This document provides an introduction and overview of the implementation of the Third EU Money Laundering Directive in the United Kingdom. It discusses the global development of anti-money laundering regulations over time, from early unilateral state actions to increased international cooperation. It describes the three stages of money laundering (placement, layering, integration) and estimates the worldwide scale of money laundering. The document also outlines the UK's anti-money laundering framework, including key laws like the Proceeds of Crime Act 2000 and Money Laundering Regulations 2007. It concludes by noting that international policy has increasingly aimed to adopt harmonized anti-money laundering measures over the past two decades.

1. 1
Implementation of the Third EU
Money Laundering Directive in
the Unite Kingdom
2009
ALI RAZA
Newcastle Law School, Newcastle University

2. 2
Table of Contents
Acknowledgement 3
Chapter One 4
Introduction
Chapter Two 10
The Third EU Money Laundering Directive
Chapter Three 13
Anti-Money Laundering framework in the United Kingdom
3.1 Proceeds of Crime Act 2000
3.2 Terrorism Act
3.3 Money Laundering Regulations 2007
Chapter Four 23
Core Concepts from the 3rd Directive and their Implementation in the UK legal System
4.1 Risk-based Approach
4.2 Customer Due Diligence
4.3 Beneficial Ownership
4.4 Politically Exposed Persons
Chapter Five 43
Conclusion
Bibliography 45

3. 3
Acknowledgement:
I would like to express my gratitude to my supervisor Professor Joanna Gray for providing
me inspiration, guidance and encouragement. I also would like to thank my friends and
family for their endless support and encouragement.
Regards,
Ali Raza

4. 4
1- Introduction:
The mostly serious crimes are motivated by greed and prospect of acquisition of money and
control over it than those that might be described as economic crimes1. Economic crimes are
committed for the purpose of obtaining profits through illegal activities, from murder to drugs
trafficking to fraud; these crimes have made many people rich at the great cost to others. As a
result these illegal actions create social harms and divert money away from economies and
legal business activities. Money laundering is a serious crime that effects the growth of
economy as a whole. It hampers social, political and cultural developments of societies
worldwide. After the attacks on New York’s twin towers in September 2001, attention is
beginning to turn to the connections between money laundering and terrorist financing.
The term ‘money laundering’ originated in the US in 1920s or even earlier when US based
mafia started using high cash turnover business such as launderettes and carwash to hide the
origin of their illicit money.2 The practice disguises of illegal gains pre-date recent history
and indeed traces its roots back to the emergence of banking itself. For instance, when
Roman Catholic Church in medieval times condemned usury or lending money at interest,
financers formulate methods to dodge these restrictions that are still practiced today3. The
earliest use of the term in legal context was in the US in 1982 in the case of US v $4, 225,
625, 394.
1
Barry Rider M A (ed.), Money Laundering Control, (Round Hall Sweet & Maxwell, 1996)
2 Friedrich Schneider U W, ‘Money Laundering: Some Facts’,(2008) 26 EJLE
3
O’ Meara K P, Dirty Dollars(2000) 16, Insight on the News,
file:///C:/Users/Nad/AppData/Local/Temp/insight051500.htm (Accessed: 26 July 2009)
4 Ryder N, The Financial Services Authority and Money Laundering: A Game of Cat and Mouse, (2008)67 CLJ

5. 5
Since late 1980s, solid actions have been taken in various parts of the world to harmonize
global measures to combat money laundering5. This was because of the problem of drug
trafficking, apart from social harms of drugs there was growing realization of money which
was being produced by it, an estimated $122 billion per year generated between US and EU
in 19896. In 1980s, globalisation of financial markets benefited both legal and illegal trade.
huge increase in number of cross border money transactions together with emergence of
electronic banking explored the new prospects for legal business activities and for money
launderers as well7. Initially states tried to handle the problem unilaterally; USA Bank
Secrecy Act 19708 is one example of this approach. Given that the organised crime and
terrorism are global in their reach, it was soon become evident that states could no longer
coup unilaterally, and global response requires combating the problem of money laundering.
Money Laundering is a process of converting or transferring criminal proceeds with the
intention of disguising their illegitimate origin9. It is conversion or transfer of property
knowingly that such property is originated from any offence or offences, for the intention of
concealing the illicit origin of such property or helping any person who is involved in the
commission of such offence. The concealment of the true nature, source, location, right with
respect to or ownership of property wittingly that such property is derived from an offence.
5 Gilmore W C, Dirty Money: The Evaluation of International Measures to Counter Money Laundering and
Financing of Terrorism, Third Edition,(Council of Europe Publishing,2004)
6 W. Gilmore, ‘International Efforts to Combat Money Laundering’ (1992)18, Commonwealth Law Bulletin
7 Mark Pieth and Gemma A (ed.), A Comparative Guide to Anti-money Laundering: A Critical Analysis of
Systems in Singapore, Switzerland, the UK and the US, (Edward Elgar, 2004)
8 US Department of the Treasury, Bank Secrecy Act 1970,
earahttp://www.irs.gov/businesses/small/article/0,,id=152532,00.html (Accessed.25 July 2009)
9
Preller S F, 'ComparingAML legislation of the UK, Switzerland and Germany', (2008) 11, JMLC

6. 6
The acquisition, possession or use of such property knowing that such property is derived
from an offence10. The Financial Action Task Force (FATF)11, an international standards
setter for anti-money laundering measures defined money laundering as the practice of
processing criminal proceeds to disguise their illegal origin12. Since the September 11, 2001
terrorist attacks in the USA money laundering measures have been expanded to cover a wide
range of serious crimes including terrorist financing.
The process of money laundering involves three stages; placement, layering and integration.
The placement stage is the process during which illicit derived money introduced to the
financial markets; the second stage is the process during which launderer engage in one or a
series of transactions to separate the money from its criminal origin. In layering stage, the
first attempt to hide the actual source of ownership of the money by complex transactions
between accounts, across states and international borders, purchases and resale of assets.
Finally, in integration stage the illicit derived proceeds are integrated into the legitimate
financial system and made available for use without any suspicion13.
International Monetary Fund (IMF) estimated worldwide volume of money laundering
somewhere between 2 and 5 percent of the world’s Gross Domestic Product (GDP) but,
unfortunately IMF’s documents never clarified the mechanism they use to concluded these
10 Schott P A, Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism, 2nd
Edition, (The World Bank, 2006)
11 The Financial Action Task force(FATF) is an intergovernmental body established by the G7 Summit held in
the Paris in 1989,the purpose of the FATF is the development and promotion of policies both at national and
international levels,to combat money launderingand terroristfinancing.
12 Financial Action Task Force,Money Laundering FAQ, http://www.fatf-
gafi.org/document/29/0,3343,en_32250379_32235720_33659613_1_1_1_1,00.html (Accessed. 25 July 2009)
13 Ulph J, Commercial Fraud, (OUP, 2006)

7. 7
figures14. However, if we believe that these figures are accurate, it then shows that money
laundering varies between $590 billion to $ 1.5 trillion per year. The lower figure is nearly
equal to the total yield of Spanish economy15. In the UK an assessment by HM Treasury in
2007 concluded that the most serious forms of organised crimes alone generated an illicit turn
over of nearly £15 billion per year leading to money laundering through the regulated sector
of £10 billion per year. However, most of the money laundering literature based on
speculations and is stand on incorrectly estimated or misrepresented or self invented. IMF
and walker model of estimation are supposed to be two most reliable sources on estimation of
the volume of money laundering but the credibility of the both sources is questionable16.
International community is committed to the fight against money laundering and terrorist
financing. Objectives of this effort are to protect the integrity of the international financial
system and cutting off the resources available to the terrorists. Money laundering can have
diverse effects on the economy, society and politics. Its effects can be both direct and
indirect. Direct effects are the cost of underlying crime itself to the victim and society.
Failure to prevent money laundering allows criminals to benefit from their crimes, thus
making crime more attractive. This trend allows criminals to finance further criminal
activities which can cause increasing level of crimes. The free use of financial system for
money laundering has potential to destabilize the financial institutions individually and whole
financial system. It could affect exchange rates through large capital flow and could possibly
14 Donato Masciandaro RB, 'Worldwide- Anti-Money LaunderingRegulation: EstimatingCosts and Benefits',
(2008) <http://ssrn.com/abstract=1136107>(Accessed: 25 July 2009)
15 FATF, Money Laundering FAQ, http://www.fatf-
gafi.org/document/29/0,3343,en_32250379_32235720_33659613_1_1_1_1,00.html , (Accessed:26 July 2009)
16 Donato Masciandaro,See n. 14

8. 8
lead to distorted resource allocation. Money laundering might create contempt for the law
which could result denting public confidence in the legal and financial system17.
The past two decades have witnessed an unprecedented development in the international
policy arena aimed at the adoption of measures against the problem of money laundering.
The UN approved the Vienna Convention 198818 to establish a global approach to the money
laundering. The Vienna Convention was the starting point to develop international concerns
in this regard; these early measures were based on drugs’ trafficking. The Convention also
encouraged international cooperation between national police forces. It must be noted that
before the Vienna Convention few efforts had already been made on international level to
combat money laundering. Supranational bodies such as the European Union and ad-hoc
bodies established for this very purpose, such as Financial Action Task Force (FATF),
produced a series of detailed ‘hard’ and ‘soft’ legal rules in the fight against money
laundering19. The Basel Committee20 issued a statement to banks regarding the significance
17 Toby Graham, Money Laundering, (Butterworths LexisNexis,2003)
18 UN Vienna Convention againstIllicitTraffic in Narcoticsand PsychotropicSubstance(1988)
19 Mitsilegas V,Money Laundering Counter-Measures in the European Union: A New Paradigm of Security
Governance versus Fundamental Legal Principles, (Kluwer Law International,2003)
20 The Basel Committee on BankingSupervision is an institution created by the central banks Governors of the
G-10 nations in 1974.It is composed of senior representatives of bank supervisory authorities and central
banks from the G-10. The Committee formulates broad supervisory standardsand guidelines of best practice
in bankingsupervision in theexpectation that member states will implement them through their own national
systems.

9. 9
of properly identifying a customer. The statement is now a well established principle which is
known as Know your Customer (KYC) or Customer Due Diligence (CDD)21.
In 1989, the FATF produced its famous 40 Recommendations which illustrated the existing
international hard and soft law such as the Vienna Convention and the Basel Committee
Statement. Although, the Forty Recommendations are a collection of soft laws such as the
Basel Statement, but they carry huge influence as is expressed their significance in the IMF
and the World Bank in regard to their assessment of countries ability to combat money
laundering22. The FATF revised the Forty Recommendations in 2003 in response to growing
complexity of the money laundering techniques. After the 9/11 attacks in the US, they issued
further 8 Recommendations concerning anti-terrorist financing.
In this dissertation the implementation of the 3rd EU money laundering directive in the UK
will be discussed. The dissertation will proceed in the following ways, in the second chapter
the 3rd Directive and its background will be discussed, this is not intended to be an exhaustive
list of the provisions, but intention is to focus on particular areas in which rules prescribed by
the 3rd Directive are different from its predecessor Directives. Chapter three will examine
incorporation of the 3rd Directive in the UK legal system and the UK’s anti-money laundering
framework. Chapter four examines some core concepts from the Directive in more detail and
the way UK’s legal have transposed these concepts. Chapter five will act as a conclusion of
this dissertation.
21 Basel Committee: Prevention of Criminal useof the Bankingsystem for the purposeof money laundering
(December, 1988)
22 EnhancingContribution to Combat Money Laundering, IMF Policy Paper (April 2001)

10. 10
2- The Third EU Money Laundering Directive
The European Union has passed a series of Directives which designed to incorporate the
FATF’s Recommendations and thus strengthen the anti-money laundering (AML) standards
and bring about a certain degree of unity between international and European measures for
fight against money laundering23. The fight against money laundering has been a top political
priority of the European Union. It is based on the need to protect the financial system from
misuse. Money laundering is the hub of organised crimes, it should be eradicated wherever it
occurs and solid measures must be taken in order to trace, seize, freeze and confiscate the
proceeds of crime24. Coordinated measures on the community level were necessary to prevent
money launderers’ from abusing the European Community’s borderless internal market for
their criminal activities.
The EU’s Directive on the prevention of the use of the financial system for the purpose of
money laundering and terrorist financing (Third EU Money Laundering Directive) was
approved on 26the of October 200525. Member states had until 15th December 2007 to bring
23 Masciandaro D, Black Finance: The Economics of Money Laundering, (Edward Elgar,2008)
24 Tampere Summit European Council (1999),Conclusion 51,
http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/ec/00200-r1.en9.htm (Accessed: 26
July 2009)
25 Directive2005/60/EC

11. 11
into force their laws, regulations and administrative provisions to comply with the Directive.
The Directive consolidates and updates the first26 and the second27 Money Laundering
Directives.
The first Community measure, the 1st ML Directive was adopted in June 1991 and required
member states to prevent the use of their financial systems for money laundering by
criminalising money laundering, taking measures to identify laundered proceeds with a view
to confiscation. It was largely aimed at tackling drug trafficking offences. The 1st Directive
established the requirements of customer identification (KYC) and record keeping of
identification and transaction.
The 2nd Money Laundering Directive extended to cover wider financial crimes, agreed in
December 2001. It amended the 1st Directive in two main aspects. First, it widened the
definition of criminal activity and included all serious crimes including offences related to
terrorism. Second, it extended the scope of the regulated sector to number of new professions
as lawyers, accountants, estate agents and casinos.
The 3rd ML Directive was adopted under the UK’s presidency of the EU and shows the
European commitment to fight against the money laundering and terrorist financing. The
Directive is replica much of the 2nd Directive however, it is more detailed and increases the
scope of regulated sector. The Directive unlike the first two specifically, deals with terrorist
financing. Its main changes from the 2nd Directive are explicitly coverage of Countering
terrorist financing (CTF), introduction of some new definitions such as politically exposed
persons (PEPs), beneficial owners and business relationships. It has detailed codification of
customer due diligence (CDD) requirements with explanation of when enhanced and simple
26 Directive 91/308/EEC
27 Directive2001/97/EC

12. 12
due diligence should be undertaken. The 3rd Directive introduces ‘risk-based approach’ to all
of its CDD requirements.
Until recently, nearly all member states have fully aligned their national legislations with the
Directive, except Ireland and Spain where implementation is still pending. The member states
which had not yet adapted their legislation to the Directive, Ireland28 and Sweden29 have been
convicted by the European Court of Justice (ECJ) for their failure to implement the Directive
within the time limit30.
The main purpose of the Directive is to update European legislation in line with the
international standards to fight against money laundering and to stop criminals benefiting
from their crimes, to protect the integrity of the sectors regulated by AML and CTF
legislation and to promote a co-ordinated European response to this international problem.
28 Ireland convicted by ECJ on 19th May 2009
29 Sweden Convicted by ECJ on 11th June 2009,however, in the meantime Sweden has fully implemented the
3rd Directive
30 EU AML Info-letter (2009)1, European Commission,DG Internal Market and Services ,
http://ec.europa.eu/internal_market/company/docs/financial-crime/aml-news-200709_en.pdf, (Accessed: 25
July 2009)

13. 13
3- Anti-Money Laundering framework in the United Kingdom
The UK has had legislation in place making it an offence to help in disposing of the proceeds
of drugs trafficking since 1986. Suspicions of fraud and other serious crime reporting system
was allowed without any liability since 198831. The failure of banking supervisors to deter the
frauds and laundering by Banco Ambrosiano32 in 1970s and the BCCI scandal, one of the
biggest scandal of all times was the starting point to think about to regulate this area.
The 3rd ML Directive incorporated into the UK law by the ML Regulations 2007, Terrorism
Act 2000 and Proceeds of Crime Act 2002 (POCA). These are three main pieces of
legislation that established the UK’s AML regime33. The Regulations introduce a completely
revised AML/CFT framework with the decision to repeal the 2003 ML Regulations. After an
extensive consultation with different bodies the final version of the 2007 Regulations was
laid down before the Parliament on 25th July 2007 coming into force on 15th December 2007
in line with the implementation date of the Third ML Directive.
The importance of AML legislation was highlighted in Bank of Scotland v A34 as where court
of appeal stated:
31 Joseph J. Norton G A W (ed.) Banks: Fraud and Crime, (Lloyds of London Press,2000)
32 An Italian Bank
33 Officeof Fair Trading,Money Laundering Regulations 2007:Core Guidance(May 2009)
34 Bank of Scotland v A [2001]

14. 14
“Money laundering is an increasingly common problem of large scale crime. It is of the
greatest importance in the public interest, that the police should be supported by financial
institutions in their attempts to prevent money laundering and to detect it when it happens”.
The AML structure in the UK involves criminal law, civil law and the regulatory law. The
UK has established three legislative structures in response to the threat of money laundering
and terrorist financing. This involves primary legislation promulgated by Parliament such as
the POCA 2002, Terrorism Act 2000. Secondary legislation in the form of ML Regulations
2007 and a third layer of explanatory guidance notes produced by regulatory authorities the
Financial Services Authority (FSA) which is responsible to make regulatory rules to combat
money laundering and Joint Money Laundering Steering Group (JMLSG)35 which issues
guidance notes on the meaning and application of the regulations and on good practice.
The United Kingdom plays leading role in European and world finance and remains attractive
to money launderers because of the size, sophistication and reputation of its financial
markets. The UK began to fulfil its responsibilities under the European Law and the FATF’s
Recommendations with the passing of ML Regulations 199336 and Criminal Justice Act
(CJA) 1993. The introduction of the 1993 (CJA) revealed an immediate issue in regard to the
1st money laundering directive requirements. When the CJA 1993 came in to force at that
time the Drug Trafficking Act 1988 was also in force. This created confusion where English
law defined the proceeds of drugs from other criminal activities. This development led to the
situation where, “Unless the crown could establish that a defendant knew or suspected it was
the proceeds of non-drug crime, they would be acquitted”37
35
JMLSG, ismade up of leadingtrade associationsof the UK.Its objective istoissue guidance in
counteringmoneylaunderingandtogive practical assistance ininterpretationof ML Regulations. It
isheadedbythe BritishBankersAssociation(BBA).
36
S.I 1993/1933
37
OrmerodD, Smithand Hogan Criminal Law, 12th Edition,(OUP,2008)

15. 15
It was demonstrated in a historic ruling R v Cuthbertson38. The problem was resolved with
the passing of POCA 2002 which introduces the separate offences relating to non-drugs and
drugs crime. The 2nd EU ML Directive was implemented in to the UK law with the passing of
the POCA 2002 and the ML Regulations 200339 which amended the 1993 Regulations. The
POCA 2002 was then amended by the Serious and Organised Crime& Police Act 2005. The
Terrorism Act 2000 and Anti-terrorism, Crime and Security Act 2001 also form the part of
UK AML/CTF regime.
The ML Regulations 2007 primarily aimed at the regulated sector which is defined in both
the POCA 2002 and the ML Regulations 2007 as well as consolidating previous European
Directives. The Regulations play a crucial role in safeguarding the UK financial system from
organised criminals and terrorists.
3.1 Proceeds of Crime Act 2002 (POCA)
Proceeds of Crime Act 2002 (POCA) updates and reforms criminal law in the UK concerning
money laundering40. It is not only implementing the provisions of the 3rd ML Directive, but
extends these provisions to the onerous extent. Since the decision of R v Cuthbertson a whole
series of legislative measures have been implemented the requirement to implement
international treaty obligations, the emergence of international harmony on the threat
presented by money laundering to the integrity of the financial systems; and the
implementation of the European Legislation41. The objective of the legislation is to deny the
38 R V Cuthbertson [1981]
39 S.I 2003/3075
40 Proceeds of Crime Act 2002 Part 7 (Money Laundering), (Home Office, August 2002)
41 Marshall P,‘Part7 of the Proceeds of Crime Act 2002: Double Criminality’,Legal Certainty, Proportionality
and Trouble Ahead', (2003) 11, JFC

16. 16
use of the financial system to criminals as former Prime Minister Tony Blair one of the
mentors of the POCA said42, “We are hitting organised criminals where it really hurts - in
their pockets”. The POCA 2002 is an extensive and the largest single piece of legislation that
had ever been enacted in the UK and it did not repeal any of its forerunner legislations43. The
Part 7 of the POCA is dedicated to the offence of money laundering.
The Act seeks to control money laundering by creating three categories of criminal offence in
relation to the activities, laundering, failure to report, and tipping off44. The offences created
by the POCA control the proceeds of all crimes without any qualitative or quantitative
limitation as it was observed in P v P45 as, “An illegally obtained sum of £10 is no less
susceptible to the definition of ‘criminal property’ than a sum of £ 1 million” Quantity is
irrelevant in the POCA 200246.
The first category relates to the principle offence of money laundering where Section 340(11)
of the Act defines money laundering as an act where a person conceals criminal property47,
enters into money laundering arrangement48 or acquires, uses or possesses criminal
property49. The Act also declares it an offence to attempt, conspiracy or incitement as well as
aiding abetting, counselling or procuring in the commission in relation to Section 327-329
offences50.Law society had particularly concerns about the legislation, In Bowman v Fels51
42 Crime Pays, BBC Panorama,http://www.bbc.co.uk/programmes/b00j8fnj ( Accessed: 17 August 2009)
43 Gough T (ed), Anti-Money Laundering: A guide for Financial Firms, (Risk Books, 2005)
44 Leong AVM, The Disruption of International Organised Crime: An analysis of legal and non-legal Strategies,
(Ashgate, 2007)
45 P v P [2004]
46 Powles E, 'All the Glisters is notGold: Laundering the UK Money Laundering Regime', (2006) 65 CLJ
47 Section 327, POCA 2002
48 Section 328, POCA 2002
49 Section 329, POCA 2002
50 Section 340(11) POCA 2002

17. 17
the issue at the centre of the appeal was the extent to which Section 328 is applicable during
the legal proceedings, where a lawyer receives information leading to the suspicion of money
laundering. Such information is protected and represents the fundamental principles of access
to justice through legal proceedings and the ability to get private legal advice.
There are number of practical concerns raised by the application of POCA 2002. As
mentioned above main offences relates to dealing with criminal property, POCA 2002
defines the notion ‘criminal property’52, R v Saik53 is an instance of how wide courts define
‘criminal property’. The Part 7 of the Act sets up mens rea requirement so low, mere on the
basis of suspicion. It is established in R v Da Silva54 that the suspicion or momentary thought
that money paid in an account might be proceeds of criminal conduct and therefore be
conduct for the crime to be proved. It is possible that offenders will be able to take plea that
they should be sentenced on the basis of suspicion rather than knowledge and sentences will
be rare. It is further stated that there is no need for suspicion to be reasonable55. Furthermore,
burden of proof is on the prosecution to establish the mens rea and establishing that property
is the proceeds of criminal conduct56. It is difficult to maintain both these two facts which
makes hard to get conviction under the POCA.
The second category of offences relates to failure to report knowledge or suspicion of money
laundering. The failure to report is placed on relevant person (Money laundering reporting
officer). A person will be prosecuted for the failure to report offence if he had reasonable
51 Bowman v Fels [2005]
52 Section 340(3), POCA 2002
53 R v Saik [2006]
54 R v Da Silva [2006]
55 Squirrel Ltd v National Westminster Bank Plc [2005]
56 R v Montilla [2005]

18. 18
grounds for suspecting money laundering was taking place57. However, the offence only
relates to individuals, such as accountants, solicitors who are acting in the course of business
in the regulated sector. Three solicitors Denis Jebb in1999, Louise Glatt in 2001 and Noel
Horner in 2001 pleaded guilty on different occasions for failure to report the money
laundering58. 2001Any individual who is covered by the section is required to make
disclosure to a nominated money laundering reporting officer within their organisation, or
directly to the Serious and Organised Crime Agency (SOCA)59.
The third category of offences relates to ‘tipping off’ and is contained in Section 333. It
outlines how it is an offence to make a disclosure likely to prejudice a money laundering
investigation already being undertaken, or which may be undertaken by law enforcement
authorities. It therefore covers the situation where a professional such as an accountant or a
solicitor informs his client that a report has been submitted to the SOCA. This offence is
subject to general defence that the individual concerned did not know or suspect that the
disclosure would prejudice an investigation into money laundering activity60. A complicated
issue relates to the offences of disclosure and tipping off demonstrated in C v S61 where a
bank had embezzled a customer’s money. The customer got an injunction ordering the bank
to disclose the information. The bank had already reported suspicion of money laundering to
the NCIS62 therefore was not expecting to be prosecuted for the offence of tipping off. The
NCIS told the bank that disclosure would establish an offence of tipping off, therefore was
trapped where it would be responsible for the offence of tipping off if it discloses the
57 Section 330(2) POCA 2002
58 Bell R E, ‘ The Prosecution of Lawyers for Money Laundering Offences’, (2002) 6, JMLC
59 The SOCA is UK’s Financial Intelligence Unit(FIU) with responsibility for collectingand disseminating
information regardingmoney launderingand related activities in the UK.
60 Section 333, Proceeds of Crime Act 2002
61 C v S [1999]
62 Now SOCA

19. 19
information or being in infringement of the injunction order. In the end, the court of appeal
permitted disclosure on the basis that the NCIS investigation would not be prejudiced. The
court stated that it was for the NCIS to convince the court that investigation would be
prejudiced if disclosure was made63.
The POCA 2002 puts banks in very uncomfortable position between customers and the
regulators, the case of Shah and Another v HSBC Private Bank (UK) Ltd64 is another example
which provides the concerning implication of the POCA to the banking sector and individual
rights. It is stated that even if a bank account does not have any dirty money, without bad
faith, little more than “bad feeling” can put bank under obligation of POCA 2002. This
situation can create overwhelming commercial effects for the customer’s reputation in
financial markets65.
The Proceeds of Crime Act 2002 is a comprehensive piece of legislation however; this is not
without practical issues as mentioned above. The courts and legislators have tried to resolve
these complicated issues, but there is very little success with several loopholes still remains66.
3.2 Terrorism Act 2000:
The 3rd directive extends the scope of the European Union’s AML regime to the terrorist
financing, unlike the previous directives it applies not only the dirty money which represent
the proceeds of criminal activity, but also to money which is not dirty yet because it is being
63 See n.61
64 Shah and Another v HSBC Private Bank (UK) Ltd
65 Hislop D,’ Banks,SARS & the Customer’, (2009) 159, NLJ
66 A very interesting report “ crimePays” by Samantha Polingis availableon BBC Panorama,she reveals that
how criminalsaremakingmockery of the legislationsdesigned to take the proceeds of their crime,
http://www.bbc.co.uk/programmes/b00j8fnj (Accessed 17 August 2009)

20. 20
collected to be applied in future for the financing of terrorist activities67. In the UK,
Terrorism Act 2000 deals with the terrorist financing; it creates a series of criminal offences
relating to handling terrorist funds. The Act sets up following main criminal offences,
receiving68 or possessing69 of terrorist funds or other property with the reason to believe that
it will be use for the purpose of terrorism, arrangement of funds for the purpose of terrorist
financing70, failure to report to the SOCA of suspicion of money laundering for terrorist
financing71and tipping off72. The Act establishes same defence as found in POCA 2002 where
someone intended to make a disclosure but had a “reasonable excuse” for not doing so73.
After the 9/11 attacks in the US there was a critical review of legislation regarding terrorism.
The Anti-terrorism, Crime and Security Act 2001 is a result of that review. One of the core
issues regarding money laundering is seizing of terrorist funds. The Act permits the forfeiture
of funds in civil proceedings in a magistrate court74.
3.3 Money Laundering Regulations 2007
Money laundering Regulations 2007 replace and repealed the ML Regulations 200375. The
new Regulations implement the requirements of the Third EU Money Laundering Directive
in the United Kingdom. The ML Regulations 2007 develops the principle offences of money
laundering and terrorist financing set up under the POCA 2002 and Terrorism Act 2000 and
67 Katz E, ‘Implementation of the Third Money Laundering Directive – an overview’ (2007) , Law and Financial
Market Review
68 Section.15(2), TerroristAct 2000
69 Section.16(2), TerrorismAct 2000
70 Section.17, TerrorismAct 2000
71 Section.19(2), TerrorismAct 2000
72 Section.19(5), TerrorismAct 2000
73 Section.21ZC, TerrorismAct 2000
74 Anti Terrorism, Crime and Security Act 2001
75 S.I 2003/3057

21. 21
create even more widespread framework of obligations for organisations within and outside
the financial sector76.The ML Regulations 2007 introduces several measures to be taken by
the financial sector and other ‘relevant persons’77 to detect and prevent money laundering and
terrorist financing. Relevant persons are required to apply customer due diligence (CDD)
measures when they establish ‘business relationship78’, or perform an ‘occasional
transaction’79. Customer due diligence standards comprise of verification and identification
of customer and any beneficial owner80 of the customer. It also requires by relevant person to
conduct ongoing monitoring after the establishment of business relationship. ML Regulations
2007 set out the general timing of the verification of the customer’s identity and certain
exceptions. Failure to fulfil the CDD requirements means that business relationship or
occasional transaction can not be established with the concerned customers81.
Part 3 of the ML Regulations 2007 mainly deals with record keeping policies and procedures
and staff training while Part 4 of the Regulations contain supervision and registration
provisions. Part 6 deals with enforcement powers and part 7 contains provisions for the
recovery of penalties and charges through the court82, an obligation on certain public
authorities to report suspicion of money laundering and terrorist financing83.
76 Chris Stott Z U, 'Money Laundering Regulations 2007:Part1', (2008) 23 JBLR
77 ‘Relevant Persons’defined in Regulation 3, as creditand financial institutions,auditors,accountants,tax
advisors and insolvency practitioners,independent legal professionals,trustor company providers,estate
agents, high valuedealers and casinos.
78 Regulation (2)1 defines the term ‘Business Relationship’as “A business, professional or commercial
relationship between a relevant person and a customer, which is expected by the relevant person, at the time
when the contract is established, to have an element of duration”.
79 A transaction of 15,000 Euro or over, whether the transaction is in single operation or in series of linked
transactions
80 Beneficial owner’ is an important concept it is defined in Regulation 6. We will discuss this concept in detail
in chapterfour of the dissertation.
81 Regulation 11, S.I 2007/2157
82 Regulation 48, S.I 2007/2157

22. 22
As most of the financial sectors in the UK were already subject to the provisions of ML
Regulations 2003, the ML Regulations 2007 includes banks, building societies, Money
Services Businesses (MSBs)84, investment and saving firms. The Regulations also apply to
different professionals as lawyers, accountants, tax advisors, auditors, insolvency
practitioners, estate agents, casinos, high value dealers85, trust and company service providers
(TCSPs). ML Regulations 2007 require to check the identity of a new customer in any of
these circumstances while establishing business relationship, while carrying out of an
occasional transaction, suspicion of money laundering for the purpose of terrorist financing
and any suspicion as to the reliability of documents, information or data previously obtained
from the customer for the purpose of identification or verification.
The Regulations put financial burdens on private sector by AML legislation; a single bank is
spending £36 million to comply the legislation. This could potentially hampers the UK
businesses’ development and put them into competitive disadvantage in financial markets.
There is need to make AML regime more proportionate and effective86.
83 Regulation 49, S.I 2007/2157
84 Money transferor, Bureaux de change and Cheque cashers are collectively known as Money Services
Businesses (MSBs)
85 Any business thatreceives cash payment of worth 15000 Euros or more in exchange for goods
86 Money Laundering regime hampering UK Business,(2009)159, NLJ,
http://www.newlawjournal.co.uk/nlj/content/money-laundering-regime-hampering-uk-business (Accessed:21
August 2009)

23. 23
4- Core Concepts from the 3rd
Directive and their
implementation in the UK legal system
In this part of the dissertation we will discuss some of the most important concepts from the
3rd Directive which are incorporated by the Money Laundering Regulations 2007 in to United
Kingdom law. These are application of Risk-Based Approach (RBA), Customer Due
Diligence (CDD), simplified due diligence (SDD), enhanced due diligence (EDD), beneficial
owner and Politically Exposed Persons (PEPs) and reliance on third parties.
4.1 - Application of a Risk-Based Approach (RBA)
Risk is an inevitable element of any system, and an AML system is not an exception87. The
term ‘risk-based’ can be traced in the revised FATF’s recommendations and the third EU
money laundering directive88, the 3rd Directive, FATF and the Wolfsberg Group89 all promote
the ‘risk-based approach’ both in CDD standards and in the approach that supervisory
authorities take to monitoring firms. International Securities Commission (IOSCO) echoed
‘risk’ in its ‘Principles for Securities Regulators’, but it never required any explicitly to adopt
‘risk-based approach’ to regulations. However, the Basel II explicitly encourages regulators
87 Demetis D S, 'The Risk-Based Approach to AML: Representation,Paradox, and the 3rd Directive', (2007) 10,
JMLC
88 Marcus Killick D P, 'Implementing AML/CFT Measures that address the Risks and not Tick Boxes ', (2007)
15, JFRC
89 The Group issued its guidance in 2008 on ‘risk-based approach’ for managing money laundering risks

24. 24
to follow the ‘risk-based approach90’ the notion of ‘risk’ and ‘risk-based approach’ in money
laundering was introduced by the Basel II when it expanded the widespread concepts of
credit and market risk and incorporated operational risk in context of its work on prudential
regulation of banks.91.
A ‘risk-based approach’ to money laundering is a method utilized by financial institutions
whereby institutions identify, mitigate and manage the money laundering and terrorist
financing risk, It is proportionate and cost-effective allocation of resources to the level of
risks faced by regulated sector92. It also includes appropriate risk-based system and controls
to assess and mitigate the risk. The UK has shown its strong belief in risk-based approach as
an effective and proportionate implementation of the Directive93. One of the salient features
of the ML Regulations 2007 is the introduction of a ‘risk-based approach’. The purpose of the
new system is to offer a better, less intensive and more cost effective alternative to a more
intrusive approach. It enables firms to focus their resources on high risk customers and so
they can meet compliance requirements effectively94. The approach is not only relevant to the
way firms discharge their legal obligations in the area of CDD, but also to the way
supervisors monitor the firms.
In the beginning, there was uncertainty about how a risk based approach should be applied to
the money laundering regulations. However, the Financial Services Authority (FSA) worked
90 Stewart S, 'Coping with the FSA's Risk-based Approach',(2005) 13, JFRC
91 Demetis D.S, See n.87
92 Leong A V M- See n.44
93 HM Treasury, Implementing the Third Money Laundering Directive: A Consultation Document (July 2006)
94 Overcoming the challenges of the Risk-Based Approach:Findings from the LexisNexis Anti-Money
Laundering Survey, (2008),
<http://www1.lexisnexis.co.uk/risk/downloadables/Overcoming_the_challenges_of_the_risk-
based_approach.pdf>(Accessed:02 August 2009).

25. 25
very hard to develop its thinking in this area95.The FSA describe a ‘risk based-approach’ as a
systematic approach to risk management which involves following five steps of risk
identification, risk management, portfolio allocation, prioritisation, risk mitigation and risk
monitoring96. The FSA has power to make rules regarding money laundering and to prosecute
organisations and individuals for violations of its regulations97. Reduction of financial crime
is one of the four main objectives of the FSA98. The FSA is quite familiar to the notion of
‘risk-based approach’ since 1997 When the FSA designed its ‘risk-based approach’ towards
financial regulations when it started following a process of supervision by targeting specific
business practices and levels of risk attached with financial sector99. For an instance, the FSA
published the risk-based supervisory regime for banks which establishes best practice in the
supervision of banks100. The Financial Services and Market Act (FSMA) 2001 sets out the
objectives and powers of FSA, the Act also laid down the principles for good regulations
which the FSA must follow while performing its functions, among these principles the FSA
required to use its resources in the most efficient and economic way. The FSA follow the
principle of ‘risk-based approach’ in order to meet the requirement of principles of good
regulation101.
95 Michael Blair G W (ed.) Financial Services Law, (OUP, 2006)
96 The Risk-based Regulation:The FSA’s Experience, A speech by Callum McCarthy, Chairman, FSA( February
2006)
97 Leong A V M, 'Anti-Money Laundering measures in the United Kingdom: A Review of Recent Legislation
and FSA's Risk-Based Approach',(2007) 28 Company Lawyer
98 Michael Blair, See n. 95
99 Ryder N, See n.4
100 Risk-Based Approach to Supervision of Banks, (FSA, June 1998)
101 Stewart S, 'Coping with the FSA's Risk-based Approach',(2005) 13, JFRC

26. 26
A ‘risk-based approach’ is not about using new tools to deal with problem, it is all about
choosing right measures at right time and applies them effectively102. The 3rd Directive and
ML Regulations 2007 use a “risk-based approach” to its obligations, it means the regulators
must identify the criteria to assess what potential AML/CFT risks their business face. This
means resources should be allocated on a proportionate and cost effective basis in relation to
the level of risks faced by regulated sector. The risk based approach identifies the risks varies
across customers, products or services risk as well as country or geographical risk. Each can
be measured against the firm’s exposure to those categories and appropriate and
proportionate measure taken to address the risks103.
While talking about RBA one should consider different types of risks to the financial sector
regarding Money laundering and terrorist financing. There may be different types of risks for
a financial institution involving money laundering cases, including, firstly, operational risks
which involve the risk of direct or indirect loss as a result of poor internal processes, people
or from external happenings. Secondly, Legal risks in case of lack of understanding of anti-
money laundering containing the possibility of lawsuit. Thirdly, financial risks of non-
compliance of national and international standards, regulators can impose penalties to the
guilty institution. Fourthly, concentration risks, where an institution acquires reputation as a
‘good service institution’ to the criminal world, there is risk that more and more criminals
will try to set up relationships with that institution. The last but not least, reputational risk
which is most unpredictable and uncontrollable risk for a financial institution where an
102 Robinson P, ‘The Risk-Based Approach to AML: An Opportunity not to be missed’, (2006), Money
Laundering Bulletin
103 Leong A V M, See. 97

27. 27
institution involves in money laundering activity knowingly or unknowingly, which can
results bad reputation of the institution in the financial sector104. BCCI v Shah……..
Regulation 20(1) of ML Regulations 2007 introduces the risk-based approach into the UK
anti money laundering regime. It requires all relevant persons to establish and maintain
appropriate and risk sensitive measures and procedures to enable them to comply with the
different requirements of the new regulations. These policies and procedures must cover,
customer due diligence (CDD) and ongoing monitoring, reporting, record keeping, internal
control, risk assessment and management, the monitoring and management of compliance
and internal communication of such policies. The RBA’s approach is intended to ensure that
proper focus is placed on the higher risk factors of a relevant business and to achieve more
efficient resources allocation to prevent and detect money laundering and terrorist financing.
There is always a requirement for firms to monitor their customers’ activities, but the way it
is done can vary. It mainly depending upon the nature of the risks they face and the type of
service or product they provide. A large retail bank with thousands of its branches and
millions of its customers will likely to develop or buy customer monitoring software whereas
it is far easy for a small firm to monitor its customers with a more ‘low tech’ solution105.
Although, both FATF and the 3rd Directive used the term ‘risk based’ but, there is little actual
illustrations of what is meant by ‘risk based approach’. The lack of explanation and examples
that what is ‘risk-based approach’ in action is one of the main root causes of the poorly
implemented system106. However, although all firms have to bear the impact of new
104 Wit J D, ‘A Risk-Based Approach to AML: A Controversy between financial institutions and regulators’,
(2007)15, JFRC
105 FSA, http://www.fsa.gov.uk/pages/About/What/financial_crime/money_laundering/approach/index.shtml ,
(Accessed on 20 July 2009)
106 Killick M and D Parody, ‘Implementing AML/CFT Measures that Address the Risks and not Tick Boxes’,
(2007)15 , JFRC

28. 28
regulations; the burden has been experienced unduly by small firms. Small firms found
application of ‘risk based approach’ challenging than medium to large firms. However, in the
UK, the FSA and the JMLSG are playing vital role in order to explanation of the notion and
establish best practices in the financial sector.
A ‘risk-based approach’ is more likely seen as a state of mind, it is not a tangible or definitive
thing. It demands confidence in each other, the regulators must show confidence in regulated
firm to take reasonable steps according to the situation and firms should trust regulator. The
regulators must also rely on their allied regulators’ organisations such as the law society in
their respective fields by showing confidence in them. However, despite the huge efforts
from the FSA in implementing the ‘risk-based approach’ it is often criticised for its over-
regulations of institutions as compare to other main financial centres in the world. The
estimated cost of heavily regulated area of money laundering in the UK is £253 million107.
The UK is not more effective in preventing money laundering than other developed countries
even with the massive costs of £253 million.
The history of the UK regime shows there are reasons to believe for the confidence in RBA
and the devotion of the FSA and other regulators to its application108. However, the run on
the Northern Rock bank in September 2008 is obvious example of failure of the ‘risk-based
approach’ regulations, the FSA has been failed to fulfil its statutory objectives109. After the
strong criticism, the government and the FSA re-affirmed their strong belief in ‘risk-based
approach’ by declaring the need to improve the model of ‘risk-based approach’110. As more it
107 Leong A VM, See n.97
108 Gough T, See n.43
109 These objectives are market confidence, public awareness,consumer protection and the reductions of
financial crime
110 Gray J, Is it Time to highlight the limits of risk-based Financial Regulation? (2009) 4, CMLJ

29. 29
is found that 50% firms still find ‘risk-based approach’ challenging111. There is need for more
guidelines and explanation of the concept.
4.2 Customer Due Diligence (CDD)
The 3rd Directive is mostly devoted to the obligations of relevant persons in relation to
CDD112 and the verification of customer’s credibility113. The sections dealing with CDD are
incorporated in the MLR 2007. A key element of the Regulation is that firms need to apply
customer due diligence (CDD) measures on the customers with whom the firm is establishing
a relationship. The potential customer may be an individual, or a corporate or legal entity.
CDD measures on a risk-sensitive basis are required at the point of initiation of the business
relationship. In the UK it is now of absolute importance for financial services and related
businesses to aware of the source and destination of the funds.
The notion ‘due diligence’ is mainly a creation of the American Securities laws114. These
laws imposed very strict liability on the issuers of securities that are sold to the public and all
those who assist in this process. The US courts have carved out some exceptions to these
liabilities in certain cases where the parties behaved responsibly and tried to meet the
disclosure standards of these laws. The standards of care were called due diligence, and it
quickly became a term of art. Today, it is used widely in different aspects. Apart from this
history, the concept of due diligence has been with us from the very beginning of the history
in transactions between strangers, the Roman maxim,” Buyer beware”. Others said “know the
people with whom you do business” are well settled examples of its presence in history. One
111 Rayner J, ‘Smaller Firms feeling the strain of money laundering regulations’, ( 26 June 2008), Law Society
Gazette
112 Previousl known as ‘Know Your Customer (KYC)’
113 Articles 6 – 10, [Council] Directive 2005/60/EC
114 Spedding L S, Due Diligence Handbook Corporate Governance,Risk Management and Business Planning,
(Butterworth-Heinemann Publishers, 2008)

30. 30
can say that the concept of due diligence is not a new one, the American may have come with
the appealing name “Due Diligence” but they did not invent the concept, they just
popularised it115.
The underline principles to CDD are not new, in 1914 in Ladbroke & Co v Todd116 the court
mentioned the practice of bankers to convince themselves as to the propriety of the
customers117. An interesting example of development of the CDD measures within institution
and among institutions can be traced in the Swiss law in 1977, Swiss Bankers Association
(SBA) published the first version of “Swiss Bankers Code of Conduct (CDB)”. The
document was an agreement between nearly 400 banks in Switzerland. Beside other
standards, one of the main parts introduced the detailed rules for the customer identification
first time. It developed the concept of ‘beneficial ownership’ and spelt out the circumstances
where banks may rely on third parties for identification of customer. The document provided
the outline of series of international documents on CDD. Although their guidance and
principles deal with their respective fields, still these are worthy of consideration for better
understanding of the notion of CDD118. However, the FATF Recommendations are the
leading international standards for CDD measures in AML/CFT context.
The 3rd Directive establishes comprehensive CDD requirements in its Articles 6-19. By
December 2007, with the implementation of the MLR 2007 this is the reference point for
institutions in the UK. However, most of these concepts were already part of the UK
legislation in the form of money laundering regulations 2003 or the JMLSG Guidance (2006
115 Duffy J P, Some Thoughts on Due Diligence (1995),
http://www.bergduffy.com/Personnel/Articles/95ddartl.htm, ( Accessed:15 July 2009)
116 Ladbroke & Co. v Todd [1914]
117 Koker D L, ‘Money laundering control and suppression offinancing of terrorism’, (2006)13, JFC
118 Prevention of Money laundering/Combating the Financing of Terrorism: Guidance for the UK Financial
Sector (JMLSG,2006)

31. 31
version). We have seen the importance of due diligence in the money laundering legislation
that is becoming more prevalent in financial markets119. It is one of the most common
features in money laundering legislation all over. ML Regulations 2007 set out the practical
meanings of CDD measures as, the identity of a customer must be verified on the basis of
documents, data or information obtained by the reliable sources, regulations also set the
requirement to identify the beneficial owner of customer of trust, companies and
partnership120.
Regulation 7 of the ML Regulations 2007 states that a relevant person must apply CDD
requirement when he establishes a business relationship, performs an occasional transaction,
suspects money laundering or terrorist financing and doubts the credibility of the
identification of documents or data previously obtained for the purpose of identification of
the said person121. Firms can also apply CDD at different occasions to their existing clients on
a risk-sensitive basis. ML Regulations require the verification of the customer before the
establishment of business relationship or carrying out any occasional transaction122. However,
the Regulations allow a relevant person to verify the identification of the customer during the
establishment of business relationship, but only when there is suspicion arises of money
laundering or terrorist financing123. If a relevant person is unable to complete due diligence
process satisfactorily according to the Regulations, he may refuse to undertake the
transaction, should not establish/perform a business relationship or occasional transaction and
must end any existing business relationship with that customer. In this situation relevant
119 Katz E, See n.67
120 Regulation 5, S.I 2007/2157
121 Regulation 7, S.I 2007/2157
122 Regulation 9(2), S.I 2007/2157
123 Regulation 9(3), S.I 2007/2157

32. 32
person should think about whether or not he is required to make a disclosure by Part 7 of the
POCA 2002 or the Terrorism Act 2000124.
The ML Regulations 2007 set up requirement of ongoing monitoring of business
relationship125. It includes careful examination of transactions carried out during the whole
period of the business relationship, information about the source of funds and to make sure
that transactions are consistent with the information about the customer. Ongoing monitoring
also requires relevant person to keep up-to-date information, documents and data for the
purpose of CDD measures. It is prudent on the part of a relevant person to decide the extent
of ongoing monitoring on a risk sensitive basis depending on the type of business
relationship, customer, product or transaction. However, he must be able to satisfy his
supervisory authority that the level of the monitoring is sufficient to tackle the risk of money
laundering and terrorist financing126.
The Directive and Regulations provide general principles of law on CDD measures; it is
heavily supplemented by guidance from different regulatory and professional bodies. The
FSA, JMLSG, Law Society and other professional bodies are all playing a vital role to
provide explanation and guidance to the financial sector in the UK. Due diligence is an
essential element in good business practice. To have a due diligence policy in place and not
use it properly is a serious error that could affect badly to entire organisation. It is well said
that “prevention is better than cure” and much cheaper as well.
4.3 Simplified Due Diligence (SDD)
124 Regulation.11, S.I 2007 /2157
125 Regulation.8, S.I 2007/2157
126 Mather J, ‘An Update- The Money Laundering Regulations 2007-Implementation of the EU Third Money
Laundering Directive’, (May 2008),Accountant’s Digest

33. 33
The Directive allows for national regulations to make certain derogations from the basic
requirement of CDD, mainly in respect of dealing of transactions where there is little risk of
money laundering or terrorist financing known as simplified due diligence. MLR 2007
incorporates this concept and introduces two new concepts; ‘simplified due diligence’ and
‘enhanced due diligence’127. Simplified due diligence applies where a relevant person is not
required to apply CDD measures provided that he has reasonable grounds to believe that the
customer is a financial institution which is subject to the money laundering directive or
equivalent legislation of the Directive or MLR 2007.
4.4 Enhanced Due Diligence (EDD)
The MLR 2007 also sets the requirements of enhanced due diligence procedures where risk is
high. In simple words, EDD requires financial institutions to take extra measures of
examination and prudence to identify their customers and confirm that their activities and
funds are legal. There are two particular situations where relevant person have to apply the
EDD measures, and enhanced ongoing monitoring in addition to the general requirements.
Firstly, where the customer has not been physically present for identification purpose,
secondly, where the customer is a ‘politically exposed persons (PEPs)128’ in such situations
relevant person should apply some extra measures to compensate for the higher risk of money
laundering and terrorist financing. These extra measures may include by making sure identity
is established by extra documents information or data, additional measures to verify the
documents submitted and to ensure that payment is through a personal account opened in
customer’s own name with a credit institution.
127 Chris Stott Z U, See n.76
128 Politically exposed person (PEP) is an individual who in the preceding year has exercised a prominent public
function in a state or institution outside the United Kingdom. We will discuss this important concept in detail in
coming pages in this writing, for more detail see chapterfour.

34. 34
Generally, undertaking CDD has involved the individual providing documentary evidence
such as passport, driving licence, utility bills which are then examined by the member of the
firm’s staff in order to establish that the documents are genuine and they relate to the
individual. Documents were to be produced to prove the existence of the person and to prove
their residence at a particular address. A copy of the evidence needed to be taken and stored
away as part of the record that can be recovered at some point in the future in order to
recreate the identification evidence for compliance purposes. CDD requirements can be
satisfied by the means of the use of other electronic information. This method satisfies the
risk based approach adopted by the Financial Services Authority (FSA) and this is reflected
in the JMLSG Guidance as a valid alternative method to documentary evidence.
4.5 Beneficial Ownership
A beneficial owner is defined in the MLR 2007 as in the case of an unquoted company, a
person who ultimately owns or control more than 25% of the shares or voting rights in the
entity, directly or indirectly through shares or voting rights, or who otherwise exercise control
over the entity’s management. In English law concept of ‘beneficial ownership’ is
distinguished from the strict legal ‘ownership’ origin of the notion can be traced in medieval
times, when Chancellor used to grant relief to petitioners according to his own common sense
of right or wrong. These decisions developed in the form of ‘Equity’ which is different from
the common law. This was the point of distinction between equitable and legal ownership,
where equity allows the use of property to be held separately from the legal ownership129.
One of the main changes introduced by the MLR 2007 is the definition of beneficial owner.
In the draft MLR 2007 the term ‘beneficial ownership’ defined too broadly, this was the issue
129 Legal Background: The Concept of Beneficial Ownership (HM Revenue & Customs),
http://www.hmrc.gov.uk/manuals/ihtmanual/IHTM04441.htm, ( Accessed: 12 August 2009)

35. 35
of strong lobbying by the Law Society and the Society of Estate and Trust Practitioners
(STEP), particularly from the STEP130. The Law Society obtained support in the form of
opinion from some of the leading counsels, which described definition of ‘beneficial
ownership’ in the draft MLR 2007 is unlawful and government must changed the
definition131. The government accepted the stance on definition of beneficial ownership and
agreed to change it132. The Regulations incorporate three levels of beneficial owner:
individual who ultimately control the customer, a detailed definition of person who own or
control more than 25% of a corporate entity and detailed definition of the beneficial owner of
a trust or other legal arrangement133. Firms will be expected to verify the identity of the
beneficial owner of an investment in addition to the customer, where this is from a different
entity.
The Directive clarifies that ownership and control of a company is suggested as a 25 percent
shareholding or the person otherwise exercise control over the management of a legal entity.
The requirement to ascertain the beneficial owner not applies to the companies listed on
EU/EEA stock exchange or other exchanges that are subject to disclosure requirements
consistent with community legislation or subject to equivalent international standards.
4.6 Politically Exposed Persons (PEPs)
Durban Declaration 1999 highlighted the issue of involvement of international banking
community in corruption. Banks facilitate transfer of stolen money from developing states by
the corrupt leaders and officials. The declaration urged international community to cooperate
130 Helen Darling K H, 'Potential Impact of the Draft Money Laundering Regulations 2007 on Trusts',(2007) 13
Trust & Trustees
131 Harris J,‘Defining “beneficial ownership”in the draftMoney Laundering Regulations’,2007 (2007) 10,
Company Law
132 Rice A, ‘Treasury Backs down over anti-money laundering laws’ (June 2007), Law Society Gazette
133 Regulation 6, MLR 2007

36. 36
in fight against corruption134. Banking Sector was asked to build enforceable international
standards to identify corruption and linked money laundering which could possibly help in
returning money to the poor countries looted by their corrupt leaderships. There are number
of cases such as Abacha in Nigeria, Mobutu in Zaire, Benazir Bhutto in Pakistan, Marcos of
the Philippines and Suharto of Indonesia are few who allegedly looted huge amount of money
while they were in political power.
International community responded hesitantly to the Declaration with measures from few
countries. It was 2001, when Basel Committee on Banking Supervision included in its
instructions for the CDD for banks with detailed guideline to deal with PEPs. The FATF have
recognised the need to identify PEPs in its revised Recommendations in 2003. A ‘politically
exposed person’ is a concept that very often is left to interpretation. PEPs are individuals
whose prominent position in public life gives them opportunities for profiting from
corruption. The World Bank estimates that PEPs steals US $40 billion per year135. As a result
the money laundering risk attached with PEPs customers is greater than many other types of
customers. It is important to mention that there is no universally agreed definition of PEPs.
The FATF defines PEPs as individuals who have been entrusted with high profile public
functions in a foreign country for instance, head of state, senior government, judicial or
military officials, senior politicians and political parties’ officials, senior executives of state
owned corporations. The definition also includes family members and close associates of
PEPs. The FATF encourages member countries to widen the requirements of the definition to
individuals who hold prominent public function in their respective countries136.
134 Johnson J, 'Little Enthusiasmfor Enhanced CDD of the Politically Connected', (2008) 11, JMLC
135 Chris Stott Z U, 'Money Laundering Regulations 2007: Part 2', (2008) 23, JIBLR
136 Interpretive note to Recommendation 6, FATF

37. 37
It is important to acknowledge that the above mentioned PEPs guideline and complimentary
list of PEPs categories designed to help in interpretation of the PEPs definitions, the
definition is not comprehensive and is vague for certain possible reasons. First, if there is a
globally accepted list of PEPs exists, criminals and terrorists will know how to make their
way and how to avoid the further scrutiny of enhanced due diligence. Second, a universal
definition of PEPs is unlikely to be successful. It could be more fruitful for the regulators and
regulated entities to adopt a risk based evaluation of the types of PEPs monitoring rather than
simply creating a checklist-based PEP definition and seeking to apply it137.
The Money Laundering Regulations 2003 did not specify PEPs as an example of higher risk
customers. The UK government sets out in detail guidelines to identify application of
enhanced due diligence for PEPs even before MLR 2007, it was explicitly mentioned in
JMLSG Guidance. The ML Regulations 2007 required enhanced due diligence (EDD) when
establishing business relationship with PEPs. The objectives of identifying and performing
EDD for the PEPs are to protect national economies and to stop the embezzlement of UK and
International financial aid to the developing countries, requirement of FATF and UN
Convention against Corruption, to protect the integrity of the UK’s financial system, and to
protect the reputation of the UK as financial hub of the world138. The special treatment of
PEPs does not mean that business relationship may/should not be entered into with PEPs or
that PEPs are suspect. However, enhanced due diligence must be applied if a customer is
PEPs.
The Money Laundering Regulations 2007 define a PEP as an individual, who is or has at any
time in the preceding year been entrusted with a high level public functions by a state other
than the UK, a European Community institution or an international body or family member
137 Kim-Kwang R C, ‘Politically Exposed Persons (PEPs): Risk and mitigation’, (2008)11 , JMLC
138 Implementing the Third Money Laundering Directive: A Consultation Document, (HM Treasury, 2006)

38. 38
or known close associate of such a person include the following the person acting for them in
the UK139. ML Regulations 2007 excludes domestic PEPs from the definition which is
contradictory to the FATF’s 6th Recommendations that demands the extension of PEPs
regime to domestic PEPs140. It is strange how the question of political exposure can be judged
to be one of nationality. PEPs must be treating regardless of nationality, as to the reputation
risk to the organisation. A local corrupt PEP is not less dangerous in this context. Apart from
exception to the domestic PEPs Regulations are consistent to the FATF Recommendations.
Since 2003, the JMLSG has issued good practice guidance to firm on how to deal with PEPs,
the Guidance revised in 2006.
The relevant person must have reason to believe that the funds from PEPs have an honest
origin. The scope to whom this principle applies are heads of state, heads of government,
ministers, members of parliaments, members of senior Judiciary whose decisions are not
subject to further appeal, members of boards of central banks, members of courts of auditors,
ambassadors, high-rank army officials and members of the administrative, management and
supervisory bodies of state owned enterprises. The immediate family members include a
spouse, partner, children and their spouses or partners and parents. Persons known to be close
associates including the following, an individual who is in joint beneficial ownership of a
legal person or any other close business relationship and an individual who has sole
beneficial ownership of a legal person which is known to have relevant set up for the benefit
of the concerned person141.
139 Regulation 14(5), S.I 2007/2157
141 Schedule 2 Para 4(1), S.I 2007/2157

39. 39
A relevant person must take the following steps to deal with PEP, to apply appropriate ‘risk-
based approach’ procedure to find out whether a customer is PEP or not142, senior
management’s approval for the establishment of business relationship take satisfactory
measures to find out source of the funds which are involved in the business relationship or
occasional transaction and after setting up the relation conduct enhanced ongoing monitoring
of the business relationships. Professionals are not required to find out whether beneficial
owner of a customer is PEP, however, risk-based approach is required to apply the extra
measures to deal such customer143. These measures do not mean that every PEP is dishonest
and high risk customer and do not deny establishing business relationship with honest PEPs.
The key problem encountered by financial institutions in relation to deal with PEPs is that
there is no database of PEPs at governmental level, this element impose extra burden on
financial institutions rather than state for the identification of PEPs. The government has
refused to publish a list of PEPs or to introduce a more strict definition of the term144.
However, certain large commercial entities offer some facilities to identify PEPs, as the Dow
Jones watch list provide a database of 500,000 profiles, directory of relatives and associates
and 24/7 support. The world-check provides an extensive database of over 2000 institutions
and 2000 government agencies in more than 120 countries around the globe. World-
Compliance with a huge database of 420,000 profiles of PEPs and 5000 new profiles every
month serving the financial sector to identify the PEPs145.
142FSA, Politically Exposed Persons (PEPs): Good Practice,
http://www.fsa.gov.uk/Pages/About/What/financial_crime/money_laundering/peps/index.shtml, ( Accessed:5
August 2009)
143 Law Society, http://www.lawsociety.org.uk/productsandservices/practicenotes/aml/289.article#h4pep,
(Accessed:5 August 2009)
144 William Blair R B (ed.) Banksand Financial crime: The International Law of Tainted Money, (OUP, 2008)
145 Gilligan G, ‘PEEPing at PEPs’, (2009) 16, JFC

40. 40
Financial institutions in the UK are increasingly utilising the specific ongoing procedure to
identify and monitor PEPs. JMLSG Guidance 2006 provides detail guidelines to establish
best practice regarding PEPs. Financial Services Authority (FSA) has recognised the
following measures to establish an effective regime of PEPs identification, regular forums
and committees to deal with the issues of unusual transactions, potential new client accounts
and Suspicious Activity Reports (SARs). A firm’s own committee headed by the CEO to
decide whether to open a PEP account or not.
4.7 Reliance on Third Parties
A relevant person may rely on third party to apply any or all of the CDD standards relating to
verification of identity of the customer, beneficial owner and the nature and purpose of the
business relationship. Member States have discretion to allow exercise of reliance on
specified third parties146. The relevant person remains liable for any failure to comply with
the regulations. According to the MLR 2007, in certain situations firms may rely on a third
party as a credit or financial institution, an external auditor, insolvency practitioner, tax
advisor, an independent legal professional and accountants.
In Money Laundering Regulations 2003, there were very few exceptions to the CDD
requirements and identification checks and they were mentioned tightly. CDD measures not
required where the customer was authorised by the FSA or equivalent European Union
authority except money services operator. The CDD measures are not necessary where the
customer is regulated by a foreign regulated authority and is based in a non- EEA state whose
law is equivalent to the EU Directive. It is also not necessary where a transaction or series of
linked transaction is less than 15000 Euro, where customer is introduced by a person that is
146 (HM Treasury, 2006) See n. 138

41. 41
regulated by the FSA, the introducer confirms in writing that identification had been made
and they have retain the evidence of such identification147.
Article 14 of the 3rd Directive and Regulation 17 of the MLR 2007 permits reliance on third
parties for verification of customers for one-off transactions. The Regulations widen the
scope for the reliance to allow reliance between certain firms, to permit international reliance
and to allow an eligible third party to provide information about the intended nature of
business and identification148.It is important to remember that a firm can outsource the role
but not the responsibility so, quality of service provided and continuous management of the
reliance relationship should be performed149. In ongoing monitoring and review of CDD,
reliance can not be placed on third party150.
In the UK one can rely on different professionals who are regulated by one of the bodies
listed in Part 1 of Schedule 3. These bodies are Association of Charted Certified Accountants
(ACCA), Council of Licensed Conveyancers, Faculty of Advocates, General Council of the
Bar, Institute of chartered Accountants in England and Wales (ICAEW), Institute of
Chartered Accountants in Ireland, Institute of Chartered Accountants of Scotland, Law
Society, Law Society of Scotland and Law Society of Northern Ireland151. However, the UK
government does not consider that estate agents and high value dealers (HVD) meet the
criteria to allow them to be relied upon as third parties for identification; therefore these firms
can not be relied upon for identification of customers.
In theory, this measure would enable firms to reduce the burden of due diligence on their
clients, however it is emphasised that final responsibility still remains with the original firm
147 William Blair R B (ed.) See n. 144
148 Regulation 17, S.I 2007/2157
149 Haines J, ‘Reliance on Third Parties with respect to Customer Due Diligence’,( 2009)30, Company Law
150 Mather J, See n.126
151 Part 1 Sch.3, S.I 2007/2157

42. 42
and can not be transferred to the third party , so in reality how much this measure is applied
by firms is a contentious issue.

43. 43
5- Conclusion
The dissertation has demonstrated that the problem of money laundering is global in its
nature. It causes grave harm to society and financial reputation of the economies.
International community have made considerable efforts towards coordinating legislative and
regulatory responses globally. However, due to difficulties in calculating the actual extent of
money laundering and availability of abundant resources to criminals to launder their
proceeds of crime, the effectiveness of any AML/CFT regime will always be in questioned.
The EU has made great efforts to maintain the pace with global community’s measures to
combat money laundering and terrorist financing by taking an active part in shaping global
standards. Its actions are being pursued in close partnership with the FATF which make up
the main weapons in the arsenal to combat money laundering. The Directive brings many
positives and improves the quality of financial system protection against the money
laundering threat. The Directive requires system enhancement, process and procedure
updates, staff training and possible customer education. It is apparent from the above
discussion that the implementation of the 3rd directive has significant impact in the UK on the
procedures, systems and banking system.
The UK has a sophisticated legal and regulatory AML/CFT regime. The UK should continue
its active participation in international fora in the fight against money laundering. The ML
Regulations 2007 implemented the 3rd Directive in the UK in December 2007. POCA 2002
with Terrorism Act 2000 also forms the UK’s anti-money laundering regime, both amended
extensively in 2005. Adoption of ‘risk-based approach’ makes it possible for firms to reduce
the burden in many routine matters. Although, the Northern Rock crisis have caused serious
concerns about the RBA but it is not meant to be failure of it. The ‘risk-based approach’ to
AML is the best way to deliver the results and impact on crime and terrorism. Customer due

44. 44
diligence requirements implies greater burden on firms, but if used properly they may help to
create a better financial world. Authorities and regulators have brought lot of obligations to
the financial service industry since institutions are bound by law to detect if money
laundering takes place within their organisation. They have to invest huge amount of money
in people, system and training. However, there is no system in the world which can protect an
institution for 100 percent. It is impracticable for financial institutions to implement a zero-
failure system which can cover and scrutinize each and every customer and their transactions.
This reality leads to implementation of a system which allocate its resources according to
‘risk-sensitive bases’, maximum attention to the high-risk customers and comparatively lower
level of monitoring to low-risk customers. Certain professionals such as lawyers and
accountants are facing the burden of establishing ‘beneficial owners’ of the transaction.
Reliance on third parties makes it feasible for firms to outsource compliance work. It is to be
hoped that by the time legislatures will focus on avoiding absurdities and over-burdening of
institutions.

45. 45
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