Detecting dirty money hiding in the shadows

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The figures surrounding the UK’s financial services industry and its accompanying professional services firms are truly astounding.

Together, they generate a trade surplus of £75 billion, they employ 2.3 million people or one in every 14 workers, they handle £2.6 trillion worth of bonds, the highest in the world, and they trade nearly twice as many dollars as in the US and more than twice as many euros as in the Eurozone.

While London is at the heart of the UK industry, Scotland plays a key role, with more than £800bn of funds under management, almost 100,000 people directly employed in the sector and £8bn being generated for the nation’s economy – equating to more than 8 per cent of the country’s onshore economic activity.

But beneath all that legitimate activity lurks a darker side to the UK’s financial services.

This article appears in Talking Money - a special report and content series from The Scotsman in association with Womble Bond Dickinson

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While the above-board work is carefully catalogued and totted up, it’s much harder to calculate the amounts involved in money laundering and other forms of financial crime.

“I always shy away from trying to put a simplistic number on it – but it’s billions and billions and billions of pounds,” explains David Artingstall, a consultant specialising in anti-money laundering and combating the financing of terrorism, and an associate fellow at the Royal United Services Institute, the world’s oldest independent think tank on international defence and security.

“You see figures quoted in the tens of billions or hundreds of billions, but really they’re meaningless – there’s a sense that you have to ratchet up the numbers to make the problem look significant. But it’s clear that it’s a huge problem and it’s clear we don’t have enough resources allocated to tackle it from an enforcement point of view.”

While it might be hard to put Fraud is a major threat to us all – the money stolen funds even more damaging crimes, such as terrorism, drug trafficking and people smuggling an exact number on the extent of financial crime, some individual areas can be quantified.

Figures released by the UK Finance trade body showed that the banking and finance industry prevented £1.66bn of fraud in 2018, consisting of £1.1bn relating to credit and debit cards, £318 million linked to remote banking and £218m of oldfashioned cheque fraud.

Yet £1.2bn of fraud was detected, with criminals stealing £845m and swindling a further £354m by tricking individuals and companies into allowing them to commit “authorised fraud”.

UK Finance blamed the high figure on personal data being stolen from big brands.

“Fraud is a crime which poses a major threat to us all – it can have a devastating impact on victims, and the money stolen funds even more damaging crimes, such as terrorism, drug trafficking and

people smuggling,” points out Katy Worobec, managing director of economic crime at UK Finance.

“Every business – from online retailers to social media companies, as well as the public sector – has a duty to work together to beat

fraud and prevent stolen data getting into the hands of criminals.”

Some of the factors that attract legitimate financial services companies to the UK are also appealing to criminals. “The UK’s antimoney laundering rules are so strict that criminals believe if they can launder money through London then people will think it is clean,” says Artingstall.

“Laundering, by definition, is about getting criminal proceeds into the legitimate system. London is a global financial centre, so sooner or later a significant proportion of those proceeds will come through London.”

Artingstall points to the UK’s traditional links to crowndependencies and other overseas territories – which in the past were seen as “offshore jurisdictions”, but which nowadays are often viewed as “tax secrecy jurisdictions” – as another factor in London’s central role in financial crime.

“Whether or not they fully deserve the reputation they have, their financial systems are closely linked to the UK,” he adds.

While much of the focus may be on London, Artingstall warns that Scotland is not immune. He highlights the use of “Scottish limited partnerships” (SLPs) by criminals, especially in Eastern Europe and the former Soviet Union.

SLPs are an old-fashioned format for registering a company that dates back to the late-19th century and, unlike limited companies, at one time owners’ identities did not have to be revealed in official paperwork. Changes to the rules have been introduced after criticisms that SLPs did not have adequate anti-money laundering provisions.

“It’s not just about financial services but also about professional services,” Artingstall says. “SLPs are often registered at very well-known addresses in Edinburgh and Glasgow and other places, but they have

no economic activity in the UK and in many cases don’t even have bank accounts here.

“Property investment is a highrisk money laundering activity, whether residential and commercial. People have usually focused on the high-end London market, but Edinburgh, Glasgow and the other university towns would be attractive markets. Financial services these days are a bit nebulous – it doesn’t matter where you’re based. The flow of where money goes can be quite interesting.

“You’ve got international money laundering, which requires a specific type of response, but then every house-breaking in Scotland generates proceeds of crime that need to be laundered in one form or another.

“When we think about money laundering, we tend to picture highend complex structures involving professional services, but at the same time there is low-level activity.

“That’s where, for example, local bank branches or local solicitors or local accountants are perhaps doing the books for cash-rich businesses that are typically used by more localised organised crime groups to launder their proceeds.

“It’s not all about Russians moving money into the European Union using SLPs – it could be the local Vietnamese nail bar too.”