How the city has become hooked on hot money

 

The ObserverLondon increasingly looks like an offshore centre serving many dubious financiers while at the sametime claiming to have regulation that puts it among the world's top onshore jurisdictions.Its offshore status is underlined by the large number of banks and branches of foreign banks in theCity. More are based there than anywhere in the world. Its onshore claim rests on a long-heldreputation for respectability - who after all would ever cast an aspersion on the Bank of England? -buttressed by a mass of anti-money laundering and anti-fraud regulation as severe as anywhere elsein the world. But as each new scandal breaks, London's status looks increasingly ambiguous.London's vulnerability to launderers is not in its laws but in their implementation. Government hasfailed to invest in sufficient skilled law enforcement officers or regulators to curb its sprawlingfinancial system. But this is no accident. The UK's economy cannot afford to curb its income fromthe 'invisible' financial sector, while its industrial sector becomes anorexic.As the United Kingdom feeds its growing addiction to finance and hot money, its regulators blusterever less convincingly about the security of the UK's financial system and its antipathy tomoney-launderers. Anti-money laundering legislation has mushroomed in the Britain to keep thisoffshore haven in line with international standards.The Financial Services and Markets Act of 2000 (FSMA) provides the legal basis for the FinancialServices Authority, which acquired its money-laundering powers on 1 December, 2001. Supervision ofUK banking had been subsumed into the FSA in 1997, an early initiative driven by the Chancellor ofthe Exchequer, Gordon Brown, and his assistant, Ed Balls, in response to the Bank of England'sfailure to act promptly on the BCCI money-laundering scandal.Action against money laundering gained a new urgency when the FSA took charge, says one moneylaundering reporting officer. 'Prior to 2001, no one did a damned thing. It was another "tick in thebox" exercise. You had a compliance department, you probably had an old bombed-out complianceofficer who was the money laundering reporting officer, who had no resources and no respect. Thebanks saw no risks to themselves, no one was going to fine them and no one was going to give themany grief. They were never going to get caught by the law.'Bankers' dissatisfaction with the UK's anti-money laundering system is fuelled by resentment at thepolice, who appear detached from the realities of the financial markets.Carol Sergeant, the FSA's former managing director for markets and risk (she is now the head ofcompliance at Lloyds TSB), said: 'The information that the banks are providing may not actually meetthe needs of law enforcement. But they are not getting any feedback on what law enforcement peoplewant. One of the main areas that has been successful has been terrorist finance because it has beenmuch clearer as to what the authorities want.'The Financial Services and Markets Act has instilled a sense of fear and foreboding into UK banking.This law allows for banks to receive surprise dawn visits from the regulators to check that theirprocedures correspond with the bank's perceived risk as well as with the regulator's own principlesand regulations. Bank training in money-laundering procedures has mushroomed, creating a demand forconsultants and trainers.The minutiae of the law and regulation are closely watched by the regulator, says one former FSAofficer, but more complex problems of vulnerability to fraud or abuse are overlooked.Bureaucratic competence is valued by the organisation, which answers to Her Majesty's Treasury, butlateral thinking into a bank's deeper weaknesses in knowing client affairs is harder to obtain.One money laundering reporting officer (MLRO) of a foreign bank based in London said caustically:'The people that have been fined so far have made pretty glaring errors in terms of basicidentification of clients. The FSA would probably not feel capable of fining people who had theright documents on file, ticked in the right boxes, but failed to make the conceptual leap tounderstanding the client and the client's business.'The officer continued: 'The FSA prefers to keep people back in the office, doing what it likes tocall desk-based reviews of firms. It is less likely to find wrongdoing in its patch; it has far toomany firms to look after for its complement. More staff would increase the cost to the industry, andthat in turn would increase the pressure on government.'Mike Adlem, the London-based managing director of the consultants Protiviti, commented: 'Have welost the plot? The whole point about AML [anti-money laundering] legislation was to go aftercriminal money, freeze it and take it out of circulation. But we have now got to the point where itis only a compliance issue. The vast majority of the effort is now focused on making sure that theFSA are happy. The sums recovered are negligible and totally out of proportion with the amount thatis being spent on compliance.'Michael Foot, the FSA managing director with responsibility for deposit takers, confirmed in May2003 that the United Kingdom had a considerable problem in maintaining and enforcing anti-moneylaundering procedures.He said: 'Operation of procedures to combat the laundering of the proceeds of drugs and other crimesthrough banks and building societies is not satisfactory. There is a great deal of money-launderinggoing on throughout the UK.'Policing the system is one arm of the government's anti-money laundering strategy. Another is thefight against those who hold the proceeds of crime. This was the context for the establishment ofthe Assets Recovery Agency. But observers say that the ARA compares poorly with its opposite numberin Dublin. Felix McKenna, the chief bureau officer of the Dublin-based Criminal Assets Bureau, sayscriminal prosecutions against gang lords are often cumbersome and unreliable, as the wealthy gangleader is likely to be near-untouchable.He said: 'You're not getting the big boys or the principals of the crime organisations. You won'tget the godfathers or the man who's controlling everything. You won't get him into a criminal courtand have him convicted of his crimes, and he will still be able to enjoy the benefits and profitsthat he has generated through his group or gang of the criminal activities they've been involved in.You'll catch his runners and his people lower down the gang.'The big guy can avoid prosecution through the threat of intimidation, fear, and the reluctance ofpeople to give evidence against him within his own organisation. They have no inhibition abouthiring a contract killer to kill a witness and intimidate witnesses and intimidate their families.They intimidate juries. They go to, not extreme lengths, but they're just the normal run of whatorganised crime does - this fear factor that they instil in people.'Guardian Unlimited © Guardian Newspapers Limited 2005http://observer.guardian.co.uk/business/story/0,6903,1499284,00.html