Money Laundering, Terrorist Financing and Other Financial Crime Outside the Financial Sector

@ the IERP® Global Conference, August 2023

Presenter Nigel Morris-Cotterill, Financial Crime Risk and Compliance Strategist, gave a no-holds-barred session, telling the audience right from the outset that he was talking through them to the Boards, staff and shareholders of companies because there is an increasing trend to make officers liable for crimes committed in the names of companies and prosecute companies and staff for malfeasance. “There is a growing trend to blur the lines of mens rea – the intent to commit a crime,” he said. “You cannot convict a company, and for most crimes, the prosecution must prove that the person who committed the crime intended to commit the crime.”

However, this implies thinking; companies do not think, people do. “So you cannot prosecute a company for mens rea,” he said, but governments want to prosecute companies nevertheless. Regulators want to bring regulatory action against companies, and are finding ways of modifying the law to do so. One way is to make offences a strict liability, i.e., enforceable even if there is nobody to make the decision to commit the offence. He said that governments and regulators were now applying this to a wider range of activities than ever before. “The trend is to increase the range of activities for which strict liability can be applied,” he explained.

The overall trend is to make companies liable for acts committed in their name especially if the company gains as a result of that act being committed. The only way for companies to protect themselves, therefore, would be for the staff, officers and shareholders to understand the risks they were facing and the consequences which may arise. The message for them is to identify and manage risk, he said, adding, “Those in risk management and internal audit are there to identify failures in the risk management processes, policies, and procedures. Sometimes the failures are pre-emptive and sometimes they are reactive.”

Describing money laundering as just one of the financial crime risks and compliance issues which affect businesses and those who work in them, Morris-Cotterill said each of these factors shared core similarities, with only small peripheral differences. “To make money laundering a special case, the one upon which the most resources are concentrated, is a natural response to the legal and regulatory pressure that has been put on financial institutions and other businesses, over the past quarter of a century or so,” he pointed out. “In many jurisdictions it has already changed, and those changes are accelerating. But many businesses have not changed their concentration; they must.”

Counter money laundering applies only to financial services businesses and a small number of other such as lawyers, accountants and dealers in high value goods. These businesses are subject to regulatory requirements which have been put in place to detect, deter and report suspicions of money laundering and terrorist financing. However, the primary legislation, i.e., the laws that make money laundering an offence and that make it an offence to help money launderers, apply to everybody regardless of whether or not they are a business. “Anybody who deals in some way with proceeds of a criminal act, whether their own or somebody else’s…is a money launderer,” he said.

If someone steals money, or steals something to get money, then gives a gift which was bought in whole or in part with the stolen proceeds, to a family member, that family member becomes a money launderer. The idea that money laundering relates exclusively to the financial sector is completely false, he said. “No matter what the nature of the business, the company, its staff and its directors are all at risk of being convicted of money laundering if they take or help to take proceeds of crime into the company’s accounts,” he explained further, adding that it was difficult to see where the limits were, when it came to money laundering.

Explaining terrorism, he said that any act of causing harm or grievous hurt with the intent of compelling the government or other authority to effect change, or change its policy, was considered terrorism. “Within a company, there may be people who are helping radical groups to undermine democracy,” he said. “There are a lot of people, including politicians, who may be supporting acts like that.” Terrorism was a massive problem; it was a risk that everybody needed to be aware of. The risk of crime, and the funding of crime, was also a problem and a growing risk because it affects everyone, although there was a tendency to think that it only happened to other people.

“Any fraud that happens in society increases your living costs,” he said. “Tax evasion increases your living costs. You pay more taxes because other people do not pay the taxes they should.” Since companies cannot be jailed, governments have to find a way to make them liable for the criminal acts that take place in their name. “Offences of strict liability can be summarised very simply: did it happen? If yes, then the person who made it happen is guilty,” he said. “In the case of companies, the company does not actually make the offence happen – hence the need for strict liability to say that the company is responsible in any case.”

He explained that under the UK’s 13-year-old Bribery Act, the company that benefits from bribery is liable unless it can show that it had adequate – which is not the same as effective – measures in place to prevent bribery. It all comes down to policies and procedures, he said, citing the case of a US company which was found to be liable even though the adjudicator found that it had strong measures in place to prevent bribery. “The reason it happened was that senior managers deliberately, and with determination, circumvented the controls,” he said, added to which there were increasing instances of policies being declared inadequate by regulators even before systems were tested for failure.

“Multi million dollar penalties are being levied, but you can only test systems by failure,” he stressed. “Regulators are going to businesses and making decisions that businesses should have done business in the way that the regulator says it should have been done. The regulators are demanding unrealistic types of regulations because they do not apply the regulations that should be applicable to businesses of a particular size and nature; SMEs are expected to comply with the same regulations as big businesses.” Another major global development currently was the failure to prevent fraud; companies that don’t have provisions in place to prevent staff from committing fraud will be held liable.

Speaking on the role of the money laundering reporting officer, he said that this officer should have the authority to tell anyone involved with money laundering to leave the company immediately but no company will allow the money laundering reporting officer to have that kind of firing authority. Money laundering reporting officers are part of the risk management or internal audit function, although they are on the periphery of these two areas. As to who was ‘safe’ when it comes to the commission of fraud or bribery, he said shareholders who own shares but do not have any influence are safe from direct prosecution but the value of their shareholding is not safe.

This applies to the shares issued to them by the company and to any shares bought on the open market. “Shareholders who have power to exercise influence are not safe from prosecution and from the consequences that follow,” he said. “Nominee directors were not safe before, and they are not safe now. An indemnity agreement with the company will not prevent prosecution, and would probably be held as contrary to public policy, and be set aside.” He said that shadow directors, too, were not safe; and trustees holding shares were in the same position as shareholders and shadow directors. And, “if investigators find that a risk professional or internal auditor conspired with someone to bypass systems, a conspiracy charge will follow.”

Noting that evidence of recklessness in relation to identifying weaknesses in policies and procedures may also lead to prosecution, he said, “We are seeing nothing less than a fundamental shift in the nature of limited liability, at least for criminal purposes. Listen to your financial crime risk and compliance officers, to your risk professionals and internal auditors. You cannot be reactive; you must be proactive.” Companies are facing an existential threat because fines and civil penalties are high, and enforcement agencies and regulators are being increasingly seen as profit centres, or at least as contributors to their own costs and budget.

Now, more than at any other time in history, governments are addressing the challenges that come with money laundering and the financing of terrorism, and are doing so in a concerted, new global effort; and while self-reporting of breaches of sanctions, laws and a wide range of compliance failures in everything from data protection to consumer protection will usually mitigate penalties, the penalties will nevertheless be substantial.

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