and academics do not really understand the extent, scope and impact of the problem. It is evident that organised crime, which is capable of operating transnationally, can no longer be dealt with through mechanisms that only work within national jurisdiction. The increasing threat posed by these deviant structures calls for new anti-organised crime mechanisms at both national and international levels. The former National High-Tech Crime Unit indicated that traditional organised crime has become more involved in high-tech crimes which are perceived as ‘high return and low risk’ activities. The so-called ‘Online Organised Crime’ or ‘Virtual Organised Crime Groups’ are loose networks of specialisms with international membership. They communicate through Internet relay cards and only meet in the virtual world, thus, it is extremely difficult to identify the leaders and hard to target the groups.16 As mentioned in Chapter 3, cyberterrorism also creates new opportunities 14 Sir Stephen Lander Review of the Suspicious Activity Reports Regime (SOCA London 2006 March) 25. 15 Section 62, Serious Organised Crime and Police Act 2005. 16 Presentation by Mick Deats, Detective Superintendent of the National High-Tech Crime Unit, at the British Bankers’ Association 4th Annual Fraud Conference held in London on 27 June 2005.

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for publicising the ideology behind terrorism and recruiting extremists. Al-Qaida operatives are found to be using Internet chat rooms and free anonymous email accounts to communicate and finance illicit activities. Indeed, the potential damage of cyberterrorism and cyberlaundering is not limited to national security but also extended to the private sector as well as hindering the overall economic growth.17 There is no doubt that terrorism and many other criminal acts can be financed with perfectly clean funds, such as charities, or transferred through alternative remittance systems, thus, making the tracking of terrorist financing an arduous task. If the focus is only on the source of the money moving through the financial channels, those clean funds which are intended for criminal purposes will be completely missed. Most existing anti-money laundering legislation is backward looking and targets the proceeds after the commission of the crime and does not address the financing of crimes that have not yet occurred.18 In fact, this traditional anti-money laundering strategy is not completely efficient in identifying funds transferred through the underground banking systems and ‘its application to the financing of terrorism still seems to be in its infancy’.19 Financial institutions are not fully prepared to deal with individual terrorists who open or access accounts with false identification. Indeed, the suspicious nature of SARs is not often associated with the intrinsic characteristics of the transaction itself but from factors extraneous to the transaction, such as the nationality of the person who carries out the transaction. The whole new era of money laundering and terrorist financing has posed global challenges which require closer cooperation between the private and public sectors through information sharing, investigation sharing and ‘out of the box’ thinking. One important policy direction is that further legislation on money laundering and terrorist financing should be forward looking focusing at what the criminal is planning or intending to do with the funds that he is trying to conceal. The manner in which the fund is being moved might give some clues to the intended future use of that fund. But, the question is how far the law can or should go to criminalise the ‘original sin’, the ‘underlying motivation’ or the ‘intention to commit a crime’. Another problem reveals that international judicial cooperation does not respond quickly enough compared to the development of money laundering and technology, as a result, intelligence on money laundering remains fragmented and the sharing of information is limited. The establishment of a central database of intelligence to be used by all international organisations and state authorities has been proposed, nevertheless, this will entail significant national security difficulties.20 There are also 17 FN Baldwin ‘The Financing of Terror in the Age of the Internet: Wilful Blindness, Greed or a Political Statement?’ (2004) 8(2) Journal of Money Laundering Control 127; SN Welling & AG Richman ‘Cyberlaundering: the Risks, the Responses’ (1998) 50 Florida Law Review 295. 18 SD Cassella ‘Reverse Money Laundering’ (2003) 7(1) Journal of Money Laundering Control 92. 19 JM Sorel ‘Some Questions About the Definition of Terrorism and the Fight Against Its Financing’ (2003) 14(2) The European Journal of International Law 365. 20 The Interdiction of Terrorist Property Working Group The Funding of Terror: The Legal Implications of the Financial War on Terror (The Society for Advanced Legal Studies United Kingdom 2002) 89.

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practical issues such as the institutional framework for the central database and the ownership of the data. Furthermore, there is the lack of universal implementation of the established standards worldwide, which is essential to ensure sufficient financial transparency for tracking the movements of funds of criminal origin. Some countries have often hesitated to equip themselves with restrictive financial legislation because the law can become an obstacle to the free flow of capital, thus, tax havens and shelters are provided for drug traffickers and money launderers in these countries. The Financial Action Task Force’s ‘policies of name, blame and shame’ have been criticised for not being able to yield good results in the long run as those countries which depend mainly on offshore financial centres are left in a dilemma for choosing between compliance with international standards and survival of the economy. Therefore, it is more important to provide an equal playing field to enhance the level of integrity globally in the long run. Another issue concerns the numerous lists of money laundering and terrorist financing typologies published by various national and international organisations. These lists keep expanding as new ways of laundering the proceeds develop. So, is it still worthwhile and meaningful to have such a never-ending typology list? In fact, international strategies and standards for combating money laundering have only been in development for about 20 years and a constant review of the validity of the strategies and legislation is essential. Further work is also required to consolidate the various codes and standards into a unified framework for protecting the financial system from abuse by money launderers and terrorists. Certainly, a major evolution of the anti-money laundering regime in the United Kingdom is necessary to keep pace with the fast changing money laundering and terrorist financing typologies. There have been numerous changes: new money laundering offences have been created under the Proceeds of Crime Act 2002; the Financial Services Authority Money Laundering Sourcebook has been abolished and replaced by a high-level obligation in the Senior Management Arrangements, Systems and Controls Sourcebook; and new Guidance for the financial sector has been published by the Joint Money Laundering Steering Group. However, the question of ‘who regulates the enlarged regulated sector’ under the Money Laundering Regulations 2003 remains. There is no legal requirement for the trust and company service providers, the estate agents and the providers of safety deposit boxes to belong to a trade body and no regulator is responsible for ensuring effective systems are in place to combat money laundering and terrorist financing in these sectors. Then the next question is ‘how about those sectors which are unregulated at all under the Money Laundering Regulations, such as nail bars, fish and chips shops, football clubs, tanning shops, pubs, taxi firms, car boot sales, etc?’ This list can go on and on. So, to what extent should the private non-financial sectors be involved in crime prevention? And more importantly, who should take the overall responsibility in monitoring these sectors, the Home Office, Her Majesty’s Treasury, the Financial Services Authority or the Department for Business, Enterprise and Regulatory Reform? What about the implications of the Money Laundering Regulations 2007? Is the United Kingdom overwhelmed by the ever-expanding legislation? All these are issues which require further and careful consideration.

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This book analyses how the traditional criminal justice system has been ineffective in targeting organised crime; indeed, criminal confiscation has not been as successful as originally anticipated.21 Policy makers are criticised for focusing on the fight against organised crime activities at street level and trying to combat 21st century organised crime with 19th century legislation. Traditional policing agencies often adopt a reactive approach and begin investigation only after the commission of a crime or at least the reasonable suspicion of one. Due to the lack of understanding of the real problems, insufficient resources are deployed to these areas and there is limited information sharing among agencies, and as a consequence, we are losing the game! Organised crime is a highly sophisticated and global problem. In order to tackle it successfully, a high-level nationwide strategy against organised and financial crime is the right way forward. It is time to focus on understanding the causes of serious organised crimes and emphasise on the reduction of harm to the society rather than simply looking at their characteristics. The Proceeds of Crime Act 2002 serves as a wake-up call to the approach in tackling serious organised crime. It represents an advanced model of money laundering legislation, confiscation legislation and organisational structures and arrangements.22 The key strategy of disrupting the criminal activities by interrupting their finances through a multi-agency approach is highlighted under this new regime. The importance of information sharing and financial investigation is also stressed. However, the mere sharing of information without developing it into meaningful and useful intelligence has only minimal value to the investigation. Information needs to be fully researched, developed and disseminated to the relevant agencies so that strategic and tactical decisions making and resource allocation can be done more efficiently. It is clear under the POCA regime that conviction-based confiscation laws are inadequate to deprive contemporary criminals, especially the masterminds behind the scenes, of their ill-gotten gains. Civil recovery legislation complements criminal confiscation and money laundering legislation as an important weapon for taking the profit out of crime. The civil recovery proceeding also provides an alternative civil remedy to the society for the harm caused by crime and it does not contravene the spirit of presumption of innocence nor the double jeopardy rule. Therefore, criminal law is not the only weapon; civil recovery legislation is necessary in practice and also justifiable in principle. Civil forfeiture models vary from jurisdiction to jurisdiction and will likely evolve in the face of litigation and experience as legislatures and policymakers attempt to produce fair but effective procedures for the civil recovery of criminal proceeds.23Although there are many overseas jurisdictions which still rely on conviction-based models and have not embraced civil recovery proceedings, international cooperation should not be limited to criminal matters and considerable attention needs to be given to legal, procedural, 21 Home Office Working Group on Confiscation Three Report: Criminal Assets (HMSO London 1998 November). 22 RE Bell ‘An Evolving Series of Proceeds of Crime Models’ (2000) 8(1) Journal of Financial Crime 21. 23 Kennedy, A., ‘Designing a Civil Forfeiture System: An Issues List for Policymakers and Legislators’ (2006) 13(2) Journal of Financial Crime 132.

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evidentiary, institutional and cultural issues. Ideally, a global civil forfeiture structure would provide an effective platform for improving mutual legal assistance among different countries in the civil recovery arena. Since the implementation of the Proceeds of Crime Act in 2003, there have been some positive feedbacks regarding the new assets recovery regime, however, certain deficiencies have been identified and further improvements are required. A consistent and coherent national framework for setting objectives and targets and monitoring performance is vital to the successful implementation of the assets recovery strategy. Although the Joint Asset Recovery Database managed by the Assets Recovery Agency serves as a central repository of data and several monitoring arrangements (including the quarterly returns on confiscation orders submitted by Magistrates Courts and data on the volume and value of cash seizures and forfeitures) are in place to assess the performance of the various agencies which contribute to the recovery of the proceeds of crime, there has been no detailed evaluation concerning the impact of this radical legislation on the reduction of crime including organised crime. Hence, there is the need for an effective national evaluation mechanism with consistency in data collection and representative indicators that can be compared and reviewed annually. This will enable the real impact of disruption to be measured so that the necessary resources can be deployed and efficient strategic decisions can be made accordingly. In addition, strong leadership and effective championing of the Proceeds of Crime Act 2002 is the key to raising the level of awareness, mainstreaming financial intelligence and realising the partnership approach. Besides, high impact marketing and the celebration of success are crucial in promoting and communicating to the general public that ‘crime does not pay’. After being delayed for over a decade, the concept of the National Crimes Commission24 put forward in 1995 has finally been realised with the establishment of the Serious Organised Crime Agency in April 2006 under the Serious Organised Crime and Police Act 2005. The Act represents a strong political commitment in the fight against organised crime. New powers against organised crime are incorporated in the criminal law and reforms in the criminal justice process are implemented so as to address the modern sophisticated criminality more effectively. The Agency is not simply an FBI type organisation, but operates on a much wider, multi-level and international basis in addressing the problem of serious organised crime. Traditional law enforcement focuses on investigation and prosecution, while the Agency is heavily involved in evaluating the crime sectors, identifying the threats and developing the relevant strategic plans. It aims to coordinate the sharing of information and intelligence as well as joint multi-agency operations and international engagement. One of its tasks is to operationalise the SAR system in order to develop good quality intelligence. The Agency also monitors the preventive systems, coordinates training and research and continues to develop reforms and other measures. The creation of the Serious Organised Crime Agency should lead to reduced bureaucracy, greater consistency of approach, more effective use of intelligence and technology, enhanced capabilities and skills in the fight against serious organised 24 BAK Rider in Home Affairs Committee Third Report on Organised Crime: Minutes of Evidence and Memoranda (HC Paper (1994–95) 18–II) 193, 220–222.

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crime. It is important that this new Agency is seen as ‘special’ and ‘elite’ with top quality staff and high morale. Strong leadership and championship is crucial to turn the tide. Besides, effective measurement and ongoing review of this new strategy against serious organised crime is necessary. Nevertheless, the establishment of such UK-wide Agency is going to pose major challenges to the long existing law enforcement culture which consists of the basic values, ideologies and assumptions that guide and fashion individual and organisational behaviour. Such reforms involve a fundamental cultural change and structural reorganisation within the existing agencies, especially among those officials from the Secret Intelligence Services who used to operate outside the English domestic legal arena. It also interferes with existing lines of responsibility and engages modifications in strategic planning and resource management. In addition, there is going to be a new role for SOCA’s specialist prosecutor.25 There is also the potential danger that the Agency may appear merely as a super police or super prosecuting authority through the integration of the various law enforcement agencies. Furthermore, there is the concern that the investigative powers created under the Act may be ineffective as the judiciary are not directly involved and can be easily evaded by ruthless or experienced criminals.26 On 11 January 2007, the Government announced that the Assets Recovery Agency will be abolished and the Serious Organised Crime Agency will take over the assets recovery function and there may be additional powers for prosecutors to seize money.27 On one hand, this might help to streamline the work done by law and order agencies. On the other hand, this might create more tension to the existing problem of culture crash within the Agency and also the potential legal challenges as civil recovery proceedings will no longer be initiated by a non-prosecuting authority. It is clear that the Government is finally determined to treat organised crime as a serious problem. A number of other measures against financial and organised crime have been initiated since the implementation of the Serious Organised Crime and Police Act 2005. In July 2006, the Government consulted on proposals for new powers against those committing serious organised crime.28 The main proposals include (i) the creation of a new disruption tool, the serious crime prevention orders that would impose conditions on the movements and transactions of those suspected of organised crime; (ii) the facilitation of sharing of data on suspected fraudsters between public and private agencies; and (iii) the introduction of new offences for 25 D Fitzpatrick ‘Advising the Serious Organised Crime Agency: The Role of the Specialist Prosecutors’ (2005) 12(3) Journal of Financial Crime 251. 26 Fitzpatrick, D., ‘Crime Fighting in the Twenty-First Century?: A Practitioner’s Assessment of the Serious Organised Crime and Police Act 2005’ (2006) 9(2) Journal of Money Laundering Control 129. 27 Lords Hansard text for 11 January 2007 (pt 1) ‘Crime: Assets Recovery Agency’, available at , accessed 22 February 2007. ‘Assets Recovery Agency Abolished’ BBC News (11 January 2007), available at , accessed 22 February 2007. 28 Home Office, New Powers Against Organised and Financial Crime Cm6875 (HMSO London 2006 July).

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encouraging or assisting criminal activity. Following this consultation, the Serious Crime Bill was introduced into the House of Lords on 16 January 2007. The Bill includes a number of provisions to enhance the ability of law enforcement agencies and prosecutors to tackle and prevent serious organised crime. A new civil serious crime prevention order with lower standard of proof will be established under the Serious Crime Bill. The High Court will be able to impose strict conditions on those suspected of money laundering, fraud, drugs and human trafficking, restricting their activities and businesses. The Bill is expected to strengthen powers to seize assets and to further develop data-sharing within the public sector and between the private and public sectors in the prevention and detection of fraud. This Bill also indicates that the Government is more prepared to use civil powers to tackle serious crimes. The increasing trend of using civil court orders to tackle serious criminal matters since the Proceeds of Crime Act 2002 reinforces the idea that criminal law is not the only weapon in the criminal justice system. However, due to the lower standard of proof is required for civil orders, the possibility of potential human rights challenges can be foreseen in future proceedings. The civil rights group has already dismissed the proposed orders as ‘unfair and ineffective’. Nonetheless, one must not forget that respect for the rule of law and fundamental human rights are essential for the war on organised crime and a balance between civil liberty and social order is of utmost significance. In addition to the proposed new powers against financial and organised crime under the Serious Crime Bill, the Government is putting more emphasis on economic and financial crime, in particular fraud, which is believed to be a key element in the activities of organised crime. Based on the recommendations of the Law Commission’s Report on Fraud,29 the Government commissioned an interdepartmental review into the prevention, detection, investigation and prosecution of fraud in October 2005. An interim report was published in March 2006 outlining the findings of the review. This was followed by the publication of a final report30 in July 2006 which made a number of proposed changes on fraud law reform. These proposals received broad positive support for a general offence of fraud. The Government published the Fraud Bill which was intended to (i) simplify fraud legislation making it easier for juries and the general public to comprehend; (ii) reduce the risk of cases being disputed through technical points; (iii) facilitate prosecutions by focusing on intentions to commit fraud rather than the outcomes; (iv) improve prosecutions by providing clear definitions of fraud; and (v) abolish all deception offences under the Theft Acts. The Fraud Act 2006 received Royal Assent on 8 November 2006 and came into force on 15 January 2007. It represents a fundamental change in the way deception and fraud offences are investigated and prosecuted. The Act creates a new general offence of fraud with a maximum custodial sentence of 10 years and replaces all previous deception offences under the Theft Acts 1968–1996. The new offence of fraud can

29 The Law Commission Fraud Cm 5560 (Law Com No. 276 United Kingdom 2002 July). 30 Attorney General Fraud Review – Final Report (Attorney General London 2006 July), available at , accessed 22 February 2007.

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be committed in three ways namely by false representation;31 by failing to disclose information32 and by abuse of position.33 The Act also creates other new offences namely obtaining services dishonestly;34 possessing, making and supplying articles for use in frauds;35 and participating in fraudulent businesses.36 To build on the progress of using financial measures in deterring, detecting and disrupting serious crime and terrorism, the Government published the strategy titled The Financial Challenge to Crime and Terrorism37 which sets out the key priorities for increasing the financial challenge to crime and terrorism in the future and announces new proposals that exemplify the Government’s commitment to their fight against serious organised crime and terrorism. The new proposals include (i) new steps to make financial tools a ‘mainstream’ part of the UK’s approach to tackling crime and terrorism; (ii) developing further data-sharing and pooling intelligence better between the public and private sectors; (iii) establishing a new licensing system for money service businesses; (iv) additional funding for the Charity Commission to identify and disrupt terrorist exploitation of charities; (v) establishing a new Money Laundering Supervisors’ Forum to ensure the implementation of the risk-based approach in all regulated industries; (vi) reforms to simplify identification and due diligence checks within the revised Money Laundering Regulations; (vii) creation of a dedicated Treasury Asset Freezing Unit to further promote the proactive use of asset freezing powers; and (viii) identifying and tackling the more serious financial threats at the international level through the UK’s presidency of the Financial Action Task Force from July 2007. No matter how much legislation is passed and how many new orders are created, proper implementation and effective enforcement are as important. The fight against organised crime requires a long-term commitment and it is going to take time for the new strategies to work. In fact, it is still early days to evaluate the effectiveness of the weapons provided under the Proceeds of Crime Act 2002 and the Serious Organised Crime and Police Act 2005, particularly when the institutional framework, such as Her Majesty’s Revenue and Customs and the Serious Organised Crime Agency, has not been fully implemented. In addition, due to the incongruent nature of data collection in relation to the new strategies, it is difficult to assemble meaningful and validated statistics for analysing the current level of successes and performance of the overall strategy discussed in this book. Besides, there is no available data in relation to the proportion of criminal assets removed from circulation and no studies on the impact of forfeiture on criminal organisations have been done. Indeed, future research on the cost-benefit analysis of the civil recovery and taxation regimes will provide valuable information for policy makers on the efficacy of the assets recovery 31 Section 2, Fraud Act 2006. 32 Section 3, Fraud Act 2006. 33 Section 4, Fraud Act 2006. 34 Section 11, Fraud Act 2006. 35 Sections 6 and 7, Fraud Act 2006. 36 Sections 9 and 10, Fraud Act 2006. 37 Her Majesty Treasury, The Financial Challenge to Crime and Terrorism (HMSO London 2007 February), at , accessed 28 February 2007.

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strategy. A closer examination on the rationale behind the Serious Organised Crime Agency is important to forecast how this new approach will impact on the landscape of criminality and to locate where the law enforcement agencies and stakeholders will be in the arena. Further research on the performance of the Serious Organised Crime Agency will reveal whether the Government is on the right track in the fight against serious organised crime and whether the right questions have been addressed. It would be extremely desirable for research to be done on how the Serious Organised Crime Agency and the proposed new measures under the Serious Crime Bill will impact on civil liberty and democracy. It would also be interesting to examine the relationship between the Serious Organised Crime Agency and Security Services in the United Kingdom.

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Wright, A., Organised Crime (Willan Devon 2006). Z/Yen Limited, Anti-Money Laundering Requirements: Costs, Benefits and Perceptions (Corporation of London 2005 June).

Index account monitoring orders, section 371 of POCA (2002), similar to those of production order 164 ACPO 75-6, 78, 80, 140 acquisition, use or possession offence, penalty for 155 act of the crime, focus on criminalising 4 Action Directe (France) 20 Action Plan to Combat the Financing of Terrorism (2001), G-7 Finance Ministers and 62 act of terrorism, outcome of internal group dynamics 21 actus reus involves person committing an offence 153-4 adequacies of criminal legal framework 118 investigation, prosecution and trial process 121-3 limitations of the confiscation regime 120-21 limitations of the money laundering legislation 119-20 adequacies of the law enforcement structures 113 changing attitude to law enforcement agencies 114-15 complexity of multi-agency cooperation 117-18 historical response to organised crime 113-14 multi-agency approach 115-17 adequacies of the money laundering regulatory regime 123 burdens on the regulated sectors 133-5 civil liabilities 135 FSA Money Laundering Rules 128-9 Limitations of the Anti-Money Laundering Disclosure Regime 129 shortcomings of the SAR disclosure regime 129-33

Money Laundering Regulations 2003: Financial and Non-Financial Sectors 125-8 Money Laundering Regulations; Financial Sectors 124-5 regulations and rules: detection and prevention of money laundering 123-4 Africa 207 Albanian gangs 12, 18 Albini, J.L., Patron-Client Model 7 American ‘War on Drugs’(1980s), FATF under OECD 124 anomie (strain theory) 10-11 Anti-Fraud and Anti-Money Laundering Committee 65 anti-money laundering initiatives criminals seek new ways of laundering proceeds 37 difficult to assess accurately 42 easily incorporated into existing compliance departments and bank systems 134 Anti-money laundering and counterterrorism legislation, dilemma between commercial responsibility and criminal liability of tipping off 190 anti-money laundering and counter-terrorist financing, common elements 66 anti-money laundering measures backward looking and targets proceeds after crime 211 may add burden on financial industry and hinder economic recovery 136 anti-money laundering regime, perceived as burden and cost ineffective 203 Anti-Money Laundering Requirements; Costs, Benefits and Perceptions 200-1 anti-money laundering strategies implemented through series of legislative measures taken by the government 198 must be implemented as widespread as possible 203-4

240

The Disruption of International Organised Crime

anti-organised crime and counter-terrorist financing legislation, attract human rights and civil liberties challenges 204 Anti-Terrorism Crime and Security Act (2001) see ATCSA Anti-Terrorist Branch 85 ARA 79, 131, 136, 139-41, 206 criteria for adoption of cases by 144-5 difficulties in measuring identified by National Audit Office (February 2007) 206 freezing injunctions under Part 25.1(1)(f) of Civil Procedure Rules 146 good relationship with Special Commissioners 196 government announced abolition of (11 January 2007) 215 Key Performance Indicators 193-4 needs to implement international powers more efficiently 195 performance from 2003 till March 2006, criticised for not meeting its targets 194 received 397 referrals until March 2006 , only 50 per cent adopted by 195-6 receives cases referred by law enforcement agencies 144 should take more active role in communicating and educating law enforcement agencies 195 three main aims and offices in London and Northern Ireland 139-41 to prove on balance of probabilities that matters alleged constitute unlawful conduct 145 arrangement offence, catches money laundering activities at layering and integration stages 155 Artificial Intelligence (AI) techniques, searching of large data sets to discover “hidden” or “buried” relationships 169 asset deprivation, attacks criminality through profit motive 137 asset recovery and financial investigation, need to be embedded within NIM 208 Asset Recovery Strategy and Committee, unenforced confiscation orders £130 million (2001) 121 Assets Recovery Agency see ARA Assets Recovery Agency v Green [2005]

EWHC 3168 (Admin) 145 ‘associated property’, portion of mixed property which is not recoverable 146 Association of Chief Police Officers see ACPO Association of Southeast Asian Nations (ASEAN) 83 ATCSA 49, 84, 86, 88, 104 company names and section 3 and schedule 2 of 164 Auld, Lord Justice, should be advance indication of sentence for defendant pleading guilty 174 Australia civil forfeiture legislation 184 civil recovery and taxation ways to combat organised crime in 176 Director of Public Prosecutions, complete immunity under section 9 of Director of Public Prosecutions Act (2005) 175 witness protection largely a police function 176 Australian Crime Commission Act (2002) definition of serious and organised crime 97-8 Australian FIU, Transaction Reports Analysis Centre (AUSTRAC), ‘data mining’ and 169 Balkans, terrorism and organised crime disrupt democratic life and a free economy 24 Bank of Credit and Commerce International claims against 135 collapse (1988), Basle Statement of Principles 64 Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2000] 4 All ER 33 30 Bank of England 117 bankers and lawyers, given role of ‘policemen, detectives and even soothsayers’ 186-7 Bank of Scotland v A Ltd [2001] WCA Civ 52 189-91 Basle Committee, established by Central Bank of Governors of G-10 countries (1974) 64 Basle II, banks to align capital with credit

Index risk, market risk and operational risk 65 Basle Statement of Principles 59, 64 BBA 47, 53-4, 135n76 Belgium, witness protection programme 175-6 Berd v Lovelace [1557] 21 ER 33 187 bin Laden, Osama, Council Resolution 1390 57 Blunkett, David further funding for MI5 (February 2004) 86 on organised crime 208 Bowman v Fels [2005] EWCA Civ 226, judge overruled P v P [2003] EWHC 2260 188 British Bankers’ Association see BBA British Government, intelligence-led approach in policing since 1990s 137 British Transport Police 84 BundesKrimialAmt (1998), definition of organised crime 17 bureaux de change, loophole used for activities of underground banking system 129 bureaux de change and money transmission agents, still not regulated 129-30 CABA 144 Cabinet office 84 report Recovering the proceeds of Crime 79 reviewed UK anti-money laundering and confiscation and implications of POCA 104 Camden Asset Recovery Inter-Agency Network see CARIN Canada 174, 176, 184 Capone, Al case 149 CARIN 82-3 cash, which has been seized may be detained for initial period of 48 hours 148-9 cash forfeiture, civil proceedings and balance of probabilities applies 147 Cash Transaction Report see CTR casinos and gambling establishments, simple and risk free choice for laundering money 38 Central Intelligence Unit (CIU) 80

241

Central Task Force, class ‘A’ drug dealers, firearms users and traffickers 78 Chambliss, W.J., Network Model 7 charging order, only gave prosecuting authority an interest in the property to which it related 110 Chechnya, guerrilla-terrorist activities and organised crime to fight against Russians 24 Chicago City Council Committee on Crime (1915) 9 China 207 Chinese Triads 8, 18, 24-5 CHIS, complies with ECHR 173 CICFA 79 civil and criminal proceedings, distinction between has become less clear in recent years 183-4 civil forfeiture in rem action brought against an object in the civil courts 96 lack of proportionality, breaching of presumption of innocence and double jeopardy 185 civil liability, many issues not been resolved 191 Civil Procedure Rules, charging orders and 110 civil recovery weapon for taking the profit out of crime 213 concept similar to civil forfeiture under RICO 143 enables ARA to recover unlawful property in England, Wales and Northern Ireland 144 initial alternative and taxation as a ‘last resort 139 obstructed by lack of international powers 196 procedure initiated by ARA through High Court proceedings 144 should be categorised as criminal rather than civil 185 civil recovery proceedings concerns include lack of proportionality, breaching presumption of innocence and double jeopardy rule 195 do not contravene spirit of presumption of

242

The Disruption of International Organised Crime

innocence nor double jeopardy rule 186 civil recovery and taxation powers: are they working? 193 evaluation of civil recovery regime 193-5 evaluation of taxation regime 196-8 reasons for variances 195-6 civil recovery and taxation powers introduced under POCA (2002) 181 research on cost-benefit analysis will give information for policy makers on efficacy of assets recovery 217 Civil Recovery Unit in Scotland 140 CJA (1993), Part V of, civil regime and insider trading 183 Code of Practice, under section 377 of POCA (2002) 160 Colombian Cartels 18 Communications Act (1985) and RIPA, obstacles to sting operations 172 Communications Electronics Security Group (CESG) 87 Communications Intelligence Unit 85 Communist Cells (Belgium) 20 Community Engagement Unit, operations against London based criminals 78 Companies House, working to guard against thieves hijacking companies’ identity 200 Compound OFCs, carry out functional and notional activities 39 concealing or disguising criminal property, penalties for 154 Concerted Inter-Agency Criminal Finance Action Group see CICFA Concerted Inter-Agency Drugs Action Group (CIDA) 79 confidentiality and duty of disclosure, professionals , banks and financial institutions 5 confiscation, purpose to recover financial benefit obtained from criminal conduct 141 confiscation and forfeiture, designed to deprive wrongdoers of fruits of their wrongs 104 confiscation order, an in personam order against defendant in UK 106, 141 ‘contract security’, growth since 1960s 177 conveyancing, service in greatest demand

for (2002) 125 conviction determination 106-7 core nations, exploit semi-periphery and periphery nations through institutional terror 21 Corporation of London, financial service in UK heavily regulated compared with other financial centres 201 corruption, four categories of 14 Corrupt Organisations Act (1970) 92 Council of Europe Convention on Laundering, Search, Seizure and Confiscation of Proceeds of Crime (1990) 57 Counter Terrorism Command (SO15), result of London terrorist attacks (July 2005) 85 countries accused of fostering terrorism, Iran, Libya, Syria and Sudan 43 course of criminal conduct determination 106-7 Court decides if defendant has criminal lifestyle 141 decides recoverable amount 142 power to make order requiring defendant to repatriate all assets held abroad 109 Court of Appeal (2005) 146 Court Service 140 Covert Human Intelligence Sources see CHIS CPS 121, 140 CPS and Courts, need to be able to manage greater volume of POCA 207 CPS lawyers and police financial investigators, problems and 207 Cressey, D.R., Costa Nostra Model 7 Crimes against Property and Financial Crime Unit (SC4), holds permanent secretariat of CARIN 82-3 crime and terrorism 22-3 Criminal Assets Bureau Act 1996, Republic of Ireland see CABA Criminal Assets Recovery Act 1990 in New South Wales, UK and 144 criminal conduct, any offence listed in schedule 4 of the Act, fourteen years emprisonment 103-4 criminal forfeiture, in personam action

Index brought against person with higher standard of proof 96 criminal funding 2-3 criminal groups in United States, poorly educated immigrants more ready to use violence 13 criminalisation of criminal finance 102 confiscation proceedings 105-8 confiscation regime 104-5 money laundering: the criminal dimension 102-4 restraint orders 108-110 criminalising membership of an organised crime group 98-9 criminalising specific offences as organised crime: American experience 91 conspiracy legislation in other countries 97-8 RICO 91-2 specified predicate offences 92-4 substantive RICO offences 94-7 Criminal Justice Act (1987) 122 Criminal Justice Act (1988) 48, 103, 105 (April 1991 to March 1993) figures for £1.7 million ordered and £0.5 million recovered 120-21 charging orders and 110 defendant required to cooperate with management receiver 109 extended confiscation legislation 106-7, 120 extended money laundering offences 119 restraint orders under 108 Criminal Justice Act (1993) 99, 103 compliant with Article 3 of Vienna Convention 107 reporting obligation mandatory 124 Criminal Justice Acts (1988 and 1993 ) 47 Criminal Justice (International Cooperation) Act 1990 107 Criminal Justice and Police Act (2001), power to seize something he is authorised to seize 161 criminal justice policies, focus on legitimate economic opportunities for lower classes 11 Criminal law Act (1977) 100 criminal lifestyle 140-42 criminal organisations, smuggling of human

243

beings and hi-tech crimes 19 Criminal Organisations and Drug SubDirectorate 82 criminals, believe goal justifies the means and use illegitimate means to achieve aims 11 Criminal Taxes Unit, aim to ensure suspected criminals made to pay fair share of tax 195 criminal terrorism, special measures needed to control and combat it 23 criminal and terrorist groups, converging and becoming indistinguishable 22 critical theorists, law enforcement agencies act in interests of dominant groups of society 72 Crown Court application for restraint orders under POCA 2002 made to 143 assumptions allowed by 105-6 conviction rate for money laundering 119 only proceeds of drug trafficking could be confiscated 120 ruled that police in Operation Cotton had overstepped line in crime creation 173-4 Crown Prosecution Service see CPS CTRs 169-70 Cultural and Communities Resource Unit 78 Cumming, Sir Mansfield (Foreign Section of Secret Service Bureau) 87 customer information defined in section 364 of POCA (2002) 163n172 orders section 38 and schedule 6 of TACT and schedule 2 of POCA 1996 163 orders section 365 of POCA (2002), similar to production orders 165 Customs, responsible for drugs and international drug smuggling 114, 117 Customs and Excise management Act (1979) 99-100, 104 cyberlaundering, could be used for laundering proceeds of illegal activities 27 cyberterrorism difficult to define or detect 26 new opportunities for ideology behind terrorism and recruiting 210-11

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The Disruption of International Organised Crime

cyberterrorism and cyberlaundering, private sector as well as hindering economic growth 211 data controller, balancing act whether he should or should not disclose 192 ‘data mining’ 177-8 advantages and limitations 170 automated tools and Artificial Intelligence techniques for searching 169 DCA 206 Defence Intelligence Staff of Ministry of Defence, central intelligence machinery and 84 democracy, definition of 12 Department of Constitutional Affairs see DCA Department for international Development 81 Department for Social Development (Northern Ireland) 140 Department of Trade and Industry see DTI Department of Work and Pensions see DWP ‘derogation control orders’, preventative orders subject to High Court or Court of Session 50-51 developing countries, criminal organisations penetrate or infiltrate politicians of 77-8 developing of law enforcement structures in UK 69 functionality of policing 70 non-traditional policing 76 police v Military 72-3 repressive role 71-2 traditional and non-traditional policing 73-6 functionality of policing expressive role 71 what is policing? 69 Diplock, Lord, on stripping drug traffickers of their profits 104-5 Directive 91/308/EEC, amended Directive 2001/97/EC, Second Money Laundering Directive 57-8 Director of ARA disclosure orders and 162 must apply interpretations of law and concessions of Board of Inland Revenue in exercising Revenue

functions 151 must have grounds to suspect that income, gains or profits are chargeable 150, 197-8 Director of Assets Recovery Agency v Singh [2005] EWCA Civ 580 146 Director General of Fair Trading v Pioneer Concrete (UK) Ltd [1994] 3WLR 1249 128 Director of Public prosecutions for Northern Ireland 140 ‘dirty’ money, laundered into ‘clean money’ 1, 31 disclosure, protects reporting entity against criminal liability but not civil liability 135 ‘disruptive strategies’ 2, 5, 179 DPA (1998) 35 exemptions to rights of data access under 192 hinders flow of information to certain extent 117 principles 191 supersedes DPA 1984 191 Driver and Vehicle Licensing Agency see DVLA Drug Enforcement Administration see DEA drug liaison officers 118 Drugs and International Crime Department (DICD) 81 Drug Trafficking Act see DTA Drug Trafficking Offences Act (1986) see DTOA DTA (1994) 48, 99, 102-3, 105, 107 charging orders and 110 defendant required to cooperate with management receiver 109 forfeiture of cash at borders under 104, 107 mandatory obligation to confiscate proceeds of trafficking offences 120 restraint orders under 108 DTI 84, 117, 212 Companies Act breaches and 122 DTOA 47, 102, 105, 107 banks and financial institutions have to report suspicious transactions to police 124 £43.4 million ordered and £14, 0 million

Index recovered 120 dual criminality test on money laundering offences 152, 157 due diligence, might act as defence for MLR offence 128 due diligence and transactional verification, boost cost 2 Durkheim, Emile, notion of anomie (strain theory) 10 DWP 76, 140 Eastern European organised crime 18 highly educated people from middle and upper class 11 money laundering services for Turkish crime groups for heroin in UK 16 ECB, should be split into three core parts, Data Management Centre, Liaison Unit and Intelligence Development Unit 132 ECHR (1950) 5, 86, 138, 163-4 Article 6(2), three criteria satisfied before burden shifted to defence consistently 159 Article 6 of guarantees fair trial in Europe about legitimacy of measures for witnesses 174 Article 8 involves some infringement on individual’s rights in private and family rights 182 Articles 6 and 7 of and taxation jurisdiction 198 MI5 surveillance of Harriet Harman and Patricial Hewitt breached 86 operation which breaches Article 8 may still be admissible at trial 173 section 1 defines basic rights and freedoms all individuals enjoy in democratic society 181-2 Economic Crime Branch at NCIS see ECB Egmont Group (1995) international group made up of members of FIUs 62, 168 May 2007 the FIUs from 106 countries members of 168-9 elections, wealthy individuals provide most of the money for and have influence on political process 12 electronic money, new opportunities for criminals 67

245

elite criminals, punished the least 12 ELMER, intelligence database 80, 132-3 enforcement receiver, Court appointment officer with wide powers , independent of prosecutor and defendant 142 Engel v The Netherlands [1976] EHRR 647, three principle criteria identified in 184-5 English legal system, focuses on money laundering and confiscation provisions 102 ENRON 16 collapse linked to use of Offshore companies 39 enterprise, any organisation that can be infiltrated by organised crime and 94 entrapment 5 issue of in sting and undercover operations 173 legality of and civil liberties 179 ethnic communities, organised crime rational choice to achieve economic and social mobility 12 ethnic diaspora, terrorist fish can move without hindrance 23 ethnic succession theory, study of economic variables 12 EU expansion (May 2004) greater threats of transnational organised crime 17 organised crime small organisations and networks with multinational orientation 19 EU Council, Council Directive 91/308/EEC, First Money Laundering Directive 57 Europe Europol has created the AWF Sustrans (2002), aim to collect SARs in EU 16970, 169n207 money laundering laws 207 view of organised crime different from American image 17 European Banking Federation established (1960) 65 Money Laundering Legislation: National Measures (2002) 66 European Convention for the Protection of Human Rights and Fundamental Freedoms see ECHR

246

The Disruption of International Organised Crime

European countries, understanding of criminal relationships patchy due to lack of research 19 European Money Laundering Directive, regulations made by UK 51 European Union see EU Europol 17, 19, 82, 116 counter-terrorist unit (2001) 62-3 Euskadi to Askatasuna ‘ETA’ (Basque Country) 20 EU Wire Transfer Regulation 1781/2006, PSPs and 54 existing laws, not able to spot legitimate money passing for illegitimate purposes in future 46 expressive role of policing, portrayed as ‘community policing 71 extradition, costly and ineffective in certain jurisdictions 77 ‘failing to disclose’, sting operations under sections 330 and 332 of POCA (2002) 172 FATF 1996-7 report shows that money launderers target non-banking financial institutions 38 Eight Special Recommendations on Terrorist Financing and Forty on Money Laundering 42, 57 established 1989 by G-7 nations at OECD in Paris 58-9 financial transaction intelligence and 169 Forty Recommendations (1990) 59-60 guidance in detecting terrorist financing 45-6 guidance for financial institutions about sources of terrorist financing (April 2002) 43 IMF and World Bank in anti-global laundering drive 61 Nine Special Recommendations combined with the Forty Recommendations 60, 167-9 policies criticised for not yielding good results in long run 212 role of financial institutions in fight against money laundering and 124 Special Recommendation IX 42

Typologies Report (2000-2001) 125 vulnerabilities of new emerging technologies ‘digital money and ‘cyberlaundering’ 67 ‘fear factor’ FSA and 200, 202 FFIN 53, 115 FID 79 Fie Ch’ieu, used by Chinese communities 36 Financial Action Task Force see FATF Financial Challenge to Crime and Terrorism, The, proposals of 217 Financial Fraud Information Network (1992) see FFIN financial institutions 29 Financial Intelligence Division see FID Financial Intelligence Unit see FIU financial investigation differences in allocation of budget to among different agencies 121-2 mystique around still remains 207 standard of training for varied among agencies 122 Financial Investigation Centre of Excellence, integral part of ARA 140 financial investigators, should be involved early to freeze assets for confiscation 121 Financial Sector Assessment Programme, IMF and World Bank 65 Financial Services Authority see FSA Financial Services and Markets Act (2000) see FMSA Finers v Miro [1991] 1 WLR 35 188 First of October Anti-Fascist Resistance Groups ‘GRAPO’ (Spain) 20 FIUs 59, 79-80 Recommendation 26 states that countries should establish a FIU 168 members from 106 countries in Egmont group 62 recommendations 13 to 16 obligations in reporting suspicious transactions 168 special Recommendation V emphasises importance of international cooperation 168 Flying Squad, investigating major robberies 78 FMSA 53

Index increase in SARS due to implementation of 80 ‘foot soldiers‘ of crime, from lower classed in Eastern Europe 11 Foreign and Commonwealth Office 81, 84 foreign direct investment, could be deterred by money laundering 40 Foreign Financial Intelligence Unit (FFIU) 80 Foreign Secretary, responsible for work of MI6 87 forensic technology 177-8 forfeiture, appeal against can be made to Crown Court within 30 days 149 Forfeiture Act (1870), concept of forfeiture abolished but introduced again 1950s 104 forfeiture system, cash discovered by Police or Customs officers during searches 144 France 201 Front National de Libération de la Corse ‘FNLC’ 20 on system of plea bargaining or witness immunity 174 fraud, can be committed in three ways 216-17 Fraud Act (2007) 216 Fraud Advisory Panel 115 Fraud Bill, aims of 216 Freedom of Information Act 2000, individual right to information held by public authorities 193 FSA 47, 52, 76, 81, 117, 212 consultation paper (2005) 05/10 ‘Reviewing the Handbook’ (CP05/10) 201 effects of 11 September on 130 external and internal challenges 199-200 Financial Crime and Intelligence Division (January 2007) 203 five main duties on firms 53 ID Working group to address issues around customer identification 199-201 MLRs (30 November 2001 (N2)) 128 new powers to prosecute have brought shift in anti-money laundering practices 133 Policy Statement (2006) 129, 201 powers of officers under MLR 122

247

powers on to impose unlimited fines without proof required in criminal law 183 powers vested in considered draconian 183-4 supports a risk-based anti-money laundering approach through supervision and enforcement 200 under FSMA is now powerful financial regulator with defined objectives 199 withdrew Money Laundering Sourcebook 129, 202, 212 FSA Handbook of Rules and Guidance, Sourcebooks, Manuals and Modules 128 FSMA 53, 76 section 14 of gives FSA authority to make rules in relation to detection of money laundering 183 functional OFCs, employ 12 per cent of local labour force 39 futures markets, laundering and 37 Geneva and Hague Conventions on Warfare, rules and norms of war 22 German Federal Criminal Office, criminal enterprises small size partnerships 17 German Red Army Faction 20 Germany 201 witness protection programme 175-6 global enterprises, organised crime entwined with 16 globalisation, need for cooperation among countries to tackle organised crime and terrorism 27 globalisation and technology innovation allow money launderers to conduct their activities 41 organised crime and 1, 4, 111 serious crime has accelerated to international level 137, 210 ‘Godfather’, prosecution of 92 Government Communications Headquarters (GCHQ) 84, 86-8 government and organised crime, three types of relationship between 13 governments, symbiotic relationship with organised crime as result of infiltration and corruption 27

248

The Disruption of International Organised Crime

Groupe Islamique Armée ‘GIA’ (Algeria), fundamental terrorism 20 group or organisation, term organised crime and 8 Haller, M.H., Partnership Model 7 Hamas, fundamentalist terrorism 20 Hamas and Hizbollah, significant finance from wealthy Muslims as zakat (charity) 44 ‘hawala’ systems 1, 170, 178 used by Indian communities 36 ‘heightened awareness’ by institutions, money laundering a serious issue 133 Her Majesty’s Customs and Excise see HMCE Her Majesty’s Inland Revenue 140 Her Majesty’s Inspectorate of Constabulary see HMIC Her Majesty’s Revenue and Customs see HMRC Her Majesty’s Treasury Anti-Money Laundering Strategy 198-9 extra funding for MI5 after US attack on 11 September (2001) 86 monitoring and 212 High Court, interim order and 146 High-Tech Crime Unit, traditional organised crime involved, perceived ‘high return and low risk’ 210 Hizbollah, linked to drug trafficking in Lebanon 43 HMCE 20, 80-81, 140 annual proceeds of crime in UK 41 fight against drugs 47 fight against organised crime 79 financial investigators and SFO were sometimes involved at an early stage 121 had only 1 percent of defendants 2003 who used Queen’s Evidence and received reduced sentences 175 remit of 76 spending of National Investigation Service budget on financial investigation 122 HMIC, first appointed under County and Borough Police Act (1856) 76, 205 HMRC, formed in 2005 76, 167, 206, 217

Hodgson Committee, review of limited forfeiture powers in recovering proceeds of crime 105, 111 Home Affairs Committee, report on organised Crime 80 Home Affairs Committee on Organised Crime (1995) concept of ‘criminal organisation’ 100 felt laws of conspiracy adequate for dealing with organised crime 101 Home Affairs Committee Third Report on Organised Crime issue of use of confiscated funds 121 Regional Crime Squads suggested RICO 120 Home Office 212 Anti-Money Laundering Task Force 132 envisage civil forfeiture powers used where evidence that property has criminal origins 146 explained what contributed to the low figures recovered from crime 121 new programme of research to estimate value of organised crime market 211 One Step Ahead: A 21st Century Strategy to Defeat Organised Crime (March 2004) 167, 208 primary responsibility for counterterrorism 84 research on money laundering in UK 199 review on benefits and risks of using intercept material (2003) 171 should include money laundering in National Policing Plan 133 taken into account ECHR (1950) and Human Rights Act (1998) 138 UK-wide Serious organised Crime Agency (2004) 79 working with ACPO and Witness Support Network on national protection scheme, recommendations 177 Home Office Committee Third Report on organised Crime (1995), areas of dissatisfaction 129 Home Office, Passport Service and DVLA, work on improving integrity of government documents and data 200 Home Office Report (2002), Comparative Analysis of organised Crime

Index Conspiracy Legislation and Practice and their Relevance to England and Wales 101 Home office Working Group on Confiscation (1992) 107-8, 121, 213n21 Hong Kong Organised and Serious Crime Ordinance 98 Secret Societies ordinance used to target activities of organised crime 99 Hostage and Crisis Negotiations Unit, specially trained negotiators 78 HRA 5, 50, 86, 135, 138, 140 gives further effect to rights and freedoms guaranteed under ECHR 182 HRA and Article 6(2) of ECHR (1950), guaranteed presumption of innocence 159 Human Rights Act (1998) see HRA human rights and civil liberties, concern powers being too intrusive and disruptive and 178 Hundi system, used by Pakistan communities 36 Hussein v Chong Fook Kam [1970] AC 942 153 Ianni, F.A.J., Network Model 7 identity verification requirements, should not become barrier to financial inclusion 202-3 Immigration and Asylum Act (1999) 104 illegal market activities, take place in a disorganised way 16 illegitimate businesses, adopt business processes like legitimate 16 IMF, size of money laundering worldwide 41 IMF and World Bank anti-money laundering drive and FATF’s efforts 61-2 core principles 65 Immigration Service 76, 81, 167 inadequate means of attaining success, five social adaptation methods for those who have 10-11 informer, one of most effective weapons in hands of detective 175 innovative assets recovery and disruption

249

strategies 137-9 acquisition , use or possession offence 155 arrangement offence 154 Assets Recovery Agency 139-41 cash forfeiture proceedings 147-9 civil recovery and forfeiture proceedings under POCA 2002 143-4 civil recovery proceedings 144-7 concealing offence 153-4 confiscation regime under POCA 2002 140-42 customer information orders 162-4 disclosure orders 162 failure to disclose offences 155-6 major changes under POCA 2002 157-60 money laundering offences under POCA 2002 151-3 prejudicing an investigation offence 157 production orders 160-61 restraint orders 143 search and seizure warrants 161-2 taxation powers under POCA 2002 14951 tipping-off offence 156-7 wider investigative powers under POCA 2002 160 innovative proactive strategies 4 instrumental approach, violence seen as intentional 20 intelligence capabilities need to be refined beyond national intelligence community 88 effective will result in resources being more efficiently targeted 165 good quality is life blood of cutting edge of modern police service 165 importance of underplayed at both strategic and tactical levels by police 77 limited sharing a problem in multi-agency approach 117 proactive is only way to detect money going through Hawala systems 170 role of compared with measures in United States 137 intelligence-led approaches, organised crime and 4 intelligence-led policing, cornerstone of UK NIM 165, 178

250

The Disruption of International Organised Crime

Intelligence and Security Committee 87 Intelligence Services Act (1994) 86-8 intelligence sharing, complexity of and secrecy hinder fight against organised crime and terrorism 27 Intelligence Support Unit 78 intelligence and technology, important to law enforcement agencies for identifying criminals 170 ‘intention to commit a crime’, question of how far law can go 211 Inter-Agency Action Group Against People Smuggling and Trafficking in Human Beings 79, 81 interim receiver, court officer with wide powers and independent of ARA and respondent 147 interim receiving order, type of worldwide freezing injunction 146-7 International Convention for the Suppression of the Financing of Terrorism (1999) 1, 42, 55 international cooperation, should not be limited to criminal matters 213-14 international judicial cooperation, does not respond as quickly as technology development 211 international measures against criminal finance 55 Council of Europe 57 Egmont Group 62 European Union 57-8 FATF 58-61 IMF and World Bank 61-2 International Convention for the Suppression of the Financing of Terrorism 55-6 Interpol, Europol and World Customs organisation 62-3 UN 55 UN against Transnational organised Crime 56 UN Security Council Resolution 1373 56-7 UN Security Council Resolution 1390 57 International Monetary Fund see IMF Internet, the gambling and money laundering 39 terrorist attack through could render aspects of society incapable 26-7

use of to launder money in and out of UK poses increasing threat 41 Interpol, member nations to cooperate and share information 62, 82, 116 Interpol Drug Enforcement Administration 78 investigative and prosecution tools, adopted to fight against organised crime 9 Ireland, civil forfeiture legislation 184 Irish Republican Army (Ireland) 20 is the risk-based anti-money laundering strategy sufficient? 198 anti-money laundering strategy 198-9 risk-based approach: role of FSA 199-203 Italian Red Brigades 20 Italians 12 Italy anti-organised legislation, Article 416bis prohibits membership of the Mafia 99 assets recovered 111 civil forfeiture legislation 184 crime in 110 crown witness or legislazione premiale (rewards regulations) 174, 176 legislation for members of criminal organisation 100 money laundering detection compared with UK 201 prosecutions for money laundering offences 119 Jamaica, witness protection 176 Jamaican Yardies 18 James & Son Ltd v Smee [1955] 1 QB 78 152 Japan, no system of plea bargaining or witness immunity 174 Japanese Yakuza 8, 10 JARD funded by Regional Asset Recovery Teams (RARTs) to support Asset Recovery Strategy 140 managed by ARA 214 JMLSG chaired by BBA 47, 53-4 issued typologies of terrorist financing (December 2001) 43 Money Laundering Guidance Notes published since (1990) 54, 202, 212

Index joined-up multi-agency approach, seen as way forward 89 Joint Asset Recovery Database see JARD Joint Intelligence Committee 87 Joint Money Laundering Steering Group see JMLSG Joint Terrorism Analysis Centre (2003) 83, 86 Judicial Committee of Privy Council in McIntosh v Lord Advocate [2001] 3 WLR 107 108 jurisdiction, principle of International law that state will not enforce law penalties of another 77 Kach (Israel), fundamentalist terrorism 20 Katzenbach Report, organised crime in US and 92 Kefauver Committee (1951) 9 Kell, Sir Vernon (Secret Service Bureau) 85 Kidnap and Special Investigations Unit, kidnapping cases 78 K Ltd v National Westminster Bank Plc [2006] EWCA Civ 1039 153, 189 ‘Know Your Customer’ checks 36, 65, 127, 134, 200 KPMG Report 21 recommendations highlighting need for reform in SAR regime 131-2, 131n66 identified issues which hindered overall management of SAR regime 131 showed more spent on ongoing compliance costs than money recovered 133-4, 134n72 Kurdish militants 23 La Cosa Nostra 10, 12 Lander, Sir Stephen, review of SAR regime (2005), recommendations 209-10 Lander’s Report 52 Langtons (IFA) Limited, fined £63.000 by FSA (2006) 202 laundering of criminal finance, transnational phenomena 66 Law Commission’s Report on fraud 216 law enforcement, internal security and maintenance of social order 73 law enforcement agencies

251

confused with criteria for civil recovery and confiscation proceedings 195 difficulty getting witnesses to cooperate in organised crime trials 123 good intelligence-led and proactive police better at crime prevention 79 overloaded with SARs and have limited resources 177 should consider merging their FIUs to ensure high quality of SARs 133 Law Enforcement Liaison Officer network 81 law enforcement officers and financial investigators, have to satisfy judge that infringement of ECHR is beneficial 182 law enforcement response to organised crime 77 Europol 82-3 HMCE 81 international initiatives to organised crime control 81 Interpol 82 national response and inter-agency approach to 78-9 NCIS 79-80 NCS 80-81 understanding the problem of 77-8 UN and other inter-governmental organisations 83 Law Lords (December 2004), ruled detention under ATCSA breach of Human Rights Act (1998) 50 lawyer, engaged in money laundering if fees from proceeds of crime liable for confiscation 188 layering 33 money launderers and insurance industry 37 legal implications of ‘disruptive strategies’ 181 banker and client confidentiality 188-90 confidentiality and duty of disclosure 186-7 defamation and third party liability 19091 ECHR (1950) 181-2 human rights and financial services regulations 183-6 lawyer and client confidentiality 187-9

252

The Disruption of International Organised Crime

money laundering regulations and Data Protection Act 191-3 Liberation Tigers of Tamil Eelam (Sri Lanka) see LTTE ‘likely to prejudice’, DPA does not explain meaning of 192 Lingens v Austria (No1) [1982] 4 EHRR 373 159 Local Authority Fraud Investigation Teams 140 London important part in deciding and promoting anti-money laundering strategies 124 prime target for money laundering 41 London Metropolitan Police, 1000 men known as ‘Scotland yard’ (29th September 1829) 74 LTTE 20, 23, 43 McClellan Committee (1963) 9 Mafia 8-9, 17-18, 24-5, 97, 100 alien to American society and seen as a conspiracy 92 background for RICO 91 invisible in United States and described as ‘disorganised crime’ 14-15 obtain wealth and power through entrepreneurial activities 15 Magistrates’Court proceedings, forfeiture of cash and 144 Mahon v Rahn (No 2) [2000] 4 All ER 41 190-91 Malayan Chinese Association (MCA) 99 Malaysia, political turmoil (1945-1957) 98 Malaysian Indian Congress (MIC) 99 market forces, create opportunities for legitimate business as well as organised crime 15-16 Maxwell Case, claims against 135 Mayne, Sir Richard 70, 74 membership of groups, focus on criminalising 4 Memorandum of Understanding see MOUs mens rea, prosecution to prove knowledge or suspicion that property the proceeds of crime 119 mens rea element effect of R v Montila on conspiracy of was to require knowledge 160

imported by definition of ‘criminal property 151 prosecution must satisfy 152 Metropolitan Police, various branches of 78 Metropolitan Police Act 1829, Sir Robert Peel and 74 Metropolitan Police Anti-Terrorist Branch, commander appointed by ACPO 84 Metropolitan Police Joint Action Group Financial Crime 115 Organised Crime 115-16 Metropolitan Police SO1 Branch (International and Organised Crime) and SO11 (Criminal Intelligence) 78, 114 Metropolitan Police Special Branch see MPSB Metropolitan Police Special Irish Branch (1883) 84 MI5 intelligence-gathering role, not law enforcement agency 86 responsible to Home Secretary 86 middle and upper class crime, not explained by anomie 11 militarism, relies on physical power, domination and use of force 73 Ministers for Justice and Home Affairs (Dutch EU Presidency 1997) 19 Ministry of Defence and Armed Forces, defend UK and overseas territories 84 minor crimes, more severe punishment due to unequal distribution of power 12 Misuse of Drugs Act (1971), forfeiture in 99, 104 MLRO 51 responsible for determining suspicious information and disclosing it to authority 127 MLRs 51, 124-5 2001(SI 2001/3461), supplemented MLR (1993) 125 certain provisions are in confrontation with principles of DTA (1998) 181 FSA and criminal prosecutions for 183 FSA has undertaken cost-benefit analysis and Regulatory Impact Assessment 200 implications of in 2007? 212 MLR 2003 replaced MLR 1993 and MLR

Index 2001 126-7, 128n50 provide for corporate liability 128 punishment for person who contravenes the Regulations 127-8 question about loopholes for money launderers in unregulated sector 134-5 question of who regulated the enlarged sector under 134, 212 statutory obligations on relevant business to identify, monitor and report suspicious activity 126 money launderers banks attractive to though they have to face due diligence checks 36 choose developing countries with lower risk of detection 35 continue to abuse the financial system 135 dummy, front or shell companies in foreign countries 34 require wide range of services from lawyers 125 scope of the problem 40-42 money laundering 3 14 years maximum emprisonment for 153 applying concept of ‘predicate offence’ made prosecution more difficult 119-20 banking secrecy should be lifted in fight against 189 designed to confuse the onlooker and confound the inquirer 33 different channels 35 financial services 37-8 formal money transfer networks 36 informal money transfer networks 36-7 non-financial sectors 38-9 offshore financial centres and overseas companies 39-40 global 207 legitimising ill-gotten gains by disguising the sources 32 ‘lifeblood of organised crime 30 precise definition in section 340(11) of POCA (2002) 151 serious issue, ‘heightened awareness’ by institutions 131 tackling effectively fundamental to combating serious organised crime 209 test for should be simplified 120 UK and 4

253

Money Laundering Directive, disclosure in good faith should be relieved from ‘liability of any kind’ 191 Money laundering Investigation Teams, established in NCS and HMCE 115 Money Laundering Regulations (1993) see MLR Money Laundering Reporting Officer see MLRO Money Laundering Sourcebook withdrawal, FSA not taking softer approach against money laundering 202 money laundering and terrorist financing expanding lists as new ways of laundering the proceeds develop 212 global challenges which require cooperation between private and public sectors 211 important to maintain right balance and not exclude people from the financial system 203 innovative approach would be private consultants or quasi-government security 177 obligation to report reasonable suspicions 192 varies across customers, jurisdictions, products and delivery channels 199 MOUs 62, 78, 117, 140 MPSB 84-5 founded (March 1883) 76 SO13 (Anti-Terrorist) 78, 115 Commander appointed by ACPO 115 Multi-Agency Witness Mobility Scheme, Social landlords, Local Authorities and Police Services for vulnerable or intimidated witnesses 176 Mutual Assistance Treaties 78 ‘narco-terrorism, drug cartels and drug trade within the terrorist groups 23, 43 National Audit office, no feasibility study carried out before creation to assess targets 194-5 National Counter Terrorism Security office (NaCTSO), works with ACPO 84 National Crimes Authority, should be created to coordinate intelligence information 118

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The Disruption of International Organised Crime

National Crimes Commission, realised with establishment of SOCA 2006 under SOCPA 2005 214 National Crime Squad see NCS National Criminal Intelligence Service see NCIS National Drug Intelligence Unit 78, 114 National Firearms Strategy Group and others 79 National Hi-Tech Crime Unit (NHTCU) 81 National Identification Service 140 National Intelligence Model see NIM National Investigation Service (NIS) 81 National Joint Unit 85 National Money Laundering Strategy for 1999, definition of money laundering 31 National Public Order Intelligence Unit 85 national security difficulties, central database of intelligence 211-12 National Terrorist Financial Investigation Unit, SARS and 85, 211-12 NCCTs 60-61 NCIS 19, 79, 80-81, 140 challenge to conventional police powers and organisation structures 115 definition of organised crime to reflect sphere in UK 18-20 exchange and discussion of information on all forms of organised crime 117 former representative of UK in Egmont Group but now is represented by SOCA 62, 167, 169 investigative and intelligence work of HMCE 52 liaised with Gaming Board, Foreign and Commonwealth Office and foreign agencies 116 operational work of undertaken by other agencies 117 overwhelmed with financial data sets and identifying money laundering patterns 129-30 prior to was no overview on impact of organised crime in UK 116 produced NIM 80 should recruit more civilian staff in producing financial intelligence packages 130

should work closely with FSA to educate financial sector about disclosure obligations 130 NCIS in conjunction with ARA, indepth analysis of money laundering typologies 199 NCS 20, 52, 79, 80-81, 117, 140, 167 Netherlands, no witness protection legislation 176 new MLRs, use phrase ‘relevant business’ instead of ‘relevant financial business’ 126 new restrictions, followed by new ‘inventions’ to escape from original restriction 135 Nigeria, local crime 13 NIM 19, 80 challenges in implementing 166-7 four components of 166 model for policing 165 NIM produced by NCIS on behalf of ACPO Crime Committee, aims to professionalise intelligence discipline in law enforcement 165-6 non-cooperatives countries and territories see NCCTs Northern Ireland Diplock type trials 123 witness and jury protection schemes 176 Dissident Irish Republican terrorist groups 83 OCTF (September 2000) 116 overlap between crime and terrorism 23 ruled that civil recovery proceedings not proceedings for penalty in context of ECHR 185 Terrorist Finance Unit (1987) 115-16 Northern Ireland Affairs Committee of the House of Commons, on terrorism 43 Northern Ireland Office, Good Friday Agreement and 84 ‘no-source’ assessment, taxation and 150, 197 Notional OFCs, shell offices of banks 39 OCDETF, in United States 114 OECD 58-9, 83, 124 OFCs 29, 39 offences after March 2003, ARA power of

Index confiscation investigation with support of law enforcement agency 141 offences before March 2003 DTA (1994) and CJA (1988) can only assist in confiscation 140-41 restraint order under DTOA (1994) and CJA (1988) used 143 offshore financial centres see OFCs Omnibus Crime Control and Safe Streets Act (1968) 9-10 ‘Online Organised Crime’ or ‘Virtual Organised Crime Groups’, specialisms with international membership 212 Operational Command Units (OCUs) 80 Operation Save America ‘OSA’, the American Patriots 20 organisational analysis, explains continuous existence of terrorism despite failure of goals 21 Organisation for Economic Cooperation and Development see OECD organised crime about economic gain 118 an act , specific set of crimes 8 basic principles of nation-wide strategy 208 become more politically involved especially through corruption 23 constantly changing phenomenon 25 definitions 3, 7-8, 19 depends on corruption of police and government officials for survival 14 deviant structures 2 evolved rapidly so that traditional criminal justice system inadequate 178 functions like legitimate businesses but only in illicit areas 15 fundraising 2 has to maintain certain level of secrecy 16 proactive approach to combating 164-5 problem must be addressed on many fronts 123-4 problem of understated until 1980s 88 ‘queer ladder of social mobility’ 11 social costs 1 sophisticated and global problem 213 transnational 4, 210 Organised Crime Control Act (1970) 9-10 Organised Crime Drug Enforcement Task

255

Force see OCDETF organised crime groups copying cellular terrorist structures 23, 26, 77 term can be misleading 18 Organised Crime Task Force see OCTF Organised Crime Unit (OCU), only group of enforcement officers monitoring organised crime in UK 116 organised criminal activity, prevention and prosecution depended on intelligence 122 organised criminal group, structured group of three or more persons, aims of committing crimes 19 organised criminals driven by economic gain 29, 43 launder money through offshore jurisdictions 1 one step ahead despite legislation 135 PACE allows Court to exclude evidence if admission would have effect on fairness of proceedings 172 police could apply for order to obtain documents 122 Paedophilis On-Line Investigation Team (POLIT) 81 Palestine émigrés in Western Europe and US, financial support to terrorists (1980s and 1990s) 44 ‘paramilitary policing’ adopted with little evidence of its suitability in law enforcement 73 when police threatened with violentoriented disorders 72 Partiya Karkeren Kurdistan (PKK), finance from narcotics smuggling 24 Payment Service Providers see PSP Performance and Innovative Unit, the UK Cabinet Office see PIU Phoei Kuan, used by Thai communities 36 PIU Report (2000) 15, 000 disclosures generated each year which led to few money laundering convictions 129 civil forfeiture power in UK recommended by in 2000 143-4

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The Disruption of International Organised Crime

Recovering the Proceeds of Crime 137 reviewed the anti-money laundering and confiscation regimes 48 showed that confiscation regime not making significant impact on criminal assets 121 some of main proposals , later implemented in POCA (2002) 138 suggestions about taxation 149-50 POCA (1995), greater powers of investigation as inserted in CJA (1988) and 108 POCA (1996) and CABA 144 framework for information between Revenue Authorities and Department of Social Welfare in Republic of Ireland 149 POCA (2002) 1, 48, 111, 127 ARA and 79, 140 British Government and non-conviction rate under, proof based on probabilities 136 cases before implementation of need to be considered under DTA 1994 and CJA 1988 157 confiscation in England and Wales and introduces concept of ‘criminal lifestyle’ 140 contains twelve parts 138 deficiencies in the implementation of 205, 214 differences between and previous legislation 157 exemptions of recoverable property 146 exemption to offence if sum paid is in exchange for adequate consideration 188 extends and replaces powers under DTA for search, seizure and forfeiture of cash 147 idea that criminal law not only weapon in criminal justice system 216 interim receivers have not yet received their powers under 196 key to raising level of awareness 214 legal and evidential burdens under money laundering offences fall on prosecution 159

money laundering in UK after 24 February 2003 can be prosecuted under 102 new money laundering offences created under 212 ‘no-source’ provision under section 319 of and 197 not clear what constitutes a disclosure 189 Part VI empowers Director of ARA to exercise function of Inland Revenue over income 150, 198 Part VII of consolidates, updates and reforms criminal law of money laundering 151 Part VIII , investigative orders for confiscation, civil recovery and money laundering 160 Part XI on overseas cooperation only came into effect January 2006 196 PIU generated policy implications for 137 possibility of human rights challenges to 216 provides for seizure of cash inland anywhere in UK 147-8 raises concerns of breaches in human rights and civil liberties and is controversial 181 requirements for disclosure orders section 358 of, similar to production orders 162 restraint powers under only available for offences on or after March (2003) 143 SARS in UK must be submitted to NCIS 80 section 10 where there are no business records and 144 section 327 replaces section 49 of DTA 1994 and sections 93C of CJA 1988 153 section 328 replaces section 50 of DTA 1994 and section 93A of CJA 1988 154 section 329 replaces section 52 of DTA 1994 and section 93B of CJA 1988 155 section 353 of and are similar to production orders 161 since implementation , positive feedbacks regarding new assets recovery regime 214 sting operations and sections 327, 328 and 329 of 172

Index taxation powers under Part VI have raised number of legal issues 197 three failure to disclose offences under 155 tipping off offences under sections 333 and 342, concerns because criminal offence can be committed without mens rea 187 Treasury Guidance Notes have not accounted for implementation of 193 under Part VIII of wider investigative powers 141 a wake-up call 205, 213 lessons learnt for further improvements 206-208 wider investigative powers under 160 POCA (2002) and MLR 2003, approved by Privy Council 2006, amendments for auditors and tax advisers 188 POCA (2002) and SOCPA new legislation which requires further improvement and clarification 204 will take time for these strategies to work 217 police charged with protection of lives and property 70 confusion over perception of organised crime and terrorism hindered intelligence 114 did not give sufficient weight to use of intelligence in creating profiles 113 ‘Dixon era’ , ‘golden Age’ of policing in 1950s 74 forces in UK in 2007 75 not keen to take on money laundering cases 113-14 problem of non-standardised practice 74 spending for financial investigation 122 urged to use minimum violence 73 Police Act 1964, ‘tripartite’ system of governance 74 Police Act 1997, NCS formed under 80 Police and Criminal Evidence Act 1984 see PACE police officers and financial investigators, need to feel confident to use powers under POCA 207

257

Police Reform Agenda (2003), UK NIM and 165 Police Service of Northern Ireland 140 police in UK, enforcing law against supply of drugs 47 policing core mandate is diffuse one of order maintenance 70 ‘hybrid’ or ‘grey’ areas of 74-5 policing institutions, develop structures that match political requirements of their states 72 Policy Statement (January 2006), FSA Senior Management Arrangements, Systems and Controls Sourcebook 53 political campaigns, money from organised crime and 12-13 political terrorists and transnational criminal groups, seldom cooperate on long-term basis 26 poor nations, violence or terrorism to express dissatisfaction and eliminate core oppression 21 post-Cold War era distinction between internal and external security increasingly blurred 73 threat of transnational organised crime 17 Powers, which assist financial investigators in obtaining information for tracing assets 160 Powers of Criminal Courts Act (1973), forfeiture and 104 powers of search and seizure, require approval of Magistrate, Justice of the Peace or senior officer 148 predicate offence 92-4, 119-20 should be abolished as recommended in PIU Report 151 prejudicing and investigation offence penalty for 157 three statutory defences are same as for tipping-off offence 157 pre-POCA environment, must be proof of knowledge that property was tainted 152 Prevention of Terrorism Act (2005) see PTA Principles of Information Exchange Between Financial Intelligence Units for Money Laundering Cases 62

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The Disruption of International Organised Crime

privacy interests, not allowed to override higher public interest in detection of crime 186 private measures against criminal finance 63 Basel Committee on Banking Regulation and Supervisory Practices 64-5 European Banking Federation 65-6 Wolfsberg Group 63-4 private non-financial sectors, to what extent should they be involved in crime prevention 212 proactive approach to combating organised crime cooperation of witnesses: national witness protection programme 175-7 evidential use of intercept material 170-71 intelligence-led policing 165-7 mainstreaming financial transaction intelligence 167-70 private security 177-8 reforming criminal trials: ‘plea bargaining and Queen’s evidence 174-5 role of intelligence: comparison between UK and United States 165 sting/undercover operations 171-4 proactive intelligence emphasised in latest asset recovery strategy 181 needed to detect money which goes through alternative or Hawala systems 178 Proceeds of Crime Act (2002) see POCA production orders also available under section 93H of CJA 1988, section 55 of DTA 1994 and PACE 1894 161 requirements for making set out in section 346 of POCA (2002) 160-61 property, considered to be criminal property if two conditions satisfied 151-2 prosecution, must show property dealt with was ‘dirty money’ 152 Providing Appropriate Tools Required to Intercept and Obstruct Terrorism see USA Patriot Act (2001) PSPs 54 PTA 50, 84 Public Service Providers see PSPs

al-Qaida Council Resolution 1390 and 57 fundamentalist terrorism 20 linked to opium distribution in Central Asia and East Africa 43 support of provided by Osama bin Laden 43 threat to UK 83 used Hawala system to move funds for 11 September attacks in US 36 using Internet chat rooms and anonymous email accounts 211 Racketeer Influenced and Corrupt Organisations Act (1970) see RICO racketeering or membership of criminal organisation, not adopted in English legal system 111 RAIF 206 RARTs, support Asset Recovery Strategy 140 RCS 78 civil forfeiture suggested by in 1995 143 result of increasing crime across police force borders 114 R (Director of the Assets Recovery Agency) v He & Cheng [2004] EWHC 3021 (Admin) 185 R (Director of Assets Recovery Agency) v Belton [2005] NIQB Ref No. COGF5334 185 Reagan, President, Commission on Organised Crime (1983) 10 Re AJ & DJ (9 December 1992), Court of Appeal and risk of dissipation 109 recoverable property, property obtained through unlawful conduct 145-6 Recovery Assets Incentive Fund see RAIF Regional Asset Recovery Teams see RARTs Regional Crime Squads (1964) see RCS Regional Intelligence Cells see RICs regional police forces, independent and lack of centralised intelligence and investigatory capability 113 Regulation of Investigatory powers Act (2000) see RIPA related-back doctrine, provides conceptual basis for forfeiture 96 removing unlawful assets, effects of 137-8

Index repressive role of police, mass physical expression of their use of force 71 restraint order, obtained to freeze defendants assets 143 reverse money laundering, use of ‘clean’ money for ‘dirty’ ends 45 Revised Core Principles for Effective Banking Supervision 65 revised Guidance from the Secretary of State (February 2005), civil recovery and/or taxation investigations can be instituted at same time 139 RICO 91-2 civil remedy which empowers courts to make appropriate orders for person to divest himself of enterprise 97 combines both civil and criminal law for removing proceeds of crime 120 criminal liability under 92-3 felt it would be of little value in UK 1012, 110-111 section 1961(1) , list of predicate offences 93 section 1962 defines ‘prohibited activities’, shows RICO criminal and civil regime 94-5 section 1963, deals with criminal penalties and provides for fines and imprisonment 95-6 UK drew experience from 144 RIPA 5, 86, 88 intersects with DPA and HRA 182 telephone taps or other intrusive devices not admissible in court as evidence 123, 171 risk-based anti-money laundering strategy 5 Road Traffic Act 1988 section 5(2), did prima facie interfere with presumption of innocence in Article 6(2) of ECHR (1950) 159 Robinson, Mr Philip (financial crime sector leader at FSA) 201 Rowan, Sir Charles 70, 74 Russian gangs 10 R v Ali and others [2005] EWCA Crim 87 158 R v Cutherbertson [1980] 2All ER 401 1045, 111 R v Da Silva [2006] EWCA Crim 1654 153

259

R v David Lee Jones [2006] EWCA Crim 933 142 R v Derby Magistrates’ Court, ex parte B [1995] 4 All ER 526 187 R v El-Kurd [2001] Crim LR 234 (CA) 119, 158 R v Gibson [2000] Crim LR 479 155 R v Hussain & Bhatti [2002] EWCA Crim LR 407 119, 154, 158 R v King [1985] 7 Cr App R (S) 227 174 R v Lambert [2001] 3 All ER 577 159 R v Looseley [2001] UKHL 53; [2002] Cr App R 29 173 R v Mason and Others [2002] EWCA Crim 385 173 R v Montila [2004] UKHL 50 158 R v Saik [2002] EWCA Crim 2936 158 R v Sakavickas [2004] EWCA Crim 2868 158 R v Siracusa [1989] Crim LR 712 154 R v Smurthwaite and Gill [1994] 98 Cr App R 437 173 R v Turner [1970] 2 WLR 1093 174 R v Williamson [2003] EWCA Crim 644, quashed because judge failed to postpone hearing prior to sentencing 106 SARs 79-80, 124 been in place since (1986) but weaknesses have been identified 129 difficulty in identifying proceeds of crime when money placed in small amounts 129 doubled between 2000 and 2002 80 increase from 20, 000 in 2000 to 200, 000 in 2005 212 KPMG recommendations for 132 Lander’s Report and 52 as long as they fall within gateway for disclosure their validity to confidentiality cannot be disputed 186 need to be analysed, developed and transformed into value-added intelligence in timely manner 169, 178 one in six in 2002 made by money service businesses 37 out-sourcing to private security consultants which specialise in intelligence databases 177-9

260

The Disruption of International Organised Crime

problem of resources shortage for handling still remained 130 SOCA and 209 supplied by third party , do not violate defendant’s own right not to incriminate himself 187 suspicious nature of, associated with factors extraneous to transaction 211 SARs and CTRs, make it difficult for criminals to avoid creating paper trail by using cash 170 SARs and duty to disclose under TACT, contrary to idea of independent legal advice 186 Saunders v United Kingdom [1996] 23 EHRR 313 183 Scarman Report (1981), proposed blend of community consultation and police professionalism 75 Schneider, Professor Friedrich, volume of laundered money (2004) 41 search and seizure warrants, section 931 of CJA 1988, section 56 of DTA 1994 and section 8 of PACE 161-2 Secret Intelligence Service see SIS Secret Societies Ordinance, made to deal with political disruptions in British Empire 98-9 securities and derivatives, means of laundering the proceeds of crime 37 Security Council, established CounterTerrorism Committee 56 Security Service Act (1989) 86 Security Service Act (1996) 79 Security Service Acts (1989 and 1996) 86 Security Service (MI5) 84, 85-6 Seized Assets Fund, confiscated funds there were used to fight against drug trafficking 121 self-incrimination 163-4 Senate Bill 30, became RICO 92 Senior Management Arrangement, Systems and Controls Sourcebook (SYSC) 129, 202, 212 Serious Crime Bill (16 January 2007) 216 need to see how it will impact on civil liberty and democracy 218 Serious Fraud Office see SFO Serious Organised Crime Agency see SOCA

Serious and Organised Crime Command of Metropolitan Police 78, 115 Serious Organised Crime and Police Act (2005) see SOCPA serious and organised criminals, use financial and legal professionals to launder money 125 SFO 76, 122 government has widened discrepancy between and interpretations of human rights 183 under section 2 of CJA have led to human rights challenges 183 Sheldrake v DPP [2003] 2 All ER 497 159 shell companies, money launderers and 34, 38 Shiite groups (Lebanon), opposed to use of drugs 22 signals intelligence (Sigint) 87 SIS (MI6) 86-7, 215 small and medium size banks, AML regulations only partially relevant to their businesses 134 Smith, D.C., Enterprise Model 7 ‘smurfing’, large amount of cash transactions broken into smaller ones, bundles or loads 33 SOCA 2-3, 5, 52, 88, 206 21st century strategy 208-210 aims to improve intelligence 167 claims about organised crime 18 core responsibility to reduce harm caused by organised crime to British society 136 enhanced capabilities and skills in fight against serious organised crime 214-15 established 9 February 2004 20, 79 examination on rationale behind important to see how it will impact on crime 205, 218 incorporates NCS, NCIS, intelligence work of HMRC, and Immigration Service 208 intelligence-led, focusing on harm reduction and information sharing 209 not yet fully implemented 217 take over of assets recovery function 215 task to operationalise SAR system to develop good quality intelligence 214

Index under SOCPA to direct multi-agency investigations 118 Societies Act of Singapore (Cap 311) 99 SOCPA 1-2, 5, 111 amendment by, the powers under Part VIII of POCA can be used in money laundering offences committed under previous legislation 151 chapter 4, placed arrangements for providing witness protection on statutory footing 177 defence under section 102, failure to disclose offences and 156 established SOCA 52 extra condition to failure to disclose offences 155-6 other measures against financial and organised crime 215-16 Part I establishes SOCA 208 section 102 of as qualified by POCA (2002) amends definition of criminal conduct 152 sections 102 and 107 of have provided change to Part VII of POCA (2002) 157 wider powers to enhance law enforcement agencies and prosecutors in preventing and investigating serious crime 210 South Africa civil forfeiture legislation 184 witness protection 176 South American Agreement on Narcotic Drugs and Psychotropic Substances (ASEP) 83 Southeast Asia 207 Special Branch 85 Special Branches and the Security Service, overlap of resources between 117 Special Branch RICs, in eight ACPO regions in England and Wales with principles of NIM 167 ‘state-organised crime’, committed by state officials as representatives of the state 12 state-sponsored terrorism, replaced by individual financial means 43 ‘stinging the launderer’, ‘stinging the entrepreneur’ 172 sting operation, designed to catch criminals by means of deception 171-2

261

strain theory, disadvantaged Italian communities in America and 11 STRs, dissemination of and FIUs 168 structures of activity, structures of association 8 Sunni Taliban (Afghanistan), revolutionaries or terrorists 22 surprise attack, compensates for weakness, indiscrimination of terrorism 21 ‘suspicion’, not defined in POCA (2002) 152-3 suspicious activity reports see SARs Suspicious Transactions Reports see STRs Sutherland, Edwin, ‘white-collar crime’ 13 Sweden 13 Switzerland, first banking secrecy statute 188 symbiosis between terrorism and organised crime has occurred 22 governments and organised crime because of infiltration and corruption 27 two different types cooperate so that survival of each enhanced 13 Syria, not accepted as participating in international terrorism by US 21 TACT 104, 153 (1998)Terrorist Bombings Convention and (1999) Terrorist Financing Convention 48-9, 84 Taliban regime Council Resolution 1390 57 supported Al-Qaida networks and operations 43 tax, cannot be collected where source of income cannot be identified 149 taxation advantages over civil recovery and confiscation proceedings 196-7 major source of recovered funds from suspected criminals in Ireland and Australia 149 shortcomings of 197 Taxes Management Act (1970) ARA and taxation production orders under section 23 of 196 Director can raise tax assessments under section 29 of 150

262

The Disruption of International Organised Crime

tax havens and shelters, when there is no restrictive legislation 212 tax inspectors from Special Compliance Office of Inland Revenue, seconded to ARA 151 Taylor v Director of Serious Fraud Office [1999] 2 AC 177 190 technology, value of real-time intelligenceled policing, recognised in many jurisdictions 169 technology improvements, with support of intelligence will give accurate crime analysis 165 terrorism built-in failure mechanism in 25 created by powerful nations in labelling poor non-core nations 21 emotive term and involves question of morality 25-6 form of unconventional war based on military trickery, deception and surprise 22 law enforcement matter as well as national security matter 88 matter of national security 84 means to a political end and represents strategic choice 20-21 perceived as threat to stability of the country 27 primary objective is to intimidate a population 43 threat of action which involves violence against a person and 49 Terrorism Act (2000) see TACT terrorism and criminal acts, can be funded with clean funds 211 terrorism as a national security matter 83-4 Government Communications Headquarters (GCHQ) 87-8 security service 85-6 SIS 87 special branch 84-5 terrorist financing 42-4 detecting and tracing of 45-6 laundering of terrorist funds 44-5 much comes from legitimate donations 1, 29, 66 terrorist groups finance combination of legitimate and

illegitimate 44 generate funding by resorting to methods copied from organised crime 23 have become more involved in criminal activities 24, 26, 29 methods for laundering funds 44-5 move to low-risk crimes such as fraud and economic crimes 25 potential to degenerate into pure criminal groups 23 some finances through crime, ultimate aim not wealth or profit 22 terrorist launderers 3 ‘terrorist money laundering, Terrorist Act (2000) and Anti-Terrorism Crime and Security Act (2001) 104 terrorist-related money laundering, should become specific focus of anti-money laundering 46 terrorists crimes to acquire funds to secure their objectives 1, 118 as freedom fighters claim to be representatives of state pursuing a political goal 22 ‘the-end-justifies-the-means’ doctrine 10 Theft Acts (1968-1996) 218 Third money Laundering Directive (2006/48/EC), FATF revised Forty Recommendations (2003) 58 tipping-off offence no offence if occurs before disclosure within sections 337 and 338 188 penalty is same as for failure to disclose offences 156 specific exemptions 187-9 three statutory defences under section 333 (2) of POCA (2002) 156-7 tipping of a person that disclosure made, also constitutes an offence 192 “tipping point”, past, current and future costs of anti-money laundering greater than benefits 201 Tournier v National Provincial and Union Bank of England [1994] 1 KB 461 189 traditional British policing, principle of local and community policing 113 traditional criminal justice, ineffective in targeting organised crime 213

Index traditional law enforcement agencies, bound by limited resources and legal jurisdiction 77 traditional policing 73-4 transnational organised crimes can no longer be dealt with within national jurisdiction 210 concerns in every society 27 cooperation among nations required in combating 20 Interpol, Europol, World Customs Organisation and UN 17 United States and 13 Treasury, Guidance Notes on interaction between anti-laundering legislation and DPA 192-3 Treasury’s Consolidated Fund, confiscated funds place in not made available to fight crime 121 Tribunals or Courts, victims of unlawful acts by public authorities have right to challenge in 182 trustee for civil recovery, functions of 147 trusts, often misused by criminals because of secretive nature and flexibility 37-8 UK 57 solicitors firms out of 12,500 make disclosures (1999) 125-6 adopted 40 FATF Recommendations and 124 attitude problem with cross-agency approach 117-18 civil forfeiture legislation 184 Colombian drug traffickers laundered £47 million through London bureaux de change 37 criminal organisations generated between 6.5 and £1.1 billion (1996), most untaxed 149 ECHR and civil recovery proceedings 184 effort to build EU criminal intelligence model based on NIM 167 financial investigation underused, undervalued and underresourced in 122 identified 48 individuals and 77 organisations whose accounts frozen by Resolution 1373 56-7 important part in promoting anti-money

263 laundering and counter-terrorist financing 47 is it being overwhelmed by everexpanding legislation? 212 law enforcement agencies find difficulty in getting witnesses to cooperate in crime trials 176-7 lead role in work of FATF 199 legal framework on organised crime control in 99-102 local and regional witness protection 176 major evolution of anti-money laundering regime necessary 212 money laundering convictions lower than in United States 164 more proactive and innovative measures necessary for money laundering convictions 165 multi-agency approach for disrupting terrorist financing 49 NIM currently being implemented across the 43 police forces 166 no single national decision-making body responsible for counter-intelligence in 117 not perceived as more effective in detecting money laundering than other countries 201 no witness protection legislation before SOCPA 176 OFCs and seemingly legitimate means to transfer funds out of 40 POCA (2002) giving LEAs wider investigative powers 178 POCA (2002), Queen’s evidence and witness protection programmes 5 ‘predicate offence’ one reason for difficulties of investigators in 119 proactive in fight against crime in international arena 167 prosecutions for money laundering offences 119 purchasing property as method of money laundering (2002) 35, 37 Queen’s Evidence underused in serious and organised crime cases 175 ratified ECHR 1951 and British citizens allowed to petition European Court of Human Rights 1966 182

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The Disruption of International Organised Crime

RCS (1964) 78 recently under SOCPA , defendant can plead Queen’s Evidence in return for discounted sentence 175 regulatory system and reporting structure for suspicious transactions 124 rights and freedoms under ECHR (1950) by enacting HRA and RIPA 181 serious criminal activity focuses on drug trafficking and money laundering 102 SOCA 136 SOCA and cultural change especially in SIS 215 some “groups” come together for specific criminal ventures and then dissolve 18 sting operations seldom used even though some allowed in money laundering operations 172 terrorist financing 4 three types of asset recovery under traditional criminal legislation 104 traditional criminal justice system and organised crime 4 training is another issue in multi-agency cooperation 118 under RIPA (2000) evidence from telephone taps or other intrusive devices not admissible in court 123, 171 until 1980s organised crime understated 77, 111, 114 use of intercept materials , belief that benefits do not outweigh costs in using 179 view that conspiracy laws adequate in dealing with membership of crime organisations 101-2, 111 witness protection largely a police function 177 UK Cabinet Office, effect of removing assets from criminals 29 UK domestic measures against criminal finance 47 money laundering offences 47-8 rules and regulations 51-2 FSA 52-3 JMLSG 53-4 SOCA 52 terrorist money laundering 48-51

UK Financial Intelligence Unit see FIU UK Government’s Financial management Initiative, Home office Circular 114/1983 75 Ulster Defence Association and Ulster Volunteer Force, extortion and blackmail used in fund-raising 24 UN commissioned team, ‘ten fundamental laws of money-laundering’ 34-5 UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances see Vienna Convention UN Convention against Transnational Organised Crime (2000) 19, 26, 56, 81 dealing with smuggling of migrants and people trafficking 27 UN Crime prevention Branch 83 undercover officers, use of governed Part II of RIPA and Code of Practice on use of CHIS 173 undercover operations, legality of and civil liberties 179 underground banking 1 sting and undercover operations and money laundering investigations 170 used to avoid taxation or government scrutiny 36-7 UN Division on Narcotic Drugs 83 UN General Assembly’s Declaration on Measures to Eliminate International Terrorism (1994) 42 United Malays National Organisation (UMNO) 99 United States Central Tactical Unit (CENTAC) 30 Civil recovery and taxation recognised as ways to combat organised crime in 178 claimed that Soviet Union and Libya primary sponsors of terrorism 21 confiscation orders and assets recovered 111 confusion over organised crime 17 crime in 110 DEA 30 integration 33-4 layering 33 placement 33 detection of money laundering , comparison with UK 201

Index enforcement agencies gather evidence of money laundering through sting operations 172 Financial Crimes Enforcement Network Artificial Intelligence Systems, CTRs and SARs 169 financing of politics made up of secret money 13 following 11 September terrorist attacks important to combat terrorist financing 42, 63 jurisdiction that makes most use of electronic surveillance 170 legislation for dealing with membership of criminal organisation 100 organised crime figures 7, 13 President’s Commission on Law Enforcement and Administration of Justice, definition of organised crime 9 prosecutions for money laundering offences 119, 207 prosecutorial discretion allows more use of money laundering charges 165 sting operations, accomplices through plea bargaining and wiretaps used 164 symbiotic relationship between government and organised crime 13 use of plea bargaining and accomplice evidence in money laundering persecutions 174, 178 Witness Security Programme (WITSEC) formed by Organised Crime Control Act 1970 175 United States v $4, 255, 625.39 [1982] 551 F Supp 314 31 United States v Navarro and Nunez-Vasquez 145 F 3d 580 [1998] 171 Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (2001) see USA PATRIOT Act UN Office on Drugs and Crime 83 unregulated sectors, MLRs and 134-5, 212 UN Security Council Resolution 1373 coordinate the counter-terrorism activities between UN member states 27 rules should be applied worldwide 63, 134 UN Security Council Resolution 1386, after

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11 September attacks in US 27 UN Security Council Resolution 1390 (2002) 57 UN Security Council Resolutions, no particular state accused of supporting terrorism 43 UN Security Resolution 1373 27, 56-7 UN World Ministerial Conference on Transnational Organised Crime (1994) 17-18 ‘upperworld’ of corporations, ‘underworld’ of criminal organisations 14 USA PATRIOT Act (2001) 1, 42, 66 amends RICO to include terrorism in ‘racketeering activity 93 Varney, Sir David (chairman of HMRC) 195 VAT investigators 118 Vienna Convention (1988) DTA (1994) introduced in compliance with 103 inter-governmental initiative for criminalisation of money laundering 55, 59 Walsh v The Director of the Assets Recovery Agency [2005] NICA 6 185 war, act of force to compel one party to do will of another 21-2 Warner v Metropolitan Police Commissioner [1969] 2 AC 256 155 Weber, Max, ideal type of legal-rational bureaucracy 9, 92 Welch v United Kingdom [1995] 20 EHRR 247 108 “welfare” functions, police and 70 West Africans 12 white-collar crime, committed by people with high social status and respectability 13-14 Williams, Phil, on money laundering 30 witnesses, cooperation of plays role in organised crime and money laundering prosecutions 178 witness and jury protection schemes, increasing number of successful prosecutions 123 Wolfsberg Group consists of twelve global banks to develop

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The Disruption of International Organised Crime

financial services industry standards 63 Anti-Money Laundering Guidance for Mutual Funds and Other Pooled Investment Vehicles 64 Guidance on a Risk Based Approach for managing Money laundering Risks (2006) 64 Statement on the Suppression of the Financing of Terrorism (2002) 63 Wolfsberg Anti-Money laundering principles for Correspondent Banking (2002) 63

Wolfsberg Anti-Money Laundering Principles on Private Banking (2000) 63 World Customs Organisation, monitors movement of money across international borders 63 world system theory, structural terrorism result of colonialism, imperialism and economic exploitation 21 Zambia, local crime 13