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The eventual conversion to the euro means there will be a mad rush to acquire property, works of art, cars and jewellery. A mini-boom is expected in 2007 and speculators are ready for the big-bang effect.
Money laundering has hit the headlines recently when an incarcerated drug dealer allegedly engaged his in-laws to run a company as ‘prestanome’ for him. In short what constitutes money laundering? It involves transactions intended to disguise the true source of funds; disguise the ultimate disposition of the funds; eliminate any audit trail and make it appear as though the funds came through legitimate sources; and evade income taxes.
Money laundering is the process by which criminal proceeds are ‘cleaned’ so that their illegal origins are hidden. It is the way crime disguises its activity, by processing its dirty money. Although it is not possible to measure in the same way as legitimate economic activity, the scale of the problem is considered to be enormous. But is banking secrecy in jeopardy?
The answer is yes. The removal of banking secrecy provisions, in appropriate circumstances, is vital in order to combat money laundering. In October 2000, the EU Council of Ministers reaffirmed its position that fiscal and banking secrecy should not provide barriers to investigations on money-laundering and international cooperation. A Protocol to the EU Mutual legal Assistance Convention now ensures that banking secrecy provisions are not invoked as a reason to refuse a request for assistance from another Member State. Malta as any other EU member is now expected to either extradite its own nationals, or where it doesn’t solely on the grounds of nationality, then we should, at the request of the country seeking extradition, submit the case without undue delay to its competent authorities for the purpose of prosecution of the offences set forth in the request.
Why all this fuss about money laundering which seems to hit the headlines so frequently? The answer is because money laundering erodes the integrity of a nation’s financial system by reducing tax revenues through underground economies, restricting fair competition with legitimate businesses, and disrupting economic development. If a financial institution suspects or has reasonable grounds to suspect that funds are the proceeds of a criminal activity, or are related to terrorist financing, it should be required, directly by law or regulation, to report promptly its suspicions to the financial intelligence unit (FIU).
It goes without saying that financial institutions should verify the identity of the customer and beneficial owner before or during the course of establishing a business relationship or conducting transactions for occasional customers. Lawyers, estate agents, notaries, other independent legal professionals and accountants are cautioned to be on their guard when they carry out transactions for their client concerning activities such as buying and selling of real estate; managing of client money, securities or other assets and finally management of bank, savings or securities accounts. Historically, such regulations were first issued in the Directive of 1991 requiring the imposition of an obligation on financial institutions to establish customers’ identity and report any suspicion of money laundering. It was later based on the 40 recommendations of the Financial Action Task Force on money laundering (FATF), of which the EU is a member. FATF is an inter-governmental policy-making body set to combat money laundering and terrorist financing. This is an inter-governmental body established by the G7, promoting anti-money laundering policy at national and international level.
Typically, financial institutions should undertake customer due diligence measures, including identifying and verifying the identity of their customers, when establishing business relations, carrying out occasional transactions: if there is a suspicion of money laundering or terrorist financing, or the financial institution has doubts about the veracity or adequacy of previously obtained customer identification data. Financial institutions and their intermediaries should pay special attention to all complex, unusual large transactions, and all unusual patterns of transactions. It is common to find that such transactions have no apparent economic or visible lawful purpose. The background and purpose of such transactions should, as far as possible, be examined, the findings established in writing, and be available to help competent authorities and auditors.
In Malta we have so far three land-based casinos. These are subject to a comprehensive regulatory and supervisory regime that ensures that they have effectively implemented the necessary anti-money laundering and terrorist-financing measures. At a minimum land-based casinos should be screened although so far it appears that online gaming casinos are not specifically mentioned. Naturally the Lotteries and Gaming Authority takes the necessary legal or regulatory measures to prevent criminals or their associates from holding or being the beneficial owner of a significant or controlling interest, holding a management function in, or being an operator of a casino.
Lately we find more extended coverage under the second directive of 2001. This extended the number of crimes to which the provisions applied and widened the range of professions who had to observe it to include lawyers, auditors, accountants, notaries, casinos and estate agents. It also provided for the establishment of financial intelligence units in each member state to which suspicious transactions reports were to be made. Due to the Twin Tower attacks, more tightening on terrorist activity was needed and a proposed third directive was issued in June 2003 to incorporate into EU law revisions made to the FATF recommendations. It aims to extend the provisions to any financial transaction which might be linked to terrorist activities.
All this has created an overkill in legislation which is seen by some quarters as slowing down legitimate business. In fact, legal challenges against the directive have been launched in Belgium and Portugal. In the light of the serious concerns over the second directive, proposals for a third directive, therefore, are seen by many as premature and inappropriate. A proposal for a third money laundering directive has inevitably caused controversy. It was widely felt that the directive should contain a general rider stating the need for a risk-based approach, to be applied to all areas of the directive. Another general point was that the directive refers to “credit and financial institutions”, whereas “legal and natural persons subject to the directive” would represent more of the people encompassed by the directive. A common complaint was that there was no reason why one authorised firm should not be able to rely on another authorised firm for an introduction to a customer. They felt that ultimate responsibility should not be on those who were relying on the introducer as this would undermine the entire point of introduced business.
Some experts now warn that the legislation has made a potentially far-reaching error by extending this obligation to trust services – a legal instrument widely used in the UK bond market and is picking up steam in Malta. Trustee relationships are also used in the equities markets, where the draft directive could cause similar problems. In terms of the law, trustees could be required to identify the ‘beneficial owners’ of an asset – meaning the ultimate bond holders. This process of identification would be virtually impossible with bonds changing hands frequently in the secondary market.
On a domestic level we note that the control over cash is almost impossible to manoeuvre. Just consider that up to last year authorities reported Lm520 million worth of cash in coin in circulation, equivalent to Lm1,300 per capita. In theory, this is meant for transaction purposes, but the size and the composition of Lm20 currency notes indicate clearly that a large part is really cash out of circulation hidden under the mattress for various reasons, not least that its owners are prepared to forego the potential interest they could earn thereon in order to remain anonymous and out of the taxman’s reach.
With the eventual conversion to euro currency such a massive hoard has only 13 months left to find an adequate shelter evading the official deposit in banks. Naturally some of the sources of such funds arise from undeclared and untaxed money and may also include drug money and other illicit sources. Technically there will be a mad rush to roll out the washing machine in great haste. Washing whiter than white there will be a stampede to acquire property, works of art, jewellery, luxury limousines and to some extent savvy designer label apparel for posh Xmas parties. A mini-boom is expected in 2007 and speculators are ready for the big-bang effect. If you are an estate agent selling a once-in-a-lifetime penthouse overlooking the Sliema creek will you be tempted to risk offending buyers by asking difficult questions?
It will also pose a problem to high-class jewellers who are approached on a no-question basis to accept cash for precious metals, diamond necklaces and fine watches.
It will be an interesting year. As Al Capone was rumoured to say, he was surprised that so many people turned to crime when there are so many legal ways to launder your hoard of unclean cash.
The writer is a partner in PKFMalta an audit and business advisory firm. |
