22 January 2007

Speech by the Economic Secretary to the Treasury, Ed Balls MP, at the FSA Financial Crime Conference

Check against delivery

Opening remarks

1. It is a pleasure to be here this morning to speak at this important conference. I want to start thanking all of you here today for all the hard work you do to track down and obstruct criminals and terrorists in our country. Because it is only by close partnership between the law enforcement agencies, government, regulators and the private sector that we can succeed in tackling the threat of organised financial crime.

2. In my speech this morning I want to set out the principles and priorities that underpin our strategy for tackling money laundering and terrorist finance. I will then focus on how we are applying these principles to one issue in particular - the implementation of the third EU Money Laundering Directive - and explain the thinking behind the draft regulations which I am publishing this morning.

3. Before I do, let me say too it is a pleasure to share the platform today with John Tiner. And, as this is the first time we have been together since last week's announcement that he will be standing down from the FSA in July, I want to thank John for his all work at the FSA over the past five and a half years - three of which as Chief Executive. John has been an excellent Chief Executive during a time of considerable change at the FSA. He has helped to build an organisation that is now regarded as a model for the rest of the world. John has driven forward the FSA's globally renowned principles and risk based regulatory approach, and his personal commitment to improving financial capability will continue to be invaluable over the next few months and will pay dividends well beyond the financial services industry. I am confident that his successor will benefit from the foundations he has laid for a continuing strong relationship between the Treasury, our financial services industry, and the FSA.

4. It is now nine months since I was appointed as Minister for the financial sector. Over that period I have seen and discussed what makes the UK a global leader in financial services: our shared commitment to openness; the great pool of talent gathered from across the world working in the City and our proportionate and risk-based regulatory approach.

5. And as globalisation has accelerated, our financial services industry has grown and prospered. The City of London now exports £19 billion of financial services more than it imports, supporting an industry that generates around 6.8 per cent of the UK economy and one million jobs.

6. But, as I said in a recent speech during my visit to Dubai and Abu Dhabi last November, the opportunities of globalisation can be used to do harm as well as good.

7. In the same way that the financial system provides a mechanism for legitimate trade and investment, it can also be abused by organised criminals and terrorists for their own purposes. And just as globalisation has created new opportunities for legitimate business, it has created potential new risks.

8. Criminals and terrorists can move funds internationally more easily and it is estimated that £3 billion of criminal profits are moved out of the UK annually. In addition to the harm caused by organised crime, the Home Office estimates that, as a market, it is worth about £15 billion a year. The UK - and British interests overseas - face an enduring terrorist menace that is historically unique in terms of its scale and international dimensions. And while the financial sector in the UK relies on its international reputation for integrity and fair-dealing, it has itself become a target for organised crime - including, for example, fraud.

9. So it is our duty to do all that we can to protect our international reputation. And we do so knowing that finance is the lifeblood of both organised crime and terrorism. Organised criminals need to use the financial system to move money, to launder and disguise it in other types of assets. Terrorists use the financial system to move funds to promote militant ideologies; train new members; pay operatives; acquire weapons; stage attacks; and sometimes also to carry out ostensibly legitimate activities to provide a veil of legitimacy for essentially terrorist organisations.

10. As criminals and terrorists have come to rely on the financial system, so the financial system and the information within it now provides a new opportunity to tackle these threats. Like the use of fingerprints in the 19th century or DNA in the 20th century, financial information is now one of the most powerful investigative and intelligence tools available, the true potential of which is only now being fully understood. And the ability to deny access to the financial system to organised criminals and terrorists presents a new opportunity to weaken their networks and we must grasp this opportunity to do so, or suffer the consequences.

Progress so far

11. And it is because of the seriousness of these threats that tackling organised crime and terrorism is such an important part of my job as Minister for financial services.

12. In dealing with these threats, the very characteristics that have made the UK a success in global finance - our global outlook, our risk-based and proportionate regulation, our commitment to working in partnership in Britain, in Europe and with other governments round the world, are also the key to success.

13. There has been improved cooperation between business and Government on tackling money laundering, including through the development of updated Joint Money Laundering Steering Group guidance, produced by industry and approved by the Chancellor last year.

14. We have also taken steps to further strengthen our counter-terrorist finance regime and to establish a proactive framework for asset freezing, through:

a new Terrorism Order, making it an offence for funds, economic resources and financial services to be made available to UK terror suspects;
a new Al-Qaida and Taliban Order, further strengthening our powers to freeze assets, including the property, of persons listed at the United Nations;
the use of classified intelligence material in asset freeze cases, balanced by proper judicial and parliamentary oversight;
action to protect charities and money service businesses from abuse by terrorists;
the restriction of state benefits paid to listed terror suspects and their households, where we won a judicial review case at the High Court in September; and
reform of the international architecture, where we will use the UK's presidency of the international Financial Action Task Force (FATF) to press for tougher action against non-compliant regimes.

15. And our strategy to date has produced results:

a four-fold increase in prosecutions for money-laundering since 2002;
the seizing of a record £96.8 million from criminals in 2005-06;
the securing of new agreements at international and EU levels; and
the freezing of nearly 200 bank accounts linked to terrorist suspects.

16. But our strategy must continue to adapt to address the evolving threat.

17. For it to be successful, the financial challenge to crime and terrorism must involve law-makers, legitimate businesses in the financial sector and law enforcement agencies. Given that the financial system, organised crime and terrorism are global in their reach, so the financial challenge to it must also be global. Just as there must be no hiding place for criminals and terrorists, so there can be no hiding place for those who profit from organised crime or fund terrorist activities.

18. This is why, in the next few weeks, the Government will publish an anti-money laundering and counter-terrorist financing strategy document, that will set out how we will meet the challenges described above over the next five years. It will build on the previous anti-money laundering strategy document that some of you may be familiar with, which was launched by Treasury Ministers in October 2004.

The Government's strategy

19. The new challenges we face require us to devise new ways of working. We have worked closely with representatives from the private sector, regulators and law enforcement to develop our strategy document - including, consulting with the Money Laundering Advisory Committee, which contains representatives from all the affected industry sectors - to ensure that it factors in the knowledge of all as well as meeting their needs.

20. We are determined to apply all the tools at our disposal to good effect, and to ensure the continuous improvement that we require.

21. Our goal is to deter, detect and disrupt organised crime and terrorist financing networks.

Deter

22. First, to deter money laundering and terrorist finance from taking place in the first place, for example through specific legal penalties, we have taken new powers in the Proceeds of Crime Act to punish those who handle illicit funds. This opens up new avenues for prosecution and targets the wider facilitation networks that make crime and terrorism possible.

23. Also acting as a deterrent are 'know your customer checks' and record keeping systems that firms apply, which make it harder for perpetrators to disguise the financial audit trails they leave behind.

Detect

24. Second, we aim to detect money laundering and terrorist financing when it happens and to bring those responsible to account. That is why firms are required to watch out for, and to report, the warning signs of suspicious financial activity. These reports are a critical aid to law enforcement efforts to combat specific cases of crime and terrorism as well as build up the general intelligence picture of the criminal economy, and I am sure Bill Hughes will say more on the Serious Organised Crime Agency's role in this effort later this morning.

25. Also aiding in detection is the use of financial information as part of the evidential case to hold criminals and terrorists to account, allowing law enforcement to:

"look backwards": by piecing together how a criminal or terrorist conspiracy was developed and put into effect and the timelines involved;
"look sideways": by identifying or confirming associations between individuals and activities linked to conspiracies, even if overseas - often opening up new avenues for enquiry; and
"look forward": by identifying the warning signs of criminal or terrorist activity in preparation.

Disrupt

26. Finally we aim to disrupt those responsible to make these activities more difficult. This is achieved through:

financial stress, for example by freezing or reclaiming illicit funds - limiting their ability to sustain their operations;
attacks to morale; leadership and legitimacy within an illicit network; and
forcing targets to shift activity into areas where they are more vulnerable and that they would otherwise avoid.

Effectiveness, proportionality and engagement

27. The key principles underpinning our approach continue to be those of effectiveness, proportionality and engagement. That is we must:

maximise the effectiveness of the financial challenge to crime and terrorism;
strike a proportionate balance between the requirements for Government intervention in the interests of security and the need to safeguard flexibility for business and liberty for the public; and
entrench a culture of engagement and collaboration, both between Government agencies and with the private sector.

28. I will deal with each of these in turn.

29. Anti-money laundering and terrorist finance activity has been made more effective by recent organisational changes, such as the creation of the Serious Organised Crime Agency and the changes of asset freezing I outlined previously. We will make it even more effective by a focussed effort to:

ensure that activity is targeted to best effect by building the collective understanding of the underlying threat and directing activity to meet it; and
make the best possible use of the financial tools we have, by making sure that all law enforcement agencies make the maximum use of the opportunities provided to them.

30. Our efforts have become increasingly proportionate thanks to changes to the ID regime affected by the revised JMLSG guidance, with input from us and from the FSA. This trend will continue as further steps are taken to entrench the risk-based approach more widely - by explicitly focussing effort in areas that are relatively more vulnerable to exploitation and reducing the burdens on citizens and business created by crime and security measures to the minimum required to protect their security.

31. On engagement, by working closely with the financial sector on the third EU Money Laundering Directive, we were able to bolster our arguments and achieve a successful outcome in negotiations. Going forward, and recognising that the shared efforts of stakeholders, in the UK and internationally, are required to succeed, the Government will prioritise efforts to deepen the culture of engagement:

domestically - by encouraging greater information sharing and collaboration within public sector, and between public and private sectors; and
internationally - so that we can shape a global solution to a global challenge. Crime and terrorism are global threats. Money launderers and terrorist financers abuse the increasingly global financial system to hide and move funds across borders as a means to disguise their true nature and put them beyond the reach of authorities. Any system to counter the threat in the UK will also rely on other countries having sufficient safeguards in place to prevent the exploitation of their financial system by networks operating in the UK and to cooperate effectively with international partners.

32. To this end, the UK will take on the Presidency of the Financial Action Task Force (FATF) in July 2007 for one year and the Government will use this opportunity to look at the challenges that now face the international Anti Money Laundering/Counter Terrorist Financing (AML/CTF) architecture and review how the FATF can evolve to deal with them. One of the issues our Presidency will look at is how the relationship between the international AML/CTF community and the private sector can be deepened and broadened.

33. Our forthcoming strategy document will set out how this approach of effectiveness, proportionality and engagement will be applied in practice in order to deter, detect and disrupt across the entire AML/CTF regime.

34. Drawing from these principles it will set out a number of priorities for the next five years, including:

making maximum use of financial tools where these can help tackle crime and terrorism. Criminal and terrorist finance measures must be an integral part of our strategy to protect the public. So we need to make the best use of the powers that we have - for example, by recovering criminal assets. We needs to make financial powers easier to use and we need to make sure that our people have the skills and awareness needed to use them;
entrenching the risk based approach. This means that we need to identify and manage areas that are particularly vulnerable to abuse. We will initially focus on three areas - Money Service Businesses, cash couriers and the charitable sector; and
minimising the burdens on business. Money laundering controls create burdens on all regulated firms. These should be the lowest possible to manage the threat of crime and terrorism effectively. We will continue to look for administrative burdens that cannot be strictly justified by the risks they seek to mitigate and see that they are removed.

The Third EU Money Laundering Directive

35. Today, I want to set out how we are adopting the principles of the strategy in one particular area - our work on the third EU Money Laundering Directive.

36. The purpose of the third Directive is to ensure a coordinated EU-wide approach to tackling the global problem of money laundering and terrorist financing. Through the Directive the EU Member States will comply with the revised FATF Recommendations; and ensure that new risks and vulnerabilities are targeted.

37. The Directive was agreed in October 2005 during the UK's Presidency of the European Union. In July 2006 we launched a consultation on proposals for implementing this Directive, which ran until October 2006. The results of this consultation have confirmed the Government's approach.

38. We are today publishing draft revised Money Laundering Regulations for further consultation. These Regulations will implement the Directive and will repeal and replace the Money Laundering Regulations 2003.

Effectiveness

39. The Regulations will introduce tough and targeted new measures to further strengthen our ability to tackle money laundering. In particular:

all sectors regulated for money laundering will be supervised for compliance: many firms that are subject to the Money Laundering Regulations are already monitored to ensure that they meet the requirements, including firms regulated by the FSA, casinos, lawyers and some accountants. We will now extend this approach so that all sectors under the Regulations are supervised. This will include, for the first time, trust and company service providers, estate agents and consumer credit providers, as well as certain other accountants and financial services providers;
supervision of Money Service Businesses will be strengthened to ensure that persons running these businesses are fit and proper. New sectoral supervision of trust and company service providers will mean that those involved in the running of such firms will also need to pass a strict test to this effect;
there will be a new requirement for regulated firms to conduct enhanced due diligence in respect of customers and situations that pose a higher risk of money laundering and terrorist financing. This will ensure that the risk-based approach to customer due diligence that many already apply becomes universal with all firms required to take extra checks at the high-end of the risk spectrum; and
the regulations make operational the Government's view that, where possible, casinos should identify their customers when they reach a threshold of €2,000 of chips exchanged or gambled - an approach recommended as international best practice by the FATF but with a level stricter than the international requirement. In the view of law enforcement, money laundering in casinos below the sum of €2,000 is not a material risk provided proper checks are in place to ensure that this threshold is not exceeded without appropriate due diligence taking place. Those casinos that are able to demonstrate to the regulator that they have the systems in place for tracking and identifying higher risk individuals and for ensuring that criminals are not able to circumvent the threshold by gradually exchanging or gambling chips should therefore follow a threshold approach. Those unable to do so should continue, as they do now, to identify all of their customers on entry.

Proportionality

40. In addition to taking tough action where the risks require it, we are also reducing regulatory burdens where possible. These include:

firms being able to apply simplified due diligence in situations that the Regulations classify as low risk. This means that fewer checks will need to be applied for certain products including the Child Trust Fund and pension products where contributions are made solely by an employer;
firms having greater scope to rely on the customer identification checks conducted by others. In particular, specific provision for regulated firms to rely on the due diligence conducted by FSA regulated firms and certain professionals will be introduced in the Regulations. Going forward the Government hopes to widen the scope of this measure to include other sectors, subject to those sectors being able to demonstrate a high level of compliance with the Money Laundering Regulations. This is a de-regulatory measure in line with the recommendation of the Better Regulation Task Force report on regulatory creep. It should improve the experience both of the firm and the customer by removing duplication of identity checks; and
firms having more flexibility to decide which records to keep. Previously there was a preference in the law for firms to keep copies of documents as opposed to references such as passport numbers. The new Regulations will place reference numbers on the same footing as copies for the purposes of record keeping, reducing business costs and increasing flexibility.

Engagement

41. The Regulations have been developed through a process of consultation with all interested parties, including law enforcement, regulators and industry.

42. As I have said, the consultation on our proposals for implementation ran from July to October last year. The responses to this confirmed the Government's approach and the Regulations have been drafted accordingly.

43. The consultation I am launching today on these draft Regulations will now run until 2 April. Following this, final Regulations will be laid before Parliament by the end of the summer. However they will not come into effect until December 2007, allowing firms several months to update their procedures.

44. And we will continue to work closely with industry, regulators and law enforcement agencies as the Regulations are implemented. This will include discussions on how the Regulations will work in practice, and also work with industry on updating industry guidance.

Conclusion

45. In conclusion, it is only by applying these principles - of effectiveness, proportionality and engagement - that we can together meet and overcome the global challenge of organised financial crime and terrorist finance.

46. The progress we have made, and the future priorities and measures I have set out today, are at the centre of our new front - a financial front - in meeting the Government's commitment to safeguarding the UK's prosperity and security for the future. You all have a central role to play. Indeed we rely upon your efforts and continued cooperation in meeting this challenge.

47. Thank you.