The Law Relating to Financial Crime in the United Kingdom

Karen Harrison, Nicholas Ryder

• Publisher: Routledge
• Year: 2016
• Print ISBN: 9781409423898, 9781409423881
• eBook ISBN: 9781317026044
• Edition: 1
• Topic: Social Sciences
• Subtopic: Criminology
• Index: Social Sciences

Outlining the different types of financial crime and its impact, this book is a user-friendly, up-to-date guide to the regulatory processes, systems and legislation which exist in the UK. Each chapter has a similar structure and covers individual financial crimes such as money laundering, terrorist financing, fraud, insider dealing, market abuse and bribery and corruption. Offences are summarized and their extent is evaluated using national and international documents. Detailed assessments of financial institutions and regulatory bodies are made and the achievements of these institutions are analysed. Sentencing and policy options for different financial crimes are included and suggestions are made as to how criminal proceeds might be recovered. Drawing the different themes of the book together, the final chapter makes recommendations for the future and will provoke further thought and discussion on this topical subject. Each chapter also has a section on Recommending Reading. It will be a valuable resource for students studying vocational courses and will be a key text for undergraduate and post-graduate students in law schools, departments of criminal justice and business schools.

Chapter 1
Introduction

What is Financial Crime?

The term financial crime, is often used in common parlance and thus is one of which we assume we know its meaning, despite the fact that there is ‘no internationally accepted definition’1 of it. As outlined throughout this book, definitions are abundant for fraud, money laundering, terrorist financing and market abuse, but are less precise for the collective expressions of both financial crime and financial abuse. For a book which purports to be about financial crime however, it is probably fairly important that some attempt is made at defining these latter terms.

In England and Wales, financial crime can be said to include ‘any offence involving fraud or dishonesty; misconduct in, or misuse of information relating to, a financial market; or handling the proceeds of crime.’2 This can therefore include the activities of money laundering and terrorist funding. The Financial Services Authority (FSA) offers a similar definition, stating that it is ‘any offence involving money laundering, fraud or dishonesty, or market abuse.’3 The European Commission does not appear to provide an actual definition of the term; but on looking at the legislation and Directives which have been issued to cover financial crime, it would appear that these only cover the areas of money laundering and terrorist financing.4 The Federal Bureau of Investigation, in the United States of America (USA) however, has a much more far-ranging definition, which includes the criminal activities of corporate fraud, commodities and securities fraud, mortgage fraud, healthcare fraud, financial institution fraud, insurance fraud, mass marketing fraud and money laundering.5 The International Monetary Fund (IMF) goes further by stating that it ‘can refer to any non-violent crime that generally results in a financial loss’ (emphasis added).6 This can therefore include tax evasion, money laundering and financial fraud, but essentially allows for anything which causes a financial loss. It further states that where the loss involves a financial institution, then the term ‘financial sector crime’7 can also be used.

Definitions of the term, financial crime, have also been presented by academics. For example, Gottschalk states that it is ‘a crime against property, involving the unlawful conversion of property belonging to another to one’s own personal use and benefit’, stating that it is often ‘profit driven … to gain access to and control over property that belonged to someone else.’8 Pickett and Pickett define financial crime as ‘the use of deception for illegal gain, normally involving a breach of trust, and some concealment of the true nature of the activities.’9 This can include fraud, insider trading, embezzlements, tax evasion, kickbacks, identity theft, cyber attacks, social engineering and money laundering.

Financial abuse is another term which is sometimes used synonymously with financial crime and is defined in the United Kingdom (UK) as:

Financial or material abuse, including theft, fraud, exploitation, pressure in connection with wills, property or inheritance or financial transactions, or the misuse or misappropriation of property, possessions or benefits.10

Under section 44 of the Mental Capacity Act 2005, this therefore includes the offences of: theft, forgery, fraud by abuse of position, fraud by false representation, fraud by failing to disclose information, and blackmail.11 The IMF also defines what is meant by financial abuse, but does this in rather broad terms. This is due to the fact that it argues its meaning can vary between different occasions and different jurisdictions; precisely in the same way that the term financial crime can vary. For example, the government of the UK has previously included money laundering, drug trafficking, illegal capital flight, tax evasion and fraud under the term financial abuse; while the USA Department of State refer to it as including money laundering, tax evasion and terrorism.12 Different jurisdictions around the world thus define the component offences (such as fraud and money laundering) differently and while some make certain actions criminal, while others do not.. An example of the latter situation is tax evasion where some countries have very low or lax tax laws while others have the practical opposite. To recognize this disparity, the IMF states that financial abuse includes ‘financial activities, many of which have the potential to harm financial systems, and legal activities that exploit undesirable features of tax and regulatory systems.’13 Another term which has been used as well as or instead of financial crime includes illicit finance which has been used by the USA’s Department of Treasury and the UK’s HM Treasury.14

A person who has committed such offences must therefore be able to be described as a financial criminal. Other perhaps more common terms of vernacular include that of the white collar criminal and the offender who has committed corporate crime although, as acknowledged by Croall, there are also problems with how these terms are defined.15 For example, while we might often regard the white collar criminal as someone who has high social status, is respectable, powerful and at management level, this is not always true, with many corporate crimes involving employees acting in the course of trade and business and with their offences relating to matters of hygiene and other health and safety issues.16 While it may therefore be true, as suggested by Croall, that the vast majority of white collar crime is not committed by the high status offender, this is not the type of offence or offender which this book focuses upon. Therefore, for the purpose of this book, a financial criminal will be defined as someone who has committed a financial crime and who has a certain level of standing (i.e. that of management) within a business or corporation.

The Extent of Financial Crime

Despite concerted efforts by national and international agencies such as the United Nations, the Financial Action Task Force (FATF) and the IMF it is impossible to accurately quantify the true extent of financial crime/financial abuse which is taking place on a daily basis around the globe. This is partly due to the fact that significant amounts of all criminal behaviour will often go undiscovered and thus unreported, but it is also due to the many methodological difficulties which are often encountered when trying to pull statistics of this kind together.17 The only estimations which can thus be provided are those for individual financial crimes.18

In the UK, for example, for the period of 2011/2012, the National Fraud Authority estimated that the cost of fraud to the UK’s economy was in the region of £73 billion. This can be broken down into losses of £20.3 billion for the public sector (predominantly through tax, benefits and tax credits and governmental frauds), £45.5 billion for the private sector (including financial services, professional services, construction and engineering, natural resources, retail, wholesale and distribution and manufacturing), £1.1 billion for the non-profit sector and £6.1 billion for UK individuals (mass marketing, rental and online tickets).19 In the European Union, according to a study prepared for the European Commission, fraud is estimated to range between 0.2 and 2 per cent of Gross Domestic Product (GDP), with the notorious examples of Barings, Drexel and Sumitomo and Daiwa, each involving losses in excess of US$1 billion. Fraud by banks, for example that seen by BCCI and Meridien, has contributed to considerable losses to depositors in a few countries, and seriously damaged the banking systems of some of the smaller African nations.20

In terms of money laundering, the FATF, on the basis of information about final sales of some illegal drugs (approximately US$120 billion a year in Europe and the USA in the late 1980s) and estimating worldwide and generalizing to include all drugs, have extrapolated that on the basis of assuming that 50–70 per cent of that amount would be laundered, the approximate amount of the laundered profits could be in the region of 2 per cent of the global GDP. In one FATF member country alone, 1,233 cases of money laundering were prosecuted in one year, with a total value of US$1.6 billion. Furthermore, an Australian study, from 1995, estimated money laundering there to amount to nearly US$3 billion or about 0.75 per cent of GDP. As with all estimations of financial crime though, given that these two latter examples were based on recorded crime, the true extent of money laundering there has been significantly underestimated.21

Further costs associated with other elements of financial crime often include the damage caused by the financial abuse of poor regulatory frameworks, which may subsequently contribute to financial crises or undermine confidence in a country’s financial system. Such losses relate to the total costs of the crises and in essence are impossible to quantify. There are also similar difficulties in attempting to estimate the effects of tax evasion, harmful tax competition and corruption.22

The Importance of Financial Crime Regulation

Even though financial crime is often thought to be victimless; this is far from true. As explained by the FATF, ‘criminal proceeds have the power to corrupt and ultimately destabilize communities or [even] whole national economies.’23 The integrity of a nation’s financial institutions can be eroded by those organized criminals who seek to maximize their illegal profits so that they are able to enjoy, the so called champagne lifestyle,24 and as further explained by Vaithilingam and Nair it can weaken the financial systems which are the main players in many global financial transactions.25 Moreover, as Ryder argues, the effects of financial crime can ultimately threaten national security on the basis that terrorists need money and resources so that they can carry out their illegal activities.26 The IMF additionally argues that financial system abuse,

… could compromise bank soundness with potentially large fiscal liabilities, lessen the ability to attract foreign investment, and increase the volatility of international capital flows and exchange rates … financial system abu...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of Abbreviations
• 1 Introduction
• 2 Money Laundering
• 3 Terrorist Financing
• 4 Fraud
• 5 Insider Dealing
• 6 Market Abuse
• 7 Bribery and Corruption
• 8 Conclusions and Recommendations
• Bibliography
• Index