Global Policy Forum

By Jon Henley

The chancellor, Gordon Brown, may have vowed last month that there would henceforth be "no safe hiding place for terrorists' money", but a French parliamentary report to be released today argues that he should look long and hard at Britain's own regulatory system.

"The discourse has changed since Tony Blair came to power, but there has been little concrete improvement," said the author of the report, French MP Arnaud Montebourg. "The City is the world's largest financial marketplace and is thus particularly vulnerable, but it continues to widely ignore its anti-money laundering obligations."

The detailed report, based largely on interviews with those responsible for fighting financial crime in Britain - the Metropolitan Police Fraud Squad, the National Criminal Investigation Service, the Serious Fraud Office, the Financial Services Authority and officials in Jersey, Guernsey and the Isle of Man - is not an exercise in Brit-bashing, Mr Montebourg stressed.

That said, the report pinpoints a number of weaknesses specific to the British arsenal against financial crime that, it claims, have turned the City of London and the offshore crown dependencies into the kind of places where Osama bin Laden is happy to hide his money.

The weak points in Britain's efforts to combat financial crime and money laundering range, the report says, "from common law legislation that allows for the judicial instrument of trusts and encourages the establishment of brass-plate companies, to the absence of any regulation for certain financial institutions such as exchange bureaux and corporate service providers".

"To these elements must be added the serious difficulties encountered in judicial cooperation with the British authorities. This makes the United Kingdom the object of criticism by the entire community of European magistrates involved in the fight against financial crime." Specifically, the report is strongly critical of Britain's mechanisms for detecting and investigating financial crimes. Although all banks and financial institutions are supposed to declare suspicious transactions, only about 10% do so with any regularity, it says.

Moreover, the 15,000 such declarations received by NCIS each year are not completed according to any standard formula and often arrive far too late to be of any use, with fewer than 500 a year leading to formal inquiries and fewer still to an eventual prosecution and guilty verdict.

Tristram Hicks of the Metropolitan Police Fraud Squad told the commission the declarations "pose a problem both of quality and of timing. Very often the quality of the information is mediocre. NCIS does not filter the declarations properly and does not succeed in establishing the links between different transactions".

Dictator's deposits

While it praises the Blair government's initiative in establishing the FSA in 1997, the report cites the agency's shortcomings in investigating earlier this year the case of some £1.3bn, deposited in 15 City banks, by the former Nigerian dictator Sani Abacha.

"Its intervention was modest," the report says. "The FSA is not allowed to name the banks involved, nor to freeze funds suspected of coming from criminal activities. In short, the FSA's investigation suffered from the restrictive legislative framework in which it took place."

The report identifies a serious ethical problem at the heart of the City. It quotes Philip Thorpe, managing director of the FSA, as saying: "We do not have enough power to prosecute individuals, and as far as banks and other financial institutions are concerned, they do not willingly accept the new powers we have been given.

"We really have to make financial institutions understand the need for ethical behaviour. The message will only get through when the individuals concerned have understood. Every time we spot weakness within an institution, it's because someone has taken a personal decision... [and] put turnover ahead of ethical principles."

Another glaring weakness, according to the French report, is the judicial impossibility for banks and other financial institutions in Britain of identifying the "final client" when lawyers, accountants or corporate service providers have opened an account under the name of a brass-plate company alone.

"The fact that the activities of corporate service providers are not subject to regulation is a major loophole," the report says, quoting James London of the FSA's money laundering unit as saying: "All parties concerned have identified these agencies as being a problem... [and] we would have difficulty devising a system that could adequately regulate their activities."

Of the 15,000 declarations of suspicious transactions filed in 1999, the report says, only one came from a corporate service provider.

Similarly at fault are exchange bureaux, which despite the fact that they processed some £4.5bn last year are subject to minimal regulation. Although they filed 2,000 declarations in 1999, 90% came from just seven organisations. Solicitors filed just 57.

Andy Blezzard of NCIS told the commission: "The big problem in Great Britain is lawyers and accountants who are supposed to make declarations. Last year they filed just 180 out of 15,000. Very often, these people see only what they want to see and convince themselves very easily that there is nothing suspect or criminal in what they do."

The report devotes some 30 pages to a stinging indictment of Britain's record on judicial collaboration in international inquiries, citing French, Belgian and Spanish investigating magistrates who complain of almost total non-cooperation and delays of one, two or even three years before even receiving a response.

Part of the problem, it suggests, is simply a difference in judicial methods: continental magistrates ask for cooperation in order to establish proof of an offence, while British authorities demand proof of an offence before proceeding with any form of cooperation, particularly when providing details of bank accounts."We want to cooperate with everyone," said Mr Hicks of the Metropolitan police.

"But we cannot respond to a demand before government lawyers have checked that it has been properly formulated. It's a bureaucratic system that takes an awful lot of time and poses us an awful lot of problems. The bureaucracy demands the proof that the investigations themselves are looking for."

The report is not entirely negative. There is high praise for the work of the Serious Fraud Office, for example. But it ends with another strong reprimand - for Britain's continued tolerance of the fiscal and judicial regimes of Jersey, Guernsey and the Isle of Man.

'Start worrying'

"The strategic fiscal and banking choices operated by the Channel Islands' authorities, with the tacit backing - if not explicit support - of the United Kingdom make these territories the veritable black holes of global finance," it says.

"It is high time that Europe started worrying about the fact that it is harbouring in its midst veritable factories for laundering criminal money."

Authorities in Jersey, a territory which refuses all judicial cooperation except for "serious and complex fraud" involving a sum of £2m (double the level at which Britain will consider cooperation), refused to accept the commission's legitimacy altogether.

"Britain must exert more pressure than it has hitherto done to obtain from these territories the effective application of international judicial norms and the judicial cooperation essential for pursuing criminal cases," the report concludes. "No major member of the international community can, today, be content to maintain, without reacting, relations with non-cooperative offshore regimes that are historically linked to that state."

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