Blog | May 6, 2015

Top UK court: banks should find out why clients are using offshore companies

A recent court decision shows tolerance is waning for bankers claiming ignorance over why some clients go to such lengths to hide the origin of the cash they handle. 

It’s about time. We’ve shown how money launderers often use layers and layers of offshore companies and bank accounts to hide and move suspect funds across borders and jurisdictions, making it almost impossible for law enforcement to track them down. This in turn makes it too easy to get away with crimes we all want to stop - corrupt politicians, tax evaders, terrorists, drug gangs, fraudsters and other criminals are all able to cover their tracks.  Yet banks often take these complex financial structures at face value and choose not to ask themselves why their clients are going to such convoluted lengths to move their money.

A recent decision by the Privy Council suggests they may not be able to absolve themselves of responsibility for much longer. 

The Privy Council is the highest court of appeal for a small number of independent Commonwealth countries, colonies and the Channel Islands and the Isle of Man. Its judges also sit on the Supreme Court of England & Wales, so while its decisions are not binding on English courts, its views are highly persuasive.

Privy council seal

Last month, it issued a decision which strengthens anti-money laundering principles in the UK and further afield.  The case Crédit Agricole Corporation and Investment Bank (Appellant) v Papadimitriou (Respondent) (Gibraltar)  concerned a collection of valuable art-deco furniture which was fraudulently sold by someone other than its owner. To “clean” the proceeds of sale, the fraudster used a complex structure of offshore companies, foundations and bank accounts.   The Privy Council found that these complicated financial arrangements were clearly suspicious and should have raised red flags at Credit Agricole.  Lord Clarke, who gave the judgment, found that the arrangements “could not have any commercial purpose other than money laundering”. 

The court found that in such suspicious circumstances, a bank must satisfy itself that there is a legitimate reason for the complex financial

arrangements. It is not enough for a bank to ask simply where the funds came from. In this case the bank was innocent of wrongdoing, but it was forced to pay the victim because it had benefited from the transaction and had failed conduct proper investigations in circumstances where the web of offshore companies involved was indicative of money laundering. 

The court’s decision is particularly topical in the run up to the implementation of the EU’s Fourth Anti-Money Laundering Directive, which will increase transparency around complex financial arrangements by obliging the EU’s 28 member states to maintain central registers stating the ultimate beneficial owners of companies, and in light of the UK government’s recent calls for the British tax havens to follow suit

Global Witness’ investigations have shown that banks often don’t do enough to question and check the complex financial structures that their clients use, in order to identify who the real beneficiaries of accounts are, and whether their funds are legitimate. This is not just a side effect of organised crime and corruption – it helps to make it happen.   In this case, the court ruled that turning a blind eye to suspect funds should hit the bank where it hurts.

UK banks should take note – they should have to do more to spot when they are being used by criminals to launder money.  

Author

  • Chido Dunn

    Senior Campaigner, No Safe Haven

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