State leans on others over laundering

Comment Roderick MaguireMichael McDowell signed the final piece of the second EU anti-money laundering Directive into force in June.

Under the new legislation, all solicitors, accountants, estate agents, auctioneers, tax advisers, investment business firms, dealers in high-value goods and casinos have been added to the list of "designated bodies". This means that they have considerable duties regarding know-your-client procedures and the reporting of suspicious transactions, which were traditionally the preserve of banks.

This change ties in with a new provision under the Central Bank and Financial Services Authority Act, 2003.

Although there was no mention of the provision in the consultation document that preceded the Act, the Revenue has been added to the Garda Síochána as a body that must be reported to in the event of a suspicious transaction.

Though the anti-money laundering regime has extended to all crimes, including tax offences, since its inception in 1994, this latest measure of increasing the domain of the Revenue is symptomatic of a growing trend in regulatory circles - a "highest common denominator" approach to regulation. If one body has extensive powers in combating fraud and crime, why not give it to all government agencies and public bodies?

The most notable example was pioneered by the US Patriot Act passed at the end of 2001, which gave a host of new powers to a variety of bodies. In the political climate that has prevailed since September 11th, 2001, there has been comparatively little criticism of measures such as this, lest critics be seen as supporting terrorist financing or Enron-style fraud.

However, the new reporting duty poses certain problems in Ireland. Diluting the traditional monopoly of the Garda Síochána in this area may undermine the close working relationship that has been fostered over the years. Further, it appears to be an unnecessary duplication of reporting - rather than feed into a shared system, each fiefdom has its own separate reporting line.

But perhaps the most troubling aspect of the measure is the fact that, unlike reports to the Garda, there is no provision for feedback by the Revenue on reports made by designated bodies. This would appear to tie in with the Revenue policy of confidentiality, but it leaves the designated bodies in a quandary. What is it meant to do with customers it has reported for suspected money laundering? Apparently, since the measure was introduced earlier this year, the report that is filed by the designated body usually indicates the details of the suspected transaction, and says that, in the absence of instructions, the body will continue to deal with their customer so as not to fall foul of the "tipping off" offence.

This offence is a measure designed to avoid frustrating the efforts of the authorities' investigation, through making it a criminal offence to refrain from doing something for a customer where that would tip them off that they were under suspicion. It is designed as a sensible measure, but there is a danger that it is being used as a blanket excuse for designated bodies to carry on their business without doing all they can to stop money laundering.

Recent developments in the English courts have shown how difficult it is to put a halt to the process once a report is made. The High Court there held in April that it could not force the police to allow a company to release assets of a customer that the company had reported for a suspicious transaction. To do so would prejudice any investigation into the report, no matter how long that took.

It is not unlikely that the Irish courts would follow suit, and there may be uncomfortable times ahead for designated bodies, trying to balance the requirements of the law, customers' interests, and their business.

Nor will designated bodies necessarily be able to take good counsel on these matters.

Under the proposed second Act setting up the new single regulator - the Irish Financial Services Regulatory Authority (IFSRA) - there will be extensive reporting requirements for company auditors directly to IFSRA. This would include audit papers and documents for both audit and non-audit work, and would include on the face of it any reviews of anti-money laundering checks and consultancy work.

Couple this with the undermining of professional advice privilege in the UK in the Three Rivers case from earlier this year, and it would seem that there may be many reasons not to tell your problems to your adviser. If its broke, just don't tell anyone its broke.

It appears that the broadening of regulatory requirements in a host of areas has left nobody on the side of industry. With a slightly Stalinist zeal, governments seem to want to make everybody an extension of the state, and carry out state work.

This leaves nobody on the side of industry.

Nobody wants to launder Al Queda's millions, but it seems that the whole financial industry is being treated as the bad guy. Whether it can prosper in such conditions remains to be seen.

Roderick Maguire is a barrister with an LLM in crime control and public policy; he has previously worked with the regulatory advisory services department in KPMG's financial services unit.