19 July 2004
Speech by Philip Robinson

Introduction

Many thanks to Professor Farrand for his words of introduction. I too would like to welcome you all to the FSA this evening and to the first in this series of ten lectures organised by the FSA and the London Metropolitan University.

I am very pleased to be here this evening in my capacity as FSA sector leader for financial crime. I want to explain why financial crime is important to the FSA, set out for you the FSA's financial crime priorities and then explain our role in the complex overall UK framework. Finally I want to pose a few questions for you to think about.

Targeting financial crime is important and I have been charged with leading the FSA's work in this area. Financial crime occurs in all sectors of our industry, the challenge is vast. We cannot stop it – but we can make it more difficult for the criminal.

Let me add it is not confined to the City of London; financial centres around the world are vulnerable. London is one of the biggest centres so criminals are far more likely to be attracted to London, partly because they may think that they will be more anonymous here and partly to be able to claim a badge of respectability

Financial crime is not new

Financial Crime is not new; money laundering, fraud and market abuse have been around so long as there has been a financial system.

Financial crime is not just about finance and money. It funds drug trafficking, human trafficking and finances terrorist atrocities that we have been only too familiar with in recent years and it enables criminals to enjoy the fruits of their labour. It is the increased perpetration of these types of crimes that has led to more criminals and terrorists laundering their funds and committing acts of fraud and dishonesty, therefore necessitating a need for increased regulation.

When we think about the crimes we are trying to thwart – the Madrid bombings, September 11th, the human misery associated with people and drug trafficking, organised crime – is the burden of regulation really too heavy?

If we cast our minds back to early 18th century London we have the South Sea Bubble scandal of 1720. The following extract from Charles MacKay's 'Extraordinary Popular Delusions And The Madness Of Crowds' gives an early example of one unscrupulous Cornhill fraudster at the time of the South Sea Bubble scandal.

' the prospectus stated] that the required capital was half a million, in five thousand shares of 100 pounds each, deposit 2 pounds per share. Each subscriber, paying his [or her] desposit, was entitled to 100 pounds per annum per share. How this immense profit was to be obtained, [the proposer] did not condescend to inform [the buyers] at that time, but promised that in a month full particulars should be duly announced, and a call made for the remaining 98 pounds of the subscription. Next morning, at nine o'clock, this great man opened an office in Cornhill. Crowds of people beset his door, and when he shut up at three o'cock, he found that no less than one thousand shares had been subscribed for, and the deposits paid. He was thus, in five hours, the winner of 2000 pounds. He was philosophical enough to be contented with his venture, and set off the same evening for the Continent. He was never heard of again.'

Fast forward to the late 20th century London and the collapse of the investment company Norton Warburg as a result of the misappropriation of investors' funds. Then the closure of the fraudulent bank BCCI, which caused serious losses to many depositors and the collapse of Barings bank as a result of fraudulent uncontrolled activities of a derivatives trader in Singapore.

Other examples of financial crime include the Maxwell Affair where we saw the misuse of pension funds to support Robert Maxwell's business, also the Barlow Clowes affair that turned out to be no more than a pyramid selling scheme and more recently the closure of yet more pyramid selling schemes.

We have also seen the more outlandish frauds relating to ostrich breeding and worm farms where consumers have lost large amounts of money.

These events have almost always resulted in the strengthening of the legal and regulatory regimes.

Regulation as a response to crime

Our previous chairman, Howard Davies discussed the regulatory response to the South Sea Bubble scandal in a speech in March 2003. His view was that 'The combined effect of the bubble itself, and the resultant legislation, led to a reaction against joint stock companies that lasted for over 100 years, putting back the development of one of the most powerful motors of economic growth and wealth creation.' These comments were made in the context of equity market bubbles rather than financial-crime related, but perhaps the recent uncertainties in the equity market caused by financial misreporting could have a similar effect.

Other scandals have had a more direct impact on financial crime regulation.

The 1986 Financial Services Act resulted from the collapse of Norton Warburg in 1980 – this prompted the Gower report and ultimately resulted in the creation of the SIB, the predecessor to the FSA.

After the collapse of Barings and BCCI, strengthening of the Banking Supervision regime occurred. The collapse of the Robert Maxwell empire led to the Pensions Act, and the creation of OPRA. The 2000 Financial Services and Markets Act consolidated the investment and banking legislation into a single financial services regime supervised by the FSA.

Financial Crime is fraud and money laundering. Have we entirely removed fraud due to financial regulation? No – policing the perimeter is still going on and fraud still happens within and through authorised businesses. Staff fraud against the firm. Staff fraud against clients of the firm and and the facilitation of fraud by others via authorised businesses either knowingly or unwittingly.

International, European and UK measures to counter money laundering

Before saying some more about fraud I want to say something about AML

We should remember that there has been a legal AML requirement for many years. The first money laundering offences were contained in the 1986 Drug Trafficking Offences Act, the government then expanded the coverage to terrorist offences in 1989 and moved to an 'all serious crimes' set of money laundering offences as part of the implementation of the 1991 first EU Money Laundering Directive. It was that Directive which required the UK to impose a requirement for AML systems and controls on a very wide range of financial institutions. This was done by HMT in the form of the 1993 Money Laundering Regulations.

The detailed requirements for firms to follow are in the Joint Money Laundering Steering Group Guidance Notes, first published in 1990. The JMLSG is the industry body made up of 16 financial sector trade bodies and produces Guidance Notes on compliance with legal and regulatory requirements and good practice.

The UK has been unique in developing a public-private sector "partnership approach" to tackling money laundering, which is most visible in the JMLSG Guidance Notes for the Financial Sector. These Guidance Notes set out a comprehensive body of good practice to financial firms on how to comply with their AML obligations – e.g. to verify the identity of new customers, keep records and train staff. (Incidentally, that approach was commended by the FATF in its 1996 mutual evaluation report on the UK's AML regime as a model for other countries to follow.)

We decided to work within this existing regime when we made our first Anti-Money Laundering rules in 2000. In these we refrain from duplicating the information in the Guidance Notes. Indeed we give them recognition and compliance with the industry's own guidance will ensure compliance with the FSA's rules in this area.

Our statutory objective

The FSA has four statutory objectives and the reduction of financial crime is one of these. The reduction of financial crime objective supports, and is supported by, our other objectives – the protection of consumers, market confidence, and public awareness.

Our financial crime objective has a very broad scope. It requires us to aim to reduce the extent to which regulated persons and unauthorised businesses can be 'used for a purpose concerned with financial crime'. Financial crime includes any offence including fraud or dishonesty, market abuse and money laundering.

FSMA also tells us that, in pursuing the objective we have regard for firms' awareness of the risk of their businesses being used in connection with financial crime and that firms take appropriate measures and devote adequate resources to the prevention of financial crime, facilitating its detection and monitoring its incidence.

The Act also gives the FSA specific power to 'co-operate with other persons….who have functions….in relation to the prevention and detection of financial crime'.

The financial crime objective was a new regulatory responsibility in 2001. Our predecessor regulators did not have a comparable objective. So we have been given something new to do here, beyond pre-existing responsibilities at N2.

Why regulate?

The reason is quite simply to deter criminals and terrorists from trying to use the financial system to perpetrate financial crime; and to make it easier to catch and punish those who do use it.

Regulation aims to deliver better systems, controls and risk management in firms, better intelligence for law enforcement, fewer crooks and facilitators in the system.

There will always be financial crime, crime pays and there will always be people trying to exploit the system for their own gain so successful delivery of the financial crime objective will make life riskier and more costly for the criminal and the job of law enforcement and the criminal justice system easier. That in turn will mean less crime in the UK than would otherwise occur. Not just financial crime, but a reduction in crime that needs to use the financial system to achieve its end of getting ill gotten gains into the hands of the perpetrators.

The institutional framework

But we are only one of many players in the fight against financial crime. We are not – and should not be – responsible for investigating and prosecuting crime and for the recovery of laundered assets. Necessarily, the UK's Anti-Financial Crime Institutional framework is made up of UK government, law enforcement agencies, FSA and industry. Each member has an essential part to play.

Let's think of it as a toolkit. Your bathroom springs a leak, you call the plumber, the room below floods and the lights go out – now you need an electrician. Then the ceiling caves in – now you need a builder. In order to fix the problem you need a range of experts with different tools, working together. The electrician needs to work with the plumber and the builder, recognising their own individual areas of expertise (and preferably to the same time-scale – difficult to achieve with builders).

The FSA has tools, to control firms' legal access to do financial business and people to perform key roles (including MLRO). We also have supervisory and enforcement tools which we can use as necessary to alter firms' behaviour to achieve our objective. We have levied fines amounting to £5,400,000 relating to breaches of anti-money laundering rules.

We also have criminal prosecution powers in relation to breaches of money laundering regulations and market abuse.

The Government has an extensive toolkit at its disposal. It plays the lead role in the fight against financial crime.

The Home Office is responsible for UK primary legislation (Proceeds of Crime Act 2002 and the Terrorism Act 2000). They set out police strategy and prioritise resource. Crucially, they provide the funding for NCIS, the ARA, the police and other law enforcement agencies.

HMT is the main representative for the UK in the European Union and the Financial Action Task Force. They are responsible for the implementation of EU directives and approve industry guidance under PoCA and the Money Laundering Regulations.

Thirdly we have the law enforcement agencies;

NCIS (the National Criminal Intelligence Service) is the UK's financial intelligence service that receives suspicious activity reports about money laundering and terrorist financing and sends them to law enforcement agencies for investigation. The 52 police forces in the UK investigate crime, money laundering and terrorism.

HM Customs and Excise investigates and prosecutes money laundering, drug trafficking and tax offences as well as licensing Money Service Business. The Crown Prosecution Service is responsible for the prosecution of crime, money laundering and terrorist offences.

We need to ensure that the right people use the right tools at the right stage, working TOGETHER to tackle the problem. The lights won't turn on in the flooded bathroom if we forget to call the electrician.

To do this a coherent strategy is necessary. For Anti-Money Laundering we stated 5 key elements for a coherent UK strategy:

  1. There is a clear UK anti-money laundering strategy; roles and responsibilities for delivering that strategy are well-understood.
  2. The key stakeholders work effectively together.
  3. We have an efficient SAR regime that delivers value to law enforcement and is used to target the efforts of reporting institutions.
  4. Law enforcement has adequate resources, and is organised to do justice to SARs and to provide good, continuing feedback to NCIS and the industry.
  5. The legal framework, from the EU down, is risk-based and proportionate and allows for the dynamic evolution of anti-money laundering techniques over time.

How can the FSA be more effective in tackling financial crime

John Tiner has told us that all work in the FSA must be carried out with the principles of focus, collaboration and action in mind. What does this mean for us in the area of financial crime?

It means:

  • Focus – Identify the biggest threats to the UK & the financial crime objective and the principles of good regulation.
  • Collaboration with others
  • Home Office ID Fraud Steering Group
  • HMT MLAC
  • Home Office Money Laundering Reporting Task Force
  • JMLSG
  • Overseas Regulators
  • Law Enforcement
  • Action – to address the threats identified - to remove or reduce them
  • Defusing the ID situation
  • Targeting our efforts on real problems by using intelligence more effectively

Are increased levels of regulation effective?

One of the problems we face is how to measure the effectiveness of our regulation. We cannot measure our success simply by looking at the fines we levy. Indeed the regulatory conundrum is deciding whether fines are a measure of success or failure within the institutional framework I have already mentioned We want to deter criminals from using London a centre through which to launder money.

We want those who perpetrate frauds to be stopped in their tracks by effective use of intelligence. We want to make criminals more catchable and punishable and this increases the cost of crime for them. And of course want to anticipate risks and head them off before they crystallise. Success in these things is very, very difficult to measure and because of this some feel that the AML regime is ineffective. For them, anti-money laundering is all pain and no gain. They see the law and regulation as generating significant cost, constraints on the way they do their business and irritation for their customers. And they see little benefit to themselves or society.

As to whether the costs outweigh the benefits. We recognise that there is much more work to do.

So, in pursuing the Financial Crime objective and, in working with and supporting the work of other UK stakeholders, what are our aims and priorities? Our main aims in relation to tackling financial crime for the FSA are:

  • Making financial crime more costly for criminals and deterring abuse of the financial system – the better the industry's defences and radar, the more difficult it will be for criminals to penetrate them or remain undetected when they do. But we need to find ways to target effort more effectively.
  • Achieving an industry perception of money well spent – we, along with industry are part of society and society suffers for crime and terror. Too few see a link between AML spend and drugs, people trafficking and fraud, and those that do want to see the same effort being expended by the other parts of the institutional framework.
  • Achieving consumer buy-in – Anti-money laundering often seems like bureaucratic intrusion to the customer, for example, checking ID. They need to understand why it is done
  • Contributing to an effective wider UK plc fight against crime
  • Having a balanced, joined-up approach to AML and fraud

We have the big advantage of knowing that there is a great deal of commitment from both industry and government to tackle financial crime.

Our priorities

Let me tell you a little about the FSA's current priorities in pursuing these aims:

Fraud

Current FSA priorities on fraud are:

  • Setting out our approach to fraud and dishonesty – response to DP26
  • Developing our partnerships
  • Increased dialogue with the industry on risk
  • Targeting

Our key aims in this area:

  • Senior management take responsibility
  • Good fraud risk management/systems – raise current systems from the operations area to senior management.
  • Industry cooperation
  • Accessible industry good practice
  • Customers protecting themselves - ID fraud
  • Law Enforcement support

We are delighted that government is taking steps to move fraud up the political agenda, examples include:

  • Extra money government is putting into the City of London Police Fraud Squad
  • Work to combat identity fraud, as a prelude to the decisions on a National Identity Card
  • Consultation on a consolidated law on fraud
  • Proposals to set up a Serious Organised Crime Agency

Anti-Money Laundering

Current FSA priorities on anti-money laundering are

  • Targeting
  • Demonstrating value for money
  • Promoting customer awareness and support

You can read more about the FSA's efforts on money laundering on our website in a speech I made on 21st April setting out the FSA's current position on anti-money laundering. In summary we want to:

  • Target AML activity;
  • Have a better approach to Identification;
  • Develop the risk-based approach to AML

We, the FSA, have defined our Financial Crime vision and are setting about allocating appropriate resources to deliver our part of the vision. In order to be successful, we need continued engagement from industry, law enforcement, government and the criminal justice system.

Targeting is key. Greater targeting of effort, resource, and intelligence on the part of all players in the system is necessary to reduce financial crime.

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